Corporate Sustainability Due Diligence Directive (CSDDD or the EU Supply Chain Law): A Comprehensive Analysis and Review of its Implications on Vietnam-based Companies

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CorporateSustainabilityDueDiligenceDirective(CSDDDortheEUSupplyChainLaw):AComprehensiveAnalysis
andReviewofitsImplicationsonVietnam-basedCompanies
In recent years, the European Union has increasingly prioritized sustainability, recognizing its fundamental
role in addressing global challenges. Various legislative frameworks have been put in place to integrate
environmental, social, and governance (ESG) considerations into corporate strategies, including the Non-
Financial Reporting Directive (NFRD), the Sustainable Finance Disclosure Regulation (SFDR), the EU
Taxonomy Regulation, the Corporate Sustainability Reporting Directive (CSRD) etc.
Recent developments have also seen individual EU Member States enact their own supply chain laws,
varying in scope and legal consequences. Seeking to establish a common baseline across Member States,
the European legislator aims to complement existing regulations with the Corporate Sustainability Due
Diligence Directive (CSDDD), commonly referred to as the “EU Supply Chain Law”.
The directive, currently under discussion within the EU, aims to establish a comprehensive due diligence
framework, requiring companies to identify, prevent, and mitigate adverse impacts on human rights, the
environment, and good governance throughout their supply chains. The CSDDD is anticipated to cover a
broad spectrum of entities, impacting various industries and sectors.
Despite the uncertainties surrounding its implementation, the CSDDD, if enacted, would impose
substantial responsibilities on companies, including those operating in Vietnam, necessitating compliance
with the directive's provisions and engaging in effective due diligence practices. As the legislative
landscape evolves, companies should remain vigilant and be prepared for potential changes to their
sustainability and due diligence obligations.
CSDDD – Overview
Status
The implementation of the directive is at risk of collapsing due to the concerns of several Member States,
led by Germany, about the bureaucratic burdens involved and the potential impact on the
competitiveness of European companies. The European Council vote, originally scheduled for 9 February
2024, then postponed to February 14 and finally held on 28 February 2024, failed. With this latest setback,
it seems unlikely that the Directive will be adopted before the European Parliament elections in June 2024.
Scope (Addressees of Obligations)
If the directive comes into effect and is implemented by the Member States, the obligated entities would
include companies, irrespective of their legal form and size, including SMEs and certain regulated financial
undertakings outlined in the directive.
The obligations set out in the directive should apply to companies established under the laws of a Member
State meeting the following criteria ("Category 1"):
 The company had, on average, more than 500 employees and a global net turnover of more than
EUR 150 million in the last financial year for which annual financial statements have been
prepared; or
 The company did not meet the above thresholds but had, on average, more than 250 employees
and a global net turnover of more than EUR 40 million in the last financial year, with at least 50%
of it generated in one or more of the following specific sectors:
o the manufacture of textiles, leather and related products (including footwear), and the
wholesale trade of textiles, clothing and footwear;

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o agriculture, forestry, fisheries (including aquaculture), the manufacture of food products,
and the wholesale trade of agricultural raw materials, live animals, wood, food, and
beverages;
o the extraction of mineral resources regardless from where they are extracted (including
crude petroleum, natural gas, coal, lignite, metals and metal ores, as well as all other,
non-metallic minerals and quarry products), the manufacture of basic metal products,
other non-metallic mineral products and fabricated metal products (except machinery
and equipment), and the wholesale trade of mineral resources, basic and intermediate
mineral products (including metals and metal ores, construction materials, fuels,
chemicals and other intermediate products).
In addition, obligations apply to companies established under the laws of a third country fulfilling one of
the following conditions ("Category 2"):
 The company generated a net turnover in the EU of more than EUR 150 million in the financial
year preceding the last financial year; or
 The company generated a net turnover in the EU of more than EUR 40 million but not more than
EUR 150 million in the financial year preceding the last financial year, with at least 50% of its global
net turnover generated in one or more of the above mentioned sectors.
Content – What Vietnam-based Companies Must Know?
Key Obligations
Companies are expected to fulfill their due diligence obligations through the following measures and
exchange resources and information with their respective groups of companies and with other legal
entities in accordance with applicable competition law:
 Integration of due diligence into their corporate policy, including an annually updated due
diligence policy containing a description of the company’s approach (in the long term), a code of
conduct (CoC) for employees and subsidiaries, and a description of related processes and
measures taken to verify compliance with the CoC and to extend its application to established
business relationships.
 Identification of actual or potential adverse human rights and environmental impacts arising from
the company's operations (or those of their subsidiaries and – where related to their value chains
– from their established business relationships) through "appropriate measures." For Category 2
companies, the obligation is limited to the relevant sector, while financial entities should identify
impacts before providing the relevant service. In any case, companies shall, where relevant, also
carry out consultations with potentially affected groups including workers and other relevant
stakeholders to gather information on actual or potential adverse impacts.
 A tiered regulatory concept follows the identification, distinguishing between potential and actual
adverse impacts:
o Potential adverse impacts should primarily be prevented and – if not (immediately)
possible – adequately mitigated. This may include:
 the development of a "prevention action plan" with defined timelines and
indicators for measuring improvement;
 obtaining contractual assurances from direct business partners within an
established business relationship – and from their partners, to the extent that
their activities are part of the company’s value chain (contractual cascading) –
ensuring the compliance with the company’s CoC and and, as necessary, a
prevention action plan;

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 necessary investments;
 targeted and proportionate support for SMEs with which the company has an
established business relationship, where compliance with the CoC or the
prevention action plan would jeopardise their viability;
 collaboration with other entities compliant with Union law for the purpose of
increasing the company’s ability to bring the adverse impact to an end, in
particular where no other action is suitable or effective;
 efforts to conclude contracts with indirect partners accompanied by appropriate
measures to verify compliance, in case the potential adverse impacts could not
be prevented/mitigated by the measures listed above; to facilitate SMEs, the
CSDDD stipulates that the terms used shall be fair, reasonable and non-
discriminatory and costs of verification measures shall be borne by the company;
 If the measures stated above are ineffective, the company shall refrain from
entering into new or extending existing relations with the partner in connection
with or in the value chain of which the impact has arisen; the company shall –
insofar as it is entitled to do so and there is reasonable expectation of a short-
term-success – temporarily suspend connections with the partner in question or
– in the event of severe impacts – terminate the business relationship. Financial
entities shall not be obliged to terminate existing credit, loan, or financial service
contracts when this can be reasonably expected to cause substantial prejudice to
the entity to whom that service is being provided.
o Actual adverse impacts should be primarily brought to an end or – if not possible –
minimized in their extent. This may involve:
 neutralizing/minimizing the extent of impacts, including through payment of
damages /financial compensation to affected individuals/communities;
 developing and implementing a corrective action plan with reasonable and clearly
defined timelines, if the adverse impact cannot be immediately brought to an
end;
 obtaining contractual assurances from direct business partners within an
established business relationship – and from their partners in case of contractual
cascading – ensuring the compliance with the company’s CoC and, as necessary,
a prevention action plan; to facilitate SMEs, the CSDDD stipulates that the terms
used shall be fair, reasonable and non-discriminatory and costs of verification
measures shall be borne by the company;
 If those measures are ineffective, the company shall refrain from establishing new
relations or expanding existing ones with the partner causing the impacts.
Financial entities shall not be obliged to terminate existing credit, loan, or
financial service contracts when this can be reasonably expected to cause
substantial prejudice to the entity to whom that service is being provided.
 Companies must also designate a legal or natural person established or domiciled in an EU
Member State as an authorized representative to facilitate effective cooperation with the
supervisory authority responsible for monitoring compliance obligations. Companies established
in Vietnam will be subject to supervisory scrutiny, with the competent authority being that of the
Member State in which the company has a branch. If the company has no branch in a Member
State or has branches in different Member states, the authority of the Member State in which the
company generated most of its Union net turnover in the financial year preceding the last financial

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year, preceding a certain date to be specified by the Member States or the time when the
company first met the Category 2 criteria, whichever comes last, will be responsible. In the event
of a significant change in circumstances, the company may request to change the competent
supervisory authority.
Other Provisions
The directive includes the following additional provisions:
 Member States must establish and maintain a complaints procedure. Individuals and
organizations with legitimate concerns about the actual or potential adverse impacts of a
company’s operations, operations of its subsidiaries and value chains can submit complaints to
the company, demand appropriate follow-up actions, and meet with company representatives
for discussions. In the case of a well-founded complaint, the adverse impact that is the subject
matter of the complaint is deemed to be identified.
 Monitoring the effectiveness of the company’s own operations and measures, those of their
subsidiaries and, where related to the value chains of the company, those of their established
business relationships regarding the identification, prevention, mitigation, bringing to an end and
minimization of the extent of human rights and environmental adverse impacts; the assessments
shall be carried out at least every 12 months and whenever there are reasonable grounds to
believe that significant new risks regarding adverse impacts may arise. The company shall update
its due diligence policy accordingly.
 Companies not subject to reporting requirements under the Accounting Directive (2013/34/EU)
shall submit an annual statement on due diligence, potential and actual adverse impacts, and
actions taken on those on their website in a language customary in the sphere of international
business, by April 30 of each year. The EU Commission will further specify the content and criteria
for reporting.
 Planned guidelines by the EU Commission will include model contract clauses and specific sectors
or adverse impacts.
 Member States shall, furthermore, establish and operate websites, platforms, or portals to
support companies and their partners as accompanying measures. The focus of this support,
especially for SMEs, is emphasized, with Member States expected to financially support SMEs
without prejudice to applicable State aid rules.
 Member States shall ensure that companies include emission reduction targets in their plans if
climate change is or should have been identified as a principal risk for or impact of their business
activities or should have been identified as such.
 Supervisory authorities should be able to initiate inspections – without prior warning to the
company where this hinders the effectiveness of the inspection – on their own motion or upon
substantiated concerns. Inspections may even be conducted in the territory of another Member
State through mutual assistance. If a violation is found, the company shall be given an appropriate
remedy period, and measures imposed by the supervisory authority do not preclude
administrative sanctions or civil liability in case of damage. In this context, the supervisory
authorities shall be empowered to order the cessation of infringements, the abstention from any
repetition, impose pecuniary sanctions and adopt interim measures. Inversely, the directive aims
to ensure the right of individuals to an effective judicial remedy against legally binding decisions
by supervisory authorities concerning them.
 Natural and legal persons with objective grounds to believe that a company is violating national
provisions adopted pursuant to the CSDDD shall be able to submit their substantiated concerns
to any supervisory authority and be informed of the outcome of the examination and the
supervisory decision. Access to national courts or other independent and impartial public bodies

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shall be granted to review the procedural and substantive legality of supervisory decisions, acts
or failures to act.
 The reporting of breaches and the protection of reporting persons shall follow the Whistleblower
Directive and the respective national implementation laws.
Sanctions
Member States shall enact rules on sanctions, complying with the European legislator's directive for them
to be "effective, proportionate, and dissuasive". Efforts by the company to comply with any required
remedial actions, any investments made, targeted support provided, as well as collaboration with other
entities in mitigating adverse impacts within value chains should be duly taken into account. If financial
sanctions are imposed, they shall also be based on the company's turnover.
A legal novelty is the proposed civil liability for companies that fail to fulfill their obligations to prevent
potential and remedy actual adverse impacts that could have been identified, avoided, mitigated,
remedied, or minimized in their extend, resulting in damaging consequences. However, companies that
have taken appropriate actions shall not be liable for damages caused by an adverse impact arising from
activities of an indirect partner in the context of an established business relationship unless it was be
unreasonable to expect that the actions taken regarding the adverse impacts are adequate. It should be
noted that the company's liability does not exclude that of its subsidiaries or direct/indirect business
partners.
Implications of the Potential Implementation of the CSDDD on Vietnam-based Companies
In the event of the CSDDD coming into effect, EU companies falling under Category 1 will extend their due
diligence obligations to their business partners, including those overseas. As a result, even companies
based in Vietnam closely linked to the value chains of these EU entities, would be indirectly held
accountable. However, the CSDDD does not limit itself to indirect effects but explicitly extends its scope
to companies based in third countries. Thus, Vietnamese companies or companies with branches in
Vietnam would be direct addressees of Category 2 obligations.
Moreover, the rules on sanctions to be adopted by Member States will also be (in-)directly relevant for
Vietnamese companies.
Therefore, investment in and adoption of sustainable technologies and practices, coupled with legal
advice on appropriate strategies, will be critical in this context and for risk mitigation. Going forward, it
will also be essential to comply with regulatory guidelines issued by the supervisory authorities.
Our firm is ready to assist and guide you in these matters and to help you develop appropriate strategies.
CSDDD and EVFTA
Nevertheless, Vietnamese companies are unlikely to be caught completely off guard by these
commitments. Given their existing commitments under the EVFTA, encompassing CSR and environmental
standards, climate protocols and biodiversity protection, they are not entirely unprepared. Chapter 13 of
the EVFTA integrates sustainable development as a fundamental component of the bilateral trade
relations with the EU. In light of the EVFTA commitments, Vietnam is striving to ensure and promote a
high level of environmental, labor and social protection through its legislation and policies, and is
constantly seeking to improve. Regarding procedural guarantees, unlike other topics discussed within the
EVFTA framework, any dispute arising from Chapter 13 relating to trade and sustainable development,
including labor, is not subject to the general dispute settlement procedures under Chapter 15. Discussion
on labor issues can only be settled through government-to-government consultations or panel of expert
as stipulated under Chapter 13.

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In terms of labor standards, the EVFTA does not create any new standards, but emphasises the
implementation of commitments that Vietnam and the EU made to as members of the ILO and it’s
Declaration on Fundamental Principles and Rights at Work, and its follow-up, specifically: i) the freedom
of association and the effective recognition of the right to collective bargaining, ii) the elimination of all
forms of forced or compulsory labor, iii) the effective abolition of child labor; and iv) the elimination of
discrimination in respect of employment and occupation. Prior to the entry into force of the EVFTA,
Vietnam had already adopted and adjusted its laws, regulations, and policies to be in line with
internationally recognized labor standards. This process continues as Vietnam fulfils its obligations under
both the CPTPP and the EVFTA, notably the amended Labor Code in 2019.
In terms of environment protection, in addition to Chapter 13, the EVFTA also contains a dedicated
chapter on Non-tariff Barriers to Trade and Investment in Renewable Energy Generation. It covers specific
rules for the renewable energy sector (i) on non-discriminatory treatment in general (licensing and
authorization procedures), (ii) on local content in particular, and further (iii) on the use of international
standards.
Relevant recent initiatives include Decision No. 876/QD-TTg, Decision No. 500/QD-TTg on the issuance of
the Power Development Plan VIII, Law No. 72/2020/QH14 on Environmental Protection, and the "One
Strategic Framework for Sustainable Development Cooperation between the Government of the Socialist
Republic of Vietnam and the United Nations for the Period 2022-2026", among others. These necessarily
imply a number of obligations for companies operating in Vietnam to adhere to these standards and local
requirements.
Conclusion
The CSDDD sets out obligations for companies concerning actual and potential adverse impacts on human
rights and the environment related to their own activities, those of their subsidiaries, and their partners
in the value chain with whom they maintain established business relationships. These obligations,
potentially to be implemented by the Member States, also extend to companies operating in Vietnam
with business activities directly or indirectly linked to the EU. At present, however, the chances of the
CSDDD being enacted seem uncertain.
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Please do not hesitate to contact Dr. Oliver Massmann under omassmann@duanemorris.com if you have
any questions on the above. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.