Earlier this year, the European Commission published its Sustainable Corporate Due Diligence legislative proposal. This Directive aims to “foster sustainable and responsible corporate behaviour and to anchor human rights and environmental considerations in companies’ operations and corporate governance”. It will set out requirements that large companies conduct due diligence to ensure that adverse impacts from their operations are addressed and minimised.
The Directive will apply to European Union (EU)-based companies that fulfil one of two conditions based on the size and turnover of the company:
- Group 1–500 or more employees and worldwide annual net turnover of at least EUR 150 million
- Group 2–250 or more employees and worldwide annual net turnover of at least EUR 40 million, of which EUR 20 million was generated in a high-risk sector, such as the agricultural and food products sectors
Companies formed outside the EU are also subject to the Directive if they generate EUR 150 million net turnover in the EU or generated at least EUR 40 million in the EU with 50% in high-risk sectors. Micro- and small and medium enterprises are excluded from the Directive.
It is estimated that approximately 12 800 EU limited liability companies will fall within the scope (9 400 in Group 1, 3 400 in Group 2) and 4 000 non-EU companies (2 600 in Group 1, 1 400 in Group 2). This represents just 1% of EU businesses.
While many critics are concerned that the scope is too limited to make meaningful change toward sustainability, the impact of this Directive may be far more reaching than what would be initially assumed given the large volumes of agricultural commodities that are traded by these large companies.
Identifying Company Scope in the Cocoa Sector
Readily available, public data from Trase was used to identify the companies involved in the trade of cocoa from Côte d’Ivoire and Ghana that are likely to fall within the scope of the proposed Due Diligence Directive. Trase data draws on official export records to provide comprehensive information on the volumes and value of agricultural commodities traded by companies from select producer countries. Trase data also indicates the destination market for these trades. Looking only at cocoa flows to the EU in 2019, the number of companies with total trades valued, as determined by the Free on Board (FOB) value which is the value of goods at the exporter’s custom frontier, of at least EUR 40 million was identified. The companies with cocoa trades valued between EUR 20 and 40 million, which may fall within the scope if their net annual worldwide turnover is at least EUR 40 million, were also identified. These thresholds were used because the cocoa sector is considered high-risk, thus companies trading at least EUR 20 million in cocoa may fall within the scope regardless of where the company is based.
Majority of Côte d’Ivoire-EU cocoa flows traded by companies covered by Directive
Percent of 2019 Ivorian cocoa exports to the EU traded by companies likely to fall within the Directive scope
Of the 74 companies exporting cocoa from Côte d’Ivoire to the EU in 2019, 20 of those companies had annual trades valued at EUR 40 million. The total volume of cocoa trade by those companies was 1,021,742 tonnes, which is 79% of all Ivorian cocoa exported to the EU and 51% of all internationally-traded Ivorian cocoa. An additional nine companies with cocoa trades valued between EUR 20 and 40 million may fall under the scope. Together, the 29 companies traded 1,144,490 tonnes of cocoa in 2019, or 88% of Ivorian cocoa to the EU.
Large share of Ghanaian cocoa export market falling under the scope of the Directive
In 2019, 108 companies imported 564,380 tonnes of cocoa from Ghana to the EU. This was over half of cocoa exported from Ghana. Of those, nine companies had annual cocoa imports valued at over EUR 40 million and another 3 at over EUR 20 million. The volumes of these trades represent 74% and 79% of all cocoa imports to the EU.
Percent of 2019 Ghanaian cocoa exports to the EU traded by companies likely to fall within the Directive scope
A reduced but powerful scope
This insight shows that while few companies are likely to fall within the scope of the proposed Corporate Sustainability Due Diligence Directive, the companies responsible for most of the trade of cocoa from Côte d’Ivoire and Ghana to the EU would likely need to comply with due diligence obligations. This suggests that the likely impact of this Directive on the cocoa supply chain may be more considerable than what would initially be assumed. The proposed Directive intends to provide a common framework to guide these companies in addressing adverse impacts on human rights and the environment in their operations, and it reinforces the need for cocoa companies to assess and manage risks in their operations especially on social issues.
Alongside this legislative proposal, the EU is also moving forward with a Regulation on deforestation-free products, which would require importers of select agricultural commodities, including cocoa, to the EU to conduct due diligence to ensure that commodities were not grown on deforested land or illegally produced. In contrast to the proposed Directive, the proposed Regulation provides detailed product-specific rules that should apply to all companies placing cocoa on the EU market. These legislative proposals represent a push to reduce the negative impact associated with EU consumption, and together, they create synergies to address critical social and environmental issues within supply chains. By requiring strict traceability to the plot level, the proposed Regulation favours companies establishing relationships with suppliers, and due diligence efforts in the context of the proposed Directive, are required for those companies with established business relationships. In this way, the pieces of legislation complement each other to ensure that companies have due diligence processes in place and that desired outcomes are achieved while reducing potential gaps in compliance.