Supply chain ESG obligations

For decades, ESG reporting focused on a company's own direct operations. That era is ending. The most significant regulatory development of the 2020s is the extension of ESG obligations into the supply chain — meaning that large companies are now legally required to collect, verify, and report on the ESG performance of their suppliers. If you are a supplier to any large company, this affects you directly.

The Corporate Sustainability Reporting Directive (CSRD) requires large EU companies to report on their entire value chain under the European Sustainability Reporting Standards (ESRS). This includes:

• Scope 3 greenhouse gas emissions — which means emissions from purchased goods and services (i.e. your products and services)
• Social standards in the supply chain — labour rights, working conditions, and human rights
• Governance practices of significant suppliers

In practice, this means that from 2025 onward, large EU companies will send ESG questionnaires to their suppliers. Suppliers who cannot respond — or who score poorly — risk being replaced by more compliant alternatives.

The Corporate Sustainability Due Diligence Directive (CSDDD) goes further than reporting. It creates a legal duty of care for large EU companies to identify, prevent, and address adverse human rights and environmental impacts in their supply chains. Key implications for SME suppliers:

• Your large EU customers must audit your ESG practices — not just ask you to self-report
• They must take action if they find problems — which may include terminating the supplier relationship
• You may be asked to sign contractual commitments to ESG standards as a condition of continued business
• Phased implementation: companies with >5,000 employees from 2027; >3,000 employees from 2028; >1,000 employees from 2029

California's Climate Corporate Data Accountability Act (SB 253) requires companies with over $1 billion in revenue doing business in California to report Scope 3 emissions from 2027. Scope 3 Category 1 (purchased goods and services) is typically the largest component of a company's carbon footprint — and it comes directly from their suppliers.

This means that if you supply to any company doing significant business in California, they will need your emissions data. The practical effect is identical to CSRD: you will receive questionnaires asking for your carbon footprint, energy use, and environmental practices.