How Much Does Noncompliance With Sustainable Supply Chain Laws Cost?

Companies around the world are subject to a web of regulations aimed at ensuring environmental responsibility, social equity, and ethical business practices in the extended supply chain.

Businesses have compelling reasons to comply with these sustainability requirements. Adherence to sustainability laws mitigates the risk of regulatory penalties, lawsuits, and the reputational damage that can ensue. Embracing sustainability also demonstrates a commitment to ethical practices, environmental responsibility, and social equity, all of which can enhance the business’s reputation among customers, investors, and employees. Moreover, by integrating sustainability into its operations, the business can enhance operational efficiency, reduce costs, and build the long-term resilience that will help it weather a rapidly changing market.

But what happens when a business fails to comply with global sustainability laws? Let’s examine two key global laws and the far-reaching consequences of noncompliance with their mandates.

Overview of CSDDD and CSRD

Two major sustainability laws apply to the European Union: the Corporate Sustainability Due Diligence Directive (CSDDD) and the Corporate Sustainability Reporting Directive (CSRD).

The CSDDD, which became effective in March 2024, requires organizations to create and publish a due diligence policy, identify and address potential adverse impacts, establish a complaint procedure, and file annual reports on their due diligence efforts. The directive applies to the following:

• Businesses in the EU that have more than 1,000 employees and €450 million in global revenue

• Companies outside the EU that generated over €450 million from the EU market annually over the past two years.

The CSRD standardizes sustainability reporting requirements to ensure that corporate stakeholders have access to reliable data. It requires companies to publish regular reports on their social and environmental risks, describing the impacts of their business on people and the environment. These reports must be independently audited based on EU sustainability reporting standards.

The CSRD is being phased in gradually. For 2024, it only applies to companies in the EU that are already subject to the Non-Financial Reporting Directive (NFRD). Over the next few years, its application will extend to include EU companies that are classified as “large” based on their assets, revenues, and number of employees and, with some exceptions, non-EU businesses that have securities in the EU. 

Companies that are subject to the CSRD must disclose sustainability information encompassing their entire global operation, including those activities that occur outside of the EU.

What happens if they don’t? Let’s look at some of the consequences companies can face if they fail to comply with the CSDDD. Specific sanctions for CSRD violations will be determined independently by EU member states as they transpose the CSRD into national law, but will likely be similar. Let’s look at some of the consequences companies can face if they fail to comply with the CSDDD.

Potential costs of noncompliance with sustainability laws

The consequences of noncompliance can be staggering, from potentially introducing significant roadblocks into your supply chain to damaging the foundations of your business and ultimately forcing its closure.

Fines and penalties

Regulatory bodies can impose hefty fines, often calculated as a percentage of the company’s turnover, for noncompliance with sustainability laws. Under the CSDDD, fines can reach up to 5% of annual net worldwide revenue, which could severely reduce any company’s bottom line.

Loss of market share

Noncompliance can lead to market exclusion or restrictions on market activity, both of which directly translate into decreased revenue and diminished market share. For example, businesses that disregard the CSDDD may be barred from participating in public contracts and tenders. Failure to meet environmental standards may also result in products being excluded from certain markets or procurement processes.

Reputational harm

In today’s interconnected world, news of noncompliance spreads like wildfire, fueled by social media and activist groups. A reputation for disregarding sustainability requirements may turn consumers against a business, leading to decreased sales and difficulty attracting talent or investors. Business partners that are committed to sustainable practices may also refuse to engage in transactions with noncompliant companies. You could even say that reputations are like forests: they take years to build (or rebuild), but can be destroyed in mere moments.

Disruption to the supply chain

When suppliers or partners fail to meet sustainability standards, their noncompliance can substantially disrupt or entirely break supply chains. This can lead to delays, increased costs, and additional procurement expenses due to the need to identify new, compliant suppliers.

Legal costs and remediation expenses

Noncompliance is likely to trigger legal action from regulatory bodies, stakeholders, or affected parties. Companies may face legal liability and potential lawsuits if their negligence results in harm to people or the environment. These battles can be protracted and costly, involving legal expenses, settlements, and the expense of remediation efforts to rectify any environmental or social harm.

An ounce of prevention is worth a pound of cure

The costs of noncompliance with sustainability laws extend far beyond immediate financial penalties—and at the same time that a business is forced to pay hefty fines and cover its legal expenses, it may also see its revenue tumble due to reduced market access, supply chain disruptions, and reputational damage.

The repercussions of flouting sustainability laws can be severe and long-lasting. Therefore, investing in sustainability compliance is about more than merely avoiding fines; it’s about safeguarding the future viability and integrity of your business in an increasingly conscientious marketplace. By embracing sustainability as a core business principle, companies can mitigate risks, enhance resilience, and earn the trust and loyalty of stakeholders.

At Sourcemap, we enable businesses to avoid those costly mistakes by gaining complete oversight of their extensive supply chains using software that facilitates top-tier business practices.Reach out to us today to learn more.