Codes of Conduct as a Mandatory Policy

Codes of conduct are corporate policies including a set of prescriptions, guidelines, or principles developed by the company intending to guide the behavior of their suppliers.Footnote ⁴ These guidelines often concern values and commitments of how the company conducts business, and specifically labor rights. Studies show that labor standards are “by far the best covered issue in the codes,”Footnote ⁵ and more recently that 90 percent of codes of conduct include a reference to child labor, forced labor, and discrimination, while collective bargaining or trade union rights are referred to in 70 percent of codes.Footnote ⁶ This suggests that most companies align their policies with the core labor rights enshrined in the International Labour Organization (ILO) Conventions.Footnote ⁷

By transforming the voluntary business practice of adopting codes of conduct into a mandatory requirement in the CSDDD, the EU legislator recognizes the private actor as a regulator of global corporate governance and gives companies a responsibility in regulating their supply chains. This role is granted with a large autonomy, as the CSDDD does not include specific guidelines or requirements on the content of codes of conduct, merely mentioning that the code of conduct must describe “rules and principles to be followed throughout the company and its subsidiaries, and the company's direct or indirect business partners.”Footnote ⁸ To ensure compliance with their codes of conduct, companies must obtain contractual assurances from business partners,Footnote ⁹ and take measures to verify their compliance.Footnote ¹⁰ The text of the Directive, however, also includes a public supervision, by establishing national supervisory authoritiesFootnote ¹¹ in charge of supervising companies’ compliance with the CSDDD's requirements, including the examination of the content of codes of conduct.

With this formulation, the CSDDD assigns companies a significant role in shaping global corporate governance by effectively entrusting them with policymaking functions. Some scholars see this as inviting multinationals to act as “quasi-legislators”Footnote ¹² because the legislator not only shifts responsibility to private actors, but also elevates them to a position of influence traditionally reserved for public authorities. This move reflects a broader trend in global governance, where non-state actors are increasingly recognized as key players in regulating transnational economic activities.Footnote ¹³ While this is a pragmatic solution to the challenges of regulating global supply chains, questions remain on the implications for labor standards down supply chains, and the potential effectiveness of this approach.

Implications for Labor Standards in Supply Chains

The consecration of codes of conduct in the CSDDD unfolds in a context of skepticism toward CSR. Civil society and sweatshop movements accuse multinationals of window dressing or greenwashing, and empirical scholars struggle to demonstrate a positive impact of codes of conduct on labor conditions in supply chains.Footnote ¹⁴ This section examines whether the codes of conduct mandated under the CSDDD are likely to overcome these limitations.

Firstly, companies have been criticized for what is termed the “symbolic adoption” of their codes of conduct, whereby they commit to standards by adopting a code, but do not change their behavior in practice, nor set mechanisms to comply with said standards.Footnote ¹⁵ In such cases, companies neither embed these codes in supplier contracts nor initiate discussions with suppliers about the standards, leading to a lack of awareness or engagement on both sides. The CSDDD seeks to address this issue by requiring companies to obtain contractual assurances of compliance from suppliers,Footnote ¹⁶ and when that fails, from indirect business partners.Footnote ¹⁷ Bound by contractual obligations, business partners are liable in case of non-compliance. In addition, companies must implement measures to verify that these standards are being upheld.Footnote ¹⁸ This creates a more robust framework that formalizes the responsibility of both parties in the contractual relationship: the buyer and the supplier, aiming to limit codes’ symbolic adoption. However, this relationship is marked by asymmetry, including in the CSDDD text. The buyer unilaterally sets the standards and monitors compliance, while the supplier bears the primary responsibility for adhering to these standards—often incurring the associated costs.Footnote ¹⁹ This reinforces a view of supply chains as hierarchical models, where market power is concentrated disproportionately at the buyer level. The company is, in essence, the chain leader, and retains a significant discretion in defining the standards that apply to their operations and those of their suppliers. This concentration of power forming a top-down style of governance is problematic, as it overlooks the complex and interdependent nature of global supply chains, where influence and accountability are often more diffused.Footnote ²⁰

Second, codes of conduct are often criticized for their “symbolic implementation.”Footnote ²¹ This occurs when mechanisms are established to enforce codes of conduct, but those mechanisms are inadequate to genuinely reach the standards they are intended to achieve. One example is social auditing, a widely used tool to verify compliance with codes of conduct. Civil society and scholars have heavily criticized the use of social audits to verify compliance, as they may perpetuate intimate governance practices that, rather than addressing root causes, enable the continued exploitation of resources and workers within global supply chains.Footnote ²² In practice, audits often devolve into box-ticking exercises, where only superficial compliance is assessed, while systemic issues remain unaddressed. The CSDDD provides little specificity regarding the measures that will be considered adequate for verifying compliance with codes of conduct. Article 10 of the Directive states that companies “may refer to independent third-party verification” for compliance checks.Footnote ²³ This provision raises concerns among scholars that third-party external auditing could be interpreted as an adequate measure,Footnote ²⁴ thereby reinforcing existing practices that have been criticized for their ineffectiveness. The determination of “adequate” compliance verification measures will likely depend on the interpretation given by national supervisory authorities and national courts.

Finally, scholars have extensively discussed the importance of stakeholder consultation and buyer-supplier collaboration to promote the improvement of labor conditions in supply chains.Footnote ²⁵ The literature opposes this “collaborative approach” to the “traditional compliance model,” which often focuses solely on ensuring that minimum legal requirements are met rather than fostering genuine improvements in social and environmental performance.Footnote ²⁶ The collaborative approach is also promoted in the UN Guiding Principles (UNGPs), which make meaningful consultation with potentially affected groups and other relevant stakeholders central to the due diligence process.Footnote ²⁷ However, the provisions of the CSDDD are less explicit on this point. While the Directive refers to an obligation to consult their direct employees,Footnote ²⁸ there are no mandatory requirements to integrate external stakeholders in this process. The initial proposal from 2022 stipulated that “[c]ompanies shall, where relevant, carry out consultations with potentially affected groups including workers.”Footnote ²⁹ Yet, the final text of the CSDDD modifies this language, suggesting that buyer-supplier collaboration and stakeholder consultation are peripheral rather than integral, stating that “[w]here information necessary for the assessment . . . can be obtained from business partners . . ., the company shall prioritize requesting such information, where reasonable, directly from business partners.”Footnote ³⁰ Even then, the scope of this consultation is very limited, as it only concerns the identification of “adverse impacts” when they are likely to occur. Again, this provision reflects a preference for the top-down approach typical of the “traditional compliance model,” where the buyer monitors compliance but does not involve business partners in setting standards or defining what constitutes compliance.

When it comes to improving labor standards, top-down governance has generally proven ineffective. Literature on collective bargaining shows that workers’ empowerment is critical for addressing structural inequalities, raising wages, and balancing power dynamics.Footnote ³¹ At the supply chain level, the same issue may persist: addressing unequal power dynamics must pass by the empowerment of business partners, workers, and affected communities to counterbalance the economic dominance of the buyer. Until now, studies showed that codes of conduct have an uneven impact on labor conditions: while technocratic labor issues such as occupational health and safety improve when companies integrate codes in their management systems, they lack impact on collective bargaining rights.Footnote ³² As demonstrated, the text of the CSDDD fails to address this issue and promote external stakeholder collaboration. This is unlikely to allow to challenge embedded labor relations or social norms underlying the production process. It also marks a departure from the more inclusive, collaborative approach initially proposed and promoted by the UNGPs.Footnote ³³

The Necessary Shift of Companies’ Internal Priorities

The analysis of the CSDDD reveals that the EU legislator (1) formalizes and promotes the role of companies in shaping global corporate governance by entrusting them with policy-making functions, and (2) adopts a top-down governance approach to global supply chains. This carries the risk that multinationals will prioritize economic interests over human rights considerations, and fails to promote innovative, multi-stakeholder governance of global supply chains. Within this model, it is essential for companies to move beyond merely shifting the compliance burden onto suppliers. Instead, they must reframe their internal priorities to integrate human rights considerations as a central component of their operational goals. While this is one of the objectives of the CSDDD, the current text may fall short in achieving it. In contrast, the UNGPs emphasize the internal integration of human rights concerns, asserting that effective integration requires changes to internal decision-making processes, budget allocations, and oversight mechanisms within companies.Footnote ³⁴ This framework sets expectations for companies to embed human rights concerns throughout all corporate practices before extending these considerations down the supply chain. The UNGPs stress that human rights impact assessments are only effective when a company's human rights policy commitments are embedded across all relevant business functions.

This internal focus is missing from the CSDDD obligations, which concentrates more on ensuring suppliers’ compliance rather than holding companies responsible for the lack of attention to labor risks internally, or investments to prevent labor rights violations. Article 7(c) of the CSDDD does, however, represent a positive step in this direction, requiring companies to “make necessary modifications or improvements to the company's own business plan, overall strategies, and operations, including purchasing practices, design, and distribution practices.” While this provision highlights the importance of internal corporate action, the European Parliament's initial 2020 proposal went further by obliging companies to avoid contributing to harm through their purchasing practices—a provision that was ultimately abandoned in the final version of the Directive. Footnote ³⁵

It is now up to national legislators and the soon-to-be-established supervisory authorities to ensure that companies prioritize stakeholder consultation, account for the internal costs of implementing human rights policies, and achieve both the horizontal and vertical integration of these policies—not only at the supplier level but within the corporate structure itself. Germany's due diligence law already sets a precedent in this regard by requiring companies to establish an internal human rights committee.Footnote ³⁶ These internal structural changes are likely to have a trickle-down effect throughout the supply chain, leading to positive implications for labor standards, as suppliers align with the renewed priorities of buyers.