Due diligence and sustainability reporting in large corporations: regulatory spillovers across value chains

The European Union’s regulatory process aimed at establishing,for large companies, detailed rules on both sustainability and due diligence reporting, has been underway for over a decade (see EU Directive 2014/95, regarding the disclosure of non-financial information). As a result of this development, companies operating within the internal market are now required to ensure that their activities do not cause negative environmental impacts (see EU Directive 2024/1760, Corporate Sustainability Due Diligence Directive). At the same time, regarding the sustainability reporting on environmental and social matters, EU regulations impose additional disclosure requirements on larger companies, which go beyond traditional data, and must be adhered to through strict common standards (see EU Directive 2022/2464, Corporate Sustainability Reporting Directive, transposed into Italian law by Legislative Decree No. 125 of September 6, 2024). A key feature of these directives is their mandatory nature, indicating a shift away from the previous voluntary approach, which incentivized companies to voluntarily comply with human rights and environmental sustainability standards. This marks a move from a reward-based system to one based on legally binding obligations. At the same time, it is important to recognize that, as widely demonstrated in the literature, companies are heavily influenced by the behaviour of their business partners. It is well-known that in supply chains, relationships between partners are typically governed by B2B contracts, often within the framework of contracting or supply agreements, and often revolve around a central player – usually a large company – that acts as the lead firm. The structural link between the different operators in the chain leads to the propagation of the operational and strategic choices of the dominant firm, significantly affecting the freedom of those at the lower levels of the supply chain. Therefore, it is important to explore whether the European directives on environmental sustainability will lead to regulatory spillovers along the value chains, potentially creating systemic effects that, even without direct application, might substantially impact small and medium-sized enterprises (SMEs). A deeper understanding of these implications requires looking at how other countries – especially the United States, Germany, and Norway – have dealt with similar issues, in order to evaluate their practical impact and draw meaningful comparisons.