Trans-Europe express: How Indian businesses can sustain and grow in Europe

India’s economic growth and expanding role in global trade, exemplified by its recent free trade deal with the European Free Trade Association (EFTA), are significant opportunities for trade with the EU. However, compliance with new EU supply chain laws is essential for Indian businesses aiming to sustain and grow in Europe, India’s third-largest trading partner. Key legislative changes are deforestation regulation, corporate sustainability and due diligence directive, and forced labour regulation.India’s domestic regulatory landscape is far from aligned with these new trade standards. So, domestic businesses must look into these new laws. Indian sectors facing the biggest risks are textiles and garments, pharma, and food and agriculture. Unless they comply, relevant products produced by Indian businesses can’t be exported to the EU market.

Deforestation-free products The law came into force in June 2023, mandating compliance from large companies by December 30, 2024, and from SMEs by June 30, 2025. It aims to reduce deforestation in supply chains for products made after June 29, 2023, focusing on seven commodities – cattle, coffee, cocoa, oil palm, rubber, soy and wood – and extends to products made from these commodities, such as leather, chocolate, palm oil, rubber tyres and books.

Under this regulation, products must be ‘deforestation-free’, meaning they should not come from land deforested after December 31, 2020. Companies must provide due diligence statements to confirm compliance. Penalties for non-compliance are severe, including substantial fines based on global turnover, confiscation of products, public procurement bans and possible future prohibition from placing relevant products on the EU market.

Corporate Sustainability Due Diligence Directive CSDDD focuses on identifying and mitigating environmental and human rights risks within large companies’ supply chains and the chain of activities of their business partners. It applies to large EU and non-EU companies, such as Indian companies with a net turnover of ₹450 m or more generated within EU. Smaller companies will be indirectly affected through supply chain demands for due diligence information.

CSDDD requires companies to take ‘appropriate measures’ to identify, prevent or mitigate environmental and human rights risks. This involves conducting risk assessments and integrating new contractual clauses with all value-chain partners to ensure compliance. To help companies focus resources on this task, the legislation identifies certain environmental and human rights harms that companies should consider in their risk assessments.For Indian businesses in EU value chains, this means enhancing their ESG policies and risk-assessment tools. Those directly affected by CSDDD will take their duties seriously. Compensation is payable to victims and substantial fines based on global turnover are payable by directly affected companies. Forced Labour Regulation aims to eliminate products made with forced labour from the EU market. It applies to all companies, regardless of size, globally. Enforcement is likely to be focused on larger economic operators at an early stage of the EU value chain, such as importers, manufacturers, producers or suppliers.

Indian businesses involved in manufacturing goods for export to the EU must ensure their products are free from forced labour. The impact of similar legislation in the US, which has resulted in the detention of 35 Indian shipments in April alone, highlights the importance of stringent supply chain audits and adherence to international labour standards.

To navigate these regulatory changes, Indian businesses need to take several strategic steps:

Enhance ESG compliance by developing policies aligned with EU standards.

Regular audits and supply chain assessments are essential.

Strengthening due diligence processes is also critical.

Tracking the origin and processing of commodities and training supply chain partners on compliance requirements will help meet the relevant EU standards and minimise exposure to prohibited products.

Monitoring regulatory developments and staying updated on EU legislation will allow businesses to proactively adjust their practices. Engaging with industry associations and regulatory bodies can also provide valuable guidance and resources.

Develop contingency plans for potential disruptions and establish crisis management teams to swiftly address compliance-related issues.

By enhancing ESG practices and policies, strengthening due diligence and realigning business strategies and business models, Indian companies can continue to capitalise on growth opportunities in the evolving global trade landscape.

(Hodivala is barrister, Matrix Chambers, London, and Naik is associate partner,MZM Legal, Mumbai)