What it means for companies in Germany
Judith Winterstein and Kathrin Ankele, supported by Bengisu Uysal
On Friday, 15.03.2024, the majority of EU member states voted in favor of adopting the EU Supply Chain Directive (Corporate Sustainability Due Diligence Directive – CSDDD). After the member states were unable to agree on the version adopted by the EU Parliament, further compromises were made. Companies in Germany are already subject to the German Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz, LkSG). The main changes resulting from the current compromise on the CSDDD and significant differences to the LkSG, which may entail additional work for companies in Germany, are outlined below.
What does the EU Corporate Sustainability Due Diligence Directive CSDDD cover?
The CSDDD requires companies to analyze, monitor, and improve their value chains regarding human rights risks such as child and forced labor as well as environmental risks. To mitigate risks, companies must develop and implement targets and measures, set up complaint mechanisms for employees, and report annually on sustainability in their value chains. The due diligence obligations apply to the company itself, direct contractual partners, and indirect suppliers. This means that a company’s responsibility does not end at its factory gates but extends along the entire value chain.
The directive is due to come into force in 2027 and applies to EU companies with more than 1,000 (previously 500) employees and an annual turnover of more than 450 million euros (previously 150 million euros). With a three-year delay, non-EU companies with turnover in the EU above this threshold are also obliged to implement the directive (affects around 4,000 companies). Another new addition is that the CSDDD will be implemented gradually over a period of five years, starting with companies with more than 5,000 employees and an annual turnover of EUR 1.5 billion (see phased model in the figure below). The gradual inclusion of companies that do not meet the thresholds but are active in high-risk sectors, as envisaged in the EU Parliament’s draft, has been abandoned. Another significant change is the weakening of civil liability. The limitation period for actions for damages must be at least five years (originally ten years) and may not be shorter than the limitation period for civil liability in national legal systems.
The next step is for the members of the EU Parliament to give their final approval to the CSDDD. This must take place in April so that the directive can be adopted before the European elections in June. Approval is considered likely. The CSDDD comes into force 20 days after publication. The EU member states must then transpose the directive into national law within two years.
Figure: Phased model of the EU Supply Chain Directive CSDDD
What are the main differences to the LkSG in Germany?
The German Supply Chain Due Diligence Act, which came into force in 2023, was initially aimed at larger companies with at least 3,000 employees. Since January 1, 2024, companies with more than 1,000 employees must also comply with the requirements of the LkSG. Due to the gradual implementation of the CSDDD, the LkSG is now even stricter. No turnover thresholds were set in the LkSG, which means that more companies could be affected by the LkSG than by the CSDDD. One key difference is that the CSDDD applies to the entire value chain, i.e. including use and disposal as well as indirect suppliers, while the LkSG focuses on regular inspections of direct suppliers. Indirect suppliers are only to be audited on an ad hoc basis. This difference also applies to the implementation of a complaints mechanism. Furthermore, environmental criteria are given greater priority in the CSDDD than in the LkSG. In terms of implementation, this means that affected companies must include more topics in their risk analyses, prevention and remedial measures.
In contrast to the LkSG, the EU directive provides for civil liability for breaches of due diligence obligations – throughout the entire value chain. However, a weakened form is to be implemented for indirect business partners. A case of liability only exists if a company has failed to implement appropriate measures to fulfill its due diligence obligations (depending on the type and probability of occurrence of the impact). The example of damage to health shows that this can entail considerable risks for a company if, for example, the drinking water of an entire region and therefore of many people is contaminated by the application of harmful pesticides. However, it is still unclear who will bear the burden of proof for any infringements and how far the authorities’ powers will extend at national level. Fines of up to five percent of global turnover can be imposed for infringements. The exact amount is to be determined by the member states. In Germany, the current rates of the LkSG could therefore be retained (two percent of average annual turnover). Furthermore, the companies’ shall be published.
Conclusion
With the compromises reached, it is currently unlikely that the CSDDD will affect more companies in Germany than the LkSG already does. The biggest extensions are that the entire value chain and additional (environmental) risks must be included. In addition, liability issues – despite many questions that still need to be clarified – present companies with further challenges. As the CSDDD is not due to come into force until 2027, companies in Germany have time to prepare for the stricter requirements and implement them. In many other EU member states, companies have not yet been affected by a supply chain law. Accordingly, they have less experience with implementation. What was originally perceived as a competitive disadvantage for companies in Germany can now become an advantage. This is because many companies in Germany have already set out to analyze their supply chains, created structures and established dialogues with suppliers to implement preventive and remedial measures. The recommendation at this point can only be to further extend this lead. We will be happy to advise you on this. You can find information about our support services here.