The European Supply Chain Due Diligence Act Is Coming

On 15 March 2024, a suf­fi­ci­ent ma­jo­rity of EU mem­ber sta­tes in the Com­mit­tee of Per­ma­nent Re­pre­sen­ta­ti­ves, a sub­si­di­ary body of the Coun­cil of the Eu­ro­pean Union...
Germany Corporate/Commercial Law
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On 15 March 2024, a suf­fi­ci­ent ma­jo­rity of EU mem­ber sta­tes in the Com­mit­tee of Per­ma­nent Re­pre­sen­ta­ti­ves, a sub­si­di­ary body of the Coun­cil of the Eu­ro­pean Union, agreed to the di­lu­ted draft of the Cor­po­rate Sus­tai­na­bi­lity Due Di­li­gence Di­rec­tive (CSDDD). Ger­many ab­stai­ned from the vote. The draft now ad­op­ted de­via­tes from the preli­mi­nary po­li­ti­cal agree­ment ori­gi­nally re­ached in the tri­lo­gue. It must now be for­mally ad­op­ted by the EU Coun­cil and sub­se­quently ap­pro­ved by the EU Par­lia­ment.

The di­rec­tive ob­li­ges com­pa­nies in Eu­rope to re­view their supply chains for en­viron­men­tal and, in par­ti­cu­lar, la­bor prac­tices to im­prove the hu­man rights si­tua­tion, pro­tect en­viron­men­tal con­cerns, and ad­vance in­ter­na­tio­nal cli­mate pro­tec­tion goals. The CSDDD aims to pre­vent com­pa­nies in the in­ter­nal mar­ket from ha­ving to deal with mul­ti­ple, po­ten­ti­ally in­com­pa­ti­ble na­tio­nal re­gu­la­ti­ons.

Who is affected by the CSDDD?

The im­pro­ved scope of the di­rec­tive now in­clu­des EU com­pa­nies with more than 1,000 em­ployees (in­iti­ally 500) and a glo­bal net an­nual tur­no­ver of over EUR 450 mil­lion (in­iti­ally EUR 150 mil­lion). The ap­pli­ca­tion is to be pha­sed in so that du­ring a tran­si­tion pe­riod of th­ree years, in­iti­ally com­pa­nies with more than 5,000 em­ployees and a glo­bal net tur­no­ver of more than EUR 1.5 bil­lion eu­ros are af­fec­ted. Af­ter four years, the th­res­hold drops to 3,000 em­ployees and EUR 900 mil­lion in tur­no­ver un­til, af­ter five years, the sta­tutory scope of ap­pli­ca­tion is re­ached.

Note: The in­iti­ally plan­ned high-risk sec­tor ap­proach (i. e., the gra­dual in­clu­sion of com­pa­nies that do not meet the cri­te­ria for the scope of ap­pli­ca­tion but are ac­tive in high-risk in­dus­tries) has been aban­do­ned.

What due diligence obligations must be met?

The hu­man rights and en­viron­men­tal due di­li­gence ob­li­ga­ti­ons to be met by af­fec­ted com­pa­nies re­late to the so-cal­led "ac­tivity chain", i. e., their own busi­ness area, up­stream busi­ness part­ners (suppliers), and to some ex­tent also busi­ness part­ners with down­stream ac­tivi­ties, such as dis­tri­bu­tion, trans­port, sto­rage, and dis­po­sal of the pro­duct.

Ob­li­ga­ted com­pa­nies must re­tain do­cu­men­ta­tion for com­pli­ance with the due di­li­gence ob­li­ga­ti­ons un­der this di­rec­tive for at least five years from the crea­tion or re­ce­ipt of the do­cu­ments.

Also, the ob­li­ga­ted com­pa­nies must de­sign and im­ple­ment a cli­mate plan ("so-cal­led tran­si­tion plan") to mit­igate cli­mate change. This plan should out­line the busi­ness mo­del and stra­tegy with which the com­pany contri­bu­tes to achie­ving the 1.5°C tar­get by 2050.

Liability Risks for Companies

Un­like the Ger­man Supply Chain Due Di­li­gence Act, the di­rec­tive pro­vi­des for ci­vil lia­bi­lity of com­pa­nies. If an ob­li­ga­ted com­pany vio­la­tes the due di­li­gence ob­li­ga­ti­ons, na­tu­ral or le­gal per­sons should have the op­por­tu­nity in na­tio­nal law to claim full com­pen­sa­tion for the da­mage cau­sed by the bre­ach of duty for at least five years (li­mi­ta­tion pe­riod).

Fur­ther­more, the di­rec­tive pro­vi­des for fi­nes of up to five per­cent of the glo­bal net tur­no­ver.

When do the new re­gu­la­ti­ons ap­ply?

The EU Par­lia­ment must still give its fi­nal ap­pro­val to the di­rec­tive, with a ma­jo­rity con­side­red li­kely. The di­rec­tive is ex­pec­ted to be publis­hed in April or May 2024 and will come into force 20 days la­ter. The EU mem­ber sta­tes then have two years to trans­pose the di­rec­tive into na­tio­nal law. In Ger­many, an amend­ment to the Supply Chain Due Di­li­gence Act is ex­pec­ted.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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