The European Supply Chain Law is coming
The European Supply Chain Law is coming
26. January 2024
As part of the EU Green Deal, the Commission has set itself the goal of making the entire EU more sustainable. This includes focusing on the value chains of companies. Germany has already introduced the Supply Chain Sustainability Act ("LkSG"). The European Council and the European Parliament have now followed, by reaching a provisional agreement on the European "Supply Chain Act", the Corporate Sustainability Due Diligence Directive ("CSDDD"), on December 14, 2023. The purpose of the directive is to identify human rights and environmental risks in the value chain and to minimize them through appropriate measures. It is a political agreement that still has to go through the legislative process. However, the key content and obligations have now been established, therefore companies should start preparing for the CSDDD at an early stage.
As expected, the CSDDD is much stricter than the LkSG and will therefore significantly expand the scope and due diligence obligations. In part 1 of our blog series on the CSDDD, we therefore provide an overview of the scope of the CSDDD and the differences to the LkSG.
The Commission, Parliament and Council have been arguing for years about the personal scope in particular. The agreement now stipulates that the CSDDD applies to the following companies:
- EU companies with more than 500 employees and a worldwide net turnover of more than EUR 150 million (Art. 2 (1) lit. a CSDDD-D);
- EU companies from certain "risk sectors" (fashion, food/agriculture and mining/commodity extraction) with more than 250 employees and a worldwide net turnover of more than 40 million euros (Art. 2 (1) lit. b CSDDD-D);
- Non-EU companies that meet the above-mentioned thresholds and generate their turnover in the EU. The EU Commission will soon publish a list of the companies concerned (Art. 2 (2) lit. a and b CSDDD-D);
Small and medium-sized enterprises (SMEs) do not fall within the scope of the CSDDD (Recital 47). However, they are likely to be indirectly affected as suppliers, as the obligations are likely to be passed on in the corresponding business relationships. The financial sector (credit institutions, investment funds, insurance companies and pension funds) is also temporarily excluded from the scope of the CSDDD (Recital 22).
Even if the LkSG is only based on the number of employees and not additionally on net turnover, it only affects companies with more than 1,000 employees, regardless of their sector (Sec. 1 (1) sentence 3 LkSG). The CSDDD will therefore greatly expand the personal scope.
The material scope of the LkSG can be divided into two parts: The "territorial" scope (own business area, direct suppliers, indirect suppliers) and the substantive scope (human rights, environmental risks, climate protection).
With regard to the "territorial" scope, it should first be noted that, contrary to the colloquial term "Supply Chain Directive", the CSDDD already extends the due diligence obligations to the company's own business area (Art. 6 (1), (7), (8) CSDDD-D), including subsidiaries (Art. 6 (1) in conjunction with Art. 3 lit. d CSDDD-D). Furthermore, companies are not only obliged to exercise due diligence for direct business partners, but also for indirect business partners with whom an "established business relationship" exists (Art. 6 (1) CSDDD-D). Finally, the CSDDD focuses not only on the supply chain up to the company itself, but also on the entire value chain, both "upstream" and "downstream". "Upstream" means the upstream value chain, starting with the extraction of raw materials. Downstream" refers to the downstream value chain, including sales, transportation and waste disposal (Art. 3 lit. g CSDDD-D).
As the due diligence obligations of the CSDDD, unlike the LkSG, cover the entire value chain, the requirements for companies for risk analysis and implementation of due diligence obligations are therefore significantly increased.
The substantive scope of the CSDDD can also be divided into three areas: The protection of human rights, of the environment and of the climate. The CSDDD refers specifically to a series of established obligations on human rights and environmental protection regulations in international agreements (Annex I and Annex II CSDDD-D).
- Human Rights
In principle, the areas of protection under the CSDDD and the LkSG are very similar. Both the LkSG and the CSDDD impose due diligence obligations on companies regarding the prohibition of child labor and forced labor as well as the prevention of unequal treatment or the withholding of an appropriate wage. Both also aim to prevent harmful soil changes, water pollution, air pollution and forced resettlement. The CSDDD also expands the catalog of human rights to include the right to liberty and security, the prohibition of arbitrary or unlawful interference with privacy, family, home or correspondence, the prohibition of interference with freedom of thought, conscience and religion, and the access of workers to adequate housing.
- Environmental Protection
The environmental risks relevant under the CSDDD only partially correspond to the environmental risks of the LkSG pursuant to Sec. 2 (3) LkSG. Both the CSDDD and the LkSG refer to the Minamata Convention for environmental risks (prohibition of processing of mercury), the POP- Convention (ban on certain organic pollutants) and the Basel Convention (ban on the import and export of hazardous waste). In addition, the CSDD also serves to protect biodiversity and endangered species, prohibit the import and export of endangered animals and covers the import of chemicals and controlled substances as well as pollution from ships. Companies are also obliged to document and refrain from negative impacts on cultural and natural heritage, wetlands and the marine environment.
- Climate Protection
Alongside human rights and environmental protection, combating climate change is the "third pillar" of the CSDDD. According to Art. 15 CSDDD-D, companies must develop a plan to ensure that their business model and strategy are compatible with the 1.5°C target. In the LkSG, however, climate protection is not a mentioned goal.
The scope therefore also goes well beyond that of the LkSG. The CSDDD expands the catalog of protected environmental and human rights and additionally includes climate protection.
It is evident that the CSDDD is much stricter than the German LkSG in all areas. Many companies not currently covered by the LkSG will be covered by the CSDDD. And many companies that are currently covered by the LkSG will be subject to significantly higher due diligence requirements. Companies of all sizes should therefore consider the new CSDDD at an early stage in order to have sufficient time to adapt to the new due diligence obligations.