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, 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.