The European Supply Chain Directive

On Friday, March 15, 2024, the EU member states voted in favor for the European Supply Chain Directive (Corporate Sustainability Due Diligence Directive - CSDDD) in the EU Committee of Permanent Representatives (COREPER) after a long back-and-forth. The vote, originally scheduled for February 9, 2024, had been initially canceled and postponed indefinitely. The reason for this was that numerous member states - including Germany - had already announced their abstention from the vote in advance. The final version of the directive is less burdensome for companies compared to the previous draft. While the full text of the directive has not yet been published, the key provisions are already known. Although the full text of the directive has not yet been published, the most important framework conditions are already known. We would like to give you an overview.

What is the European Supply Chain Directive?

Representatives of the European member states, the European Parliament, and the Commission had already agreed on key points of a European Supply Chain Directive as part of a trilogue procedure on December 14, 2023. This directive is intended to obligate companies in the EU to ensure environmental, sustainability, and social standards along their value chains. This responsibility would affect the entire upstream value chain (resource extraction, production at suppliers) and downstream value chain (processing at customers, disposal). Further content relates to the implementation of the goals of the Paris Climate Agreement in the companies covered, e.g. by making management salaries dependent on the achievement of certain climate targets.

European companies with more than 500 employees and a worldwide net turnover of 150 million euros per year and non-European companies with an annual turnover of 150 million euros within the EU should fall within the scope of the directive.

Companies with more than 250 employees and a global net turnover of more than 40 million euros should also fall within the scope of application, provided that at least half of this turnover comes from one of the listed "high-risk sectors" (textiles, agriculture, forestry, fisheries, raw materials production and trade).

For the time being, the directive will not apply to companies in the financial sector.

According to the outcome of the trilogue negotiations, companies found to be in violation of the directive could face fines of up to 5% of their global turnover. Another sanction proposed was exclusion from public procurement contracts. The most contentious issue among member states, aside from the thresholds for the applicability of the directive, was the proposed civil liability for companies for violations throughout the entire value chain, vis-à-vis affected individuals, trade unions, and NGOs.

This would have made the requirements of the European Supply Chain Directive significantly stricter than those of the German Supply Chain Due Diligence Act (LkSG), which only concerns the upstream value chain, does not pursue climate policy objectives, does not establish civil liability, and only covers companies with over 1000 employees.

What changes does the voting result include?

To obtain the consent of at least 15 member states representing more than two-thirds of the EU population, the original draft resulting from the trilogue negotiations has now been significantly weakened in key aspect.

Applicability to companies with 1000 or more employees and a net turnover of 450 million euros.
Removal of the category "high-risk sectors"
Extension of transition periods:
- For large companies with more than 5000 employees and 1.5 billion euros in annual turnover, three years after entry into force.
- For companies with more than 3000 employees and 900 million euros in annual turnover, four years after entry into force.
- For other companies within the scope, five years after entry into force.
No linkage of managerial salaries to the achievement of climate goals.
Restriction of civil liability:
- Liability towards employees and trade unions for "intentional or negligent" violations.
- Liability only for one's own wrongdoing instead of attributing wrongdoing of business partners within their supply chain.

What happens next?

The agreement reached now marks a significant milestone for the CSDDD. However, the final hurdle has not been cleared yet: the approval of the European Parliament is still pending and is expected to take place before the upcoming European elections in June 2024. An agreement is now within reach, and it is likely that the directive will come into effect this summer.

In Germany, this means that a tightening of the LkSG can be expected, less drastic than initially anticipated, as the directive will need to be transposed into national law after its entry into force. Germany will have two years to do so after the directive comes into effect. Consequently, by 2029, all companies falling within the scope of the directive will need to comply with its requirements. In our consulting practice, we observe a clear trend of companies increasingly engaging with the contents of the LkSG and the anticipated CSDDD. This is already worthwhile, as even companies not directly falling within the scope may be affected as suppliers in the risk analysis conducted by their clients.

We are happy to provide you with further advice.