European Supply Chain Act (CSDDD) nearing the finish line

On 14 December 2023, after long negotiations, the European Council and the European Parliament reached provisional agreement regarding the contents of the Corporate Sustainability Due Diligence Directive (“CSDDD”, or “CS3D”).

The directive, also known as the European Supply Chain Act or “due diligence directive”, is intended to improve the human rights situation, protect the environment and drive efforts towards international climate protection goals. The provisional agreement must still be formally adopted by both institutions.

Because the final wording of the directive will probably not be published for a few weeks, our findings are based on press releases from the European Council and the European Parliament, including oral statements made at the press conference.

Below we have summarised the essential points (I.) and analysed the extent to which the CSDDD differs from the German Supply Chain Act (II.).

I. Main elements

Scope

The CSDDD will apply to large companies that have more than 500 employees and net worldwide turnover of over €150 million. Companies with more than 250 employees and net turnover of more than €40 million will be subject to the CSDDD if they generate at least €20 million in a high-risk sector. High-risk sectors include (i) manufacture and wholesale trade of textiles, clothing and footwear, (ii) agriculture including forestry and fisheries, (iii) manufacture of and wholesale trade in food and (iv) extraction of and wholesale trade in mineral resources.

Companies that have not been established under the laws of an EU Member State are likewise subject to the CSDDD if they have over €300 million net turnover generated in the EU, three years from the entry into force of the directive. The Commission has announced that it will publish a list of such companies.

Climate and environmental protection

The CSDDD commits itself to the 1.5° C goal set out in the Paris Agreement. Companies subject to the CSDDD are required to adopt a plan ensuring that their business model and strategy are compatible with the Paris Agreement (transition plan).

The due diligence obligations will also address environmental concerns, e.g. harmful soil change, water or air pollution, harmful emissions or excessive water consumption.

Supply chains

The due diligence obligations will not extend solely to a company’s own business operations and its suppliers (upstream), but in some cases will also include activities undertaken after production (downstream), such as warehousing, distribution and recycling.

Civil liability

The CSDDD establishes a period of five years to bring claims by those concerned by adverse impacts (including trade unions or NGOs). Injunctive measures and legal aid are intended to enable an effective enforcement.

Supervision and penalties

The supervisory authorities of the Member States can initiate investigations and impose penalties, including fines of up to 5% of worldwide net turnover, and impose and publicise violations (“naming and shaming”). The Commission will establish a network of national supervisory authorities (European Network of Supervisory Authorities).

Financial sector

A trouble spot in the trilogue was the issue of whether the financial sector, e.g. credit institutes, asset managers and investment firms, should be exempted from the CSDDD. In this regard, it was stated at the press conference on 14 December 2023 that financial sector companies should also be obliged to fulfil the due diligence obligations in their own business operations and in regard to suppliers (upstream) as well as to contribute to achievement of the climate protection goal of the Paris Climate Agreement in the context of a transition plan. It was also stated that the Commission would review whether the financial sector will be completely subject to the CSDDD in the future.

II. Schedule and anticipated amendments to the German Supply Chain Act

The CSDDD will enter into force on the twentieth day after its publication in the Official Journal of the European Union. The Member States will then have two years to transpose the directive into national law. The German legislator can be expected to make adjustments to the German Supply Chain Act in several places.

The chart below compares the initial information regarding the CSDDD with the provisions of the German Supply Chain Act:

Topic	German Supply Chain Act	CSDDD
Scope	Companies with a registered office or branch office in Germany at least 3,000 or 1,000 employees respectively in Germany	Companies founded under the laws of an EU Member State with net turnover of more than €150 million and more than 500 employees Companies founded under the laws of an EU Member State with net turnover of more than €40 million or net turnover of €20 million in a “high-risk sector”, i.e. (i) manufacture and wholesale trade of textiles, clothing and footwear, (ii) agriculture, including forestry and fishery, (iii) manufacture of and wholesale trade in foods and (iv) extraction of and wholesale trade in mineral resources more than 250 employees Non-EU companies net turnover of more than €300 million in the EU, three years after CSDDD enters into force The Commission will publish a list of companies subject to the due diligence obligations.
Due diligence obligations	Companies must implement the due diligence obligations in their own business operations and towards (in)direct suppliers	Companies must implement the due diligence obligations in their own business operations, towards indirect suppliers (upstream) and in some cases, also downstream activities (warehousing, distribution or recycling)
Climate change/ Climate goals	The German Supply Chain Act does not include any climate goals or measures to protect the climate or mitigate climate change	Companies subject to the CSDDD must draft and implement a transition plan to mitigate climate change. Companies are to be climate-neutral by 2050.
Financial sector	The German Supply Chain Act applies to all companies that fall under its scope, i.e. including companies in the financial sector.	Apparently, financial sector companies must implement the due diligence obligations in their own business operations and towards their suppliers (upstream). Financial sector companies must also contribute to the achievement of the goals of the Paris Agreement.
Management remuneration	The German Supply Chain Act has no influence on company directors’ remuneration.	For companies with more than 1,000 employees, climate goals will apparently have an effect on directors’ remuneration.
Civil liability	The German Supply Chain Act does not provide for civil liability. Civil liability is possible under other German laws.	Civil liability is to be enabled.
Possible fines	Up to 2% of average annual turnover if annual turnover averages more than €400 million	Up to 5% of worldwide net turnover

 

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