Corporate Sustainability Due Diligence Directive: Sustainability obligation resulting from EU Directive 2024/1760 poses new challenges to companies

From a conceptional perspective, the CSDDD builds on the Supply Chain Act, but exceeds the regulatory scope of the latter in some respects. The CSDDD requires companies to proactively identify human rights and certain environmental risks in their value chains, take preventive and remedial measures and report on them. This includes the activities of a company’s business partners in the upstream supply chain, such as the manufacture of goods and provision of services, including, for example, product development, extraction of raw materials and transport. However, it also includes the activities of a company’s business partners in the downstream supply chain, for example, distribution, transport and storage of the products. Unlike the due diligence obligations under the Supply Chain Act, the CSDDD due diligence obligations thus exist along the entire value chain.

The CSDDD differs greatly from the regulatory content of the Supply Chain Act in that it significantly extends the due diligence obligations with regard to compliance with environmental requirements within the value chain. For example, companies are to be required to develop a climate plan in order to bring their corporate strategy in line with the 1.5 degrees Celsius target of the Paris Agreement, contribute to the goal of climate neutrality and set the appropriate emission reduction targets for themselves.

The CSDDD applies to EU companies with more than 1,000 employees and an annual net turnover of more than EUR 450 million. Similar thresholds apply to non-EU companies.

The Directive provides for the gradual implementation of its scope in three phases:

• from July 2027: companies with more than 5,000 employees and a net turnover of more than EUR 1.5 billion;
• from July 2028: companies with more than 3,000 employees and a net turnover of more than EUR 900 million;
• from July 2029: companies with more than 1,000 employees and a net turnover of more than EUR 450 million.

Due to the two cumulative criteria for the application of the CSDDD (amount of turnover and number of employees), the obligations would probably affect fewer companies in Germany than if going by the Supply Chain Act, where the only criterion used is the number of employees. It remains to be seen, however, how the German legislative bodies will adjust the Supply Chain Act in the light of the CSDDD – or whether the Directive will merely be given priority.

The CSDDD provides for a combination of official monitoring and civil liability. The Member States, which are required to transpose the Directive into national law by no later than July 2026, may carry out investigations, issue orders and impose administrative fines. As for the potential administrative fine, the national legislature must provide for a maximum limit of not less than 5% of the annual net turnover, which is to be applied based on the circumstances of the individual case.

What is new when it comes to civil liability is that the law of the EU Member States, rather than the law of the foreign place of damage, will apply in cross-border cases. This will make it easier for injured parties to seek redress in civil court and will also simplify the proceedings. In all other respects, liability will be governed by German law, which means, in particular, that companies are only liable for their own fault, and only for foreseeable damage that could have been avoided.

The Supply Chain Act, on the other hand, does not currently provide for such civil liability (see § 3 (3) Supply Chain Act). According to the CSDDD, companies could therefore, under certain circumstances, be faced with third-party claims in addition to substantial pecuniary penalties.

The CSDDD is one of a large number of pieces of proposed EU legislation, such as the Conflict Minerals Regulation (EU) 2017/821, the Deforestation Regulation (EU) 2023/1115 and the Carbon Border Adjustment Mechanism Regulation (EU) 2023/956 (CBAM). All those pieces of proposed legislation have in common that access to the European market and the associated European value creation through corporate supply chains is linked to human rights, environmental and climate protection conditions, thus increasing the economic transformation pressure on the companies concerned.

The CSDDD offers companies the opportunity to make their value chains more effective and efficient and benefit from cost savings and the minimisation of risks. Moreover, compliance with the CSDDD can also help to enhance the company’s reputation and avoid potential damage to the company’s image.

A company’s management and legal department should always keep one important point in mind: complying with the CSDDD is a legal obligation, and failure to comply with this obligation can lead to hefty pecuniary penalties and legal consequences. In particular for SMEs, it involves a considerable amount of resources, despite possible subsidies in the form of state aid. Both SMEs and large companies would be well advised to position themselves clearly with regard to the CSDDD, and to do so at an early stage, in order to benefit from competitive advantages.