The EU Supply Chain Directive

Like the German Supply Chain Act, the draft CSDDD also aims to oblige companies to fulfil human rights and environmental due diligence obligations, both for themselves and within their supply chains. Companies that fall within the scope of the draft CSDDD are to carry out risk analyses and take preventive and corrective measures to identify, prevent and put an end to adverse impacts on the environment and human rights. Furthermore, companies must establish a complaints mechanism and regularly prepare and submit an accountability report on the fulfilment of the obligations incumbent upon them.

The personal scope of the Directive is defined in Article 2 of the Commission’s draft CSDDD. With its proposal, the European Parliament has extended this scope compared to the Commission’s draft. According to Article 2(1)(a) of the EP’s draft CSDDD, companies that had more than 500 employees and a net worldwide turnover of more than EUR 40 million in the last financial year (in the Commission’s draft, the threshold was set at EUR 150 million) are to fall within the scope of the Directive.

Moreover, according to Article 2(1)(b) of the EP’s draft CSDDD, companies that did not reach those threshold values but are the ultimate parent company of a group that had more than 500 employees and a net worldwide turnover of more than EUR 150 million in the last financial year fall also within the scope of the Directive. While the Commission’s draft stipulated this exception for particular industries only, the EP’s draft contains no such restriction so that the scope has been considerably extended and can no longer be considered an exception.

In addition, according to Article 2(3) of the EP’s draft CSDDD, the Directive also applies to third-country companies – that is, companies that were established outside the EU – if they generated a net worldwide turnover of over EUR 150 million in the last financial year, provided that at least EUR 40 million was generated in the EU. According to the Commission’s draft, the Directive was only intended to apply to such companies if they generated a net turnover of EUR 150 million in the EU, so this is another tightening by the Parliament.

There are also other provisions from which it can be seen that the European Parliament intends to include as many companies as possible within the scope of the Directive. To give an example: while Article 2(3) of the Commission’s draft CSDDD provides that temporary agency workers are to be included in the calculation of the number of employees, the EP’s draft CSDDD additionally includes “other workers in non-standard forms of employment”. Finally, according to Article 3(a) of the EP’s draft CSDDD, not only corporations but also partnerships, such as general and limited partnerships, fall within the scope of the Directive.

By contrast, according to the currently applicable Section 1 (1) of the German Supply Chain Act, the German Supply Chain Act only applies to companies that have their head office, their headquarters, a branch or their statutory seat in Germany and regularly employ more than 3,000 (from 1 January 2024: 1,000) employees in Germany, regardless of legal form.

Even though the EP’s draft CSDDD reduces the minimum number of employees, it requires at the same time a certain minimum turnover, thus putting the reduction into perspective. The Commission nevertheless estimates that around 13,000 companies from the EU and approximately 4,000 third-country companies will be affected by the Directive, and these figures could be even higher if going by the European Parliament’s proposal. All in all, the scope would increase, as far as German companies are concerned.

At the core of this Directive are the due diligence obligations stipulated in Articles 5 to 11 of the Commission’s draft CSDDD, as listed in Article 4 of the Commission’s draft CSDDD. The system is similar to that of the German Supply Chain Act and includes integrating due diligence into companies’ policies (Article 5), identifying actual or potential adverse impacts (Article 6), preventing and mitigating potential adverse impacts, bringing actual adverse impacts to an end and minimising their extent (Articles 7 and 8), establishing and maintaining a complaints procedure (Article 9), monitoring the effectiveness of their due diligence policies and measures (Article 10), as well as publicly communicating on due diligence (Article 11). According to recital 15 of the Commission’s draft CSDDD – as well as according to the German Supply Chain Act – the companies concerned do not owe any particular success; instead, they are merely obliged to make efforts, which is why the appropriate measures include in particular actions to identify or prevent adverse impacts.

In addition, the European Parliament has also provided for stricter due diligence obligations. Instead of carrying out annual updates, companies are to update their policies continuously, upon the occurrence of changes (Article 5(2) of the EP’s draft CSDDD). Furthermore, in its proposal the European Parliament focuses in particular on financial undertakings within the meaning of Article 3(a)(iv) of the EP’s draft CSDDD if they exceed the thresholds in Article 3 of the EP’s draft CSDDD. If financial services are provided, adverse human rights impacts and adverse environmental impacts must be identified both before providing that service and during the provision of the service (Article 6(3) of the EP’s draft CSDDD). With regard to financial undertakings it is further assumed that they are directly linked to an adverse impact in their value chain without causing or contributing to it (Article 7(1b), Article 8(2b) of the EP’s draft CSDDD). Finally, according to Article 8a of the EP’s draft CSDDD, institutional investors and asset managers, too, are to take appropriate measures to induce their investee companies to bring actual adverse impacts to an end

According to Section 2 (5) of the German Supply Chain Act, the due diligence obligations under the German Supply Chain Act only refer to the upstream supply chain within a company’s own area of business. By contrast, according to the EP’s draft CSDDD, the due diligence obligations relate to a company’s business relationships. According to Article 3(e) of the EP’s draft CSDDD, this means any direct or indirect relationship of a company with any of the legal entities in the company’s value chain. In recital 18 of the EP’s draft CSDDD, it is expressly stated that this concerns the entire value chain, including distribution, sale and waste management of a product, which means that the due diligence obligations also relate to customers and indirect business partners. This significantly increases the scope of the due diligence obligations.

Finally, it should be noted that Article 22(1) of the Commission’s draft CSDDD provides for civil liability. By contrast, the German Supply Chain Act does not provide for civil liability and even expressly excludes it in Section 3 (3). While, according to Article 22(1) of the Commission’s draft CSDDD, only failure to comply with the obligations laid down in Articles 7 and 8 of the Commission’s draft CSDDD can give rise to liability, the EP’s draft provides that non-compliance with any of the obligations laid down in the Directive can give rise to liability. Over and above this, Article 22(2a) of the EP’s draft CSDDD stipulates a minimum limitation period of ten years for such claims and further provides that it must be ensured that the costs of the proceedings are not prohibitively expensive and that claimants are able to seek injunctive measures, including summary proceedings.

This draft now has to pass through what is known as the “trilogue” process, and it is not yet clear when the final version is likely to be adopted and will finally come into force. In any case, it can be expected that this legislative process will be completed prior to the elections to the European Parliament in June 2024.

The current discussions within the European institutions show that the German legislator will probably have to amend the German Supply Chain Act. Companies not yet affected should be aware that they will be more likely to fall within the scope of the German Supply Chain Act in future and prepare for this situation. As a result of the increased scope of due diligence, there is also a significant risk of civil liability (which has so far been excluded).