Strict framework for supply chain compliance in Europe - the "EU Supply Chain Act" is coming!

The European legal framework for due diligence obligations in supply chains has been finalised. The EU member states and the EU Parliament's chief negotiators have agreed on key points for a directive on supply chain compliance (Corporate Sustainability Due Diligence Directive/ CSDDD or CS3D for short), which was still subject to approval by the Parliament and the member states.

The new Directive, the final wording of which has not yet been published, provides for comprehensive due diligence obligations and will raise the issue of supply chain compliance in Europe to a new level. In future, companies operating in the EU that fulfil the comparatively low threshold values will be required to make a significantly greater contribution to sustainability. The days of national regulations such as the Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz, LkSG) in its current form would therefore appear to be numbered.

1. Key points

The EU Supply Chain Act goes well beyond the LkSG currently in force in Germany and imposes far-reaching due diligence obligations on the companies concerned. In future, companies will have to prevent risks across their entire supply chain and take appropriate measures to prevent or at least minimise violations of human rights or environmental standards. In this context, the "entire supply chain" includes both the company's own business area and the value chain, ranging from product development, production and distribution through to product recycling. The due diligence obligations are not just limited to suppliers with whom contractual relationships exist, but also include indirect suppliers, i.e. sub-suppliers of suppliers, if these are established business relationships. In addition to the human and environmental rights already protected under the LkSG, there will be additional environmental rights, in particular rights protecting against deforestation, excessive water consumption or the destruction of ecosystems.

In addition to the thematic anchoring in compliance management systems, larger companies with 1,000 employees or more will in future have to draw up a plan to ensure that their business model and strategy are compatible with the Paris Agreement on climate change. Financial incentives must also be negotiated within the company to incentivise management to achieve the targets.

2. Act applies to larger companies and companies in high-risk sectors

In future, considerably more companies will have to address the issue of supply chain compliance, as the thresholds of the new regulation are considerably lower than those currently provided for in some of the existing laws in the EU countries. By way of comparison, the LkSG currently in force in Germany does not apply until the company in question employs more than 3,000 in Germany; in future, 1,000 employees.

The Directive also provides for a stricter scope of application for sectors with a particular "potential for harm". Furthermore, non-EU companies also fall within the scope of application if they have significant activities in the EU. The thresholds for non-EU companies become applicable three years after the regulation comes into force. The EU Commission will then publish a list of non-EU companies that fall within the scope of application. There will also be partial exemptions from its application for the financial sector.

In detail, the Directive provides for the graduated scope of application outlined below:

Companies below the thresholds will initially not be directly affected. However, it is highly likely that they will also come into contact with the Act in their function as contractual partners, sub-suppliers, sales intermediaries or, for example, waste disposal companies.

3. Massive penalties and monitoring

The implementation of national laws that have been adapted or newly created on the basis of the EU Directive is also to be carried out by national authorities. For Germany, this should mean that the Federal Office for Economic Affairs and Export Control (Bundesamt für Wirtschaft und Ausfuhrkontrolle, BAFA) will remain responsible for monitoring and enforcement. Particularly striking points are, in addition to the power to conduct searches, the high fines of up to 5% of global company turnover and the possibility of "naming and shaming", i.e. public disclosure of sanctioned companies. Finally, compliance with due diligence obligations is to be taken into account in procurement procedures.

4. Civil liability

Civil liability for breaches of due diligence has been significantly tightened. In future, if affected companies violate the new regulations, they may be held liable. In particular, they may then face claims for damages and compensation for pain and suffering. This was previously excluded under the German LkSG.

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