In mid-March 2024, the EU member states voted in favor of the weakened version of the European Supply Chain Directive CSDDD (Corporate Sustainability Due Diligence Directive). Briefly explained, the EU directive obliges companies to check their supply chains for environmentally and socially responsible practices and to review the negative effects of corporate activities on the Human rights and the Reduce environmental impact. This applies in particular to global supply chains.
The CSDDD was adopted after lengthy negotiations and considerable concessions on the part of the EU member states. For example, the limits for the mandatory participation of companies were raised and their division into high-risk sectors was rejected. 20 days after publication, objections to the EU Supply Chain Directive could be submitted before it was ratified by the EU Parliament at the end of April 2024. The EU member states now have two years to transpose it into national law.
Which companies are affected by the CSDDD?
Following the negotiated compromise, the number of companies affected has been reduced by almost 70 percent. Experts assume that around 1,500 German and around 3,500 other EUCompanies and groups fall under the European Supply Chain Directive. The scope of the CSDDD will be extended annually until 2029 and will then apply to companies with 1,000 or more employees and an annual turnover of at least 450 million euros. In the original draft, the limits were still 500 employees with an annual turnover of 150 million euros or more. The new scale will apply as follows:
- 2027: Companies with more than 5,000 employees and a global turnover of over EUR 1,500 million
- 2028: Companies with more than 3,000 employees and a global turnover of over EUR 900 million
- 2029: Companies with more than 1,000 employees and a global turnover of over EUR 450 million
The directive applies also for non-EU companiesprovided they meet certain criteria, such as significant turnover in the EU or business agreements with EU companies. The revised version of the CSDDD now also exempts companies that do not meet the criteria for the scope of application but operate in high-risk sectors. Holding companies can also be exempted from the CSDDD's due diligence obligations under certain conditions. This is possible if they only hold shares and have no influence on decisions.
Differences between the German LkSG and the CSDDD
Overall, the EU Supply Chain Directive, in contrast to the German LkSG (Supply Chain Due Diligence Act) one Significant tightening in the area of the Environmental protection and is therefore more closely aligned with the Paris Climate Agreement and the 1.5° target. However, it is more narrowly defined, as the level of annual turnover of the companies is decisive.
In addition extended the CSDDD clearly outperforms the Catalog of riskswhich companies must face in accordance with the German LkSG. The range is growing and the number of risk management tasks is increasing. Companies must now clearly communicate the expectations and requirements of their business partners and revise the supplier selection and evaluation process.
The Duties of care of the CSDDD are, however, very similar to those of the LkSG. Therefore, a comprehensive and legally compliant implementation of the LkSG is the best preparation for the CSDDD. In contrast to the LkSG, however, the CSDDD explicitly requires that the due diligence obligations be integrated into company policy, obliging companies to implement a Strategy for the implementation of the due diligence obligations.
The risk analysis in accordance with the LkSG generally only considers direct and, to a limited extent, indirect suppliers. In contrast, the CSDDD concerns the entire value chain including operation and disposal as well as all business relationships. Accordingly, all upstream and downstream business partners must be checked for negative environmental and human rights impacts.
The German Supply Chain Protection Act applies to all legal entities and violations can currently be penalized with up to 8 million euros or 2 % of annual turnover. In contrast, the CSDDD applies to corporations and Violations should also be punished under civil law in future. The burden of proof will lie with the plaintiff and the criminal sanctions will be determined by the individual EU member states in their national laws. All injured parties are free to sue companies that violate due diligence obligations along the value chain.
Disclosure, authorized representatives & guidelines
The CSDDD reports must be updated and published at least once a year in accordance with the requirements, which ensures a regular review and disclosure of the sustainability performance of these companies. In order to fulfill these obligations, it is necessary for each company to have a Authorized person as a contact for CSDD issues.
To support companies in implementing the due diligence obligations, the EU will Industry-specific guidelines create. They are intended to provide a detailed framework and practical recommendations on how companies can shape their sustainability strategies and communicate their performance transparently. The provision of sector-specific knowledge makes it easier for companies to identify relevant ESG factors to identify, evaluate and report on these issues in order to make a constructive contribution to sustainable development.
What's next for the CSDDD?
Following the ratification of the draft CSDDD Directive by the Members of the European Parliament on April 24, 2024, there is a certain amount of risk for companies. Planning security. Until the national laws are drawn up, they can take measures to prepare for the upcoming requirements. Thanks to the German LkSG, companies are already in a position to prepare for the new standards to familiarize yourself with our products, internal processes and, if necessary Resources in order to ensure compliance with the CSDDD requirements at a later date.
Companies should see this process as an opportunity to develop their own holistic supply chain management. Numerous European directives and regulations aim to make supply chains more transparent and to identify and mitigate environmental, social and governance (ESG) risks. By actively monitoring their supply chains and taking measures to identify and mitigate potential risks, companies can not only ensure compliance with the CSDDD, but also improve their operational resilience and sustainability performance. Holistic supply chain management helps to strengthen stakeholder trust, protect corporate reputation and promote long-term value creation.