Background & objective
In a globalized world where products are traded across national borders, it is crucial to monitor supply chains and ensure that they meet ethical and sustainable standards. The European Union has recognized this and is on track to adopt a supply chain regulation, taking an important step towards sustainable trade.
The CSDD (Corporate Sustainability Due Diligence Directive) aims to hold companies accountable and ensure that they audit their supply chains for environmental and social standards. It aims to help prevent human rights abuses, environmental damage and other adverse impacts on society and the environment. Companies need to assess not only the impacts of their direct suppliers, but also the impacts of their entire value chain, including sales, distribution, transportation, storage, and waste management.
Current status of legislation & due diligence obligations of companies
Following the European Commission's February 2022 draft directive on corporate sustainability obligations, on June 1, 2023, Members of the European Parliament (EP) voted by a majority (366 in favor / 225 against / 38 abstentions) to strengthen the proposal.
The new legislative proposal goes even further than the Commission's original version and provides for a tightening of the scope. According to the EP, companies already established in the EU, irrespective of their sector, with more than 250 employees and an annual worldwide turnover of more than 40 million euros are now to be covered by the directive. In comparison, the EU Commission's original draft primarily targeted companies with more than 500 employees and global annual sales of more than 150 million euros. Non-EU companies are also included if their sales exceed 150 million euros and at least 40 million euros were generated in the EU.
According to the draft, staggered transition periods of up to five years are envisaged, varying according to the size of the company. This means that companies will be given appropriate periods of time, depending on their size and capacities, to implement the measures required to comply with the directive. In addition, the draft provides that sanctions may be imposed in the event of violations of the provisions of the directive. These sanctions can amount to up to 5 percent of the global turnover of the company concerned.
Another important aspect of the draft is the obligation for companies to draw up plans outlining how they intend to contribute to limiting global warming to 1.5 degrees Celsius. These plans are to include concrete measures and targets to help companies do their part to combat climate change and reduce their emissions.
In addition, the proposal also includes stricter liability provisions. This means that companies will bear greater responsibility for adverse impacts along their supply chains and can be held liable if necessary.
Next steps
After the European Parliament adopts its position on the CSDD, negotiations with member states can begin. In November 2022, the Member States (MS) adopted their own position on the draft directive. This means that both the EP and the MS have defined their positions on the key points of the directive. In the coming negotiations, they will now try to reach agreement on the final text, which will form the basis for the Supply Chain Directive.
Impact on German & European companies
The EU Parliament's decision does not (yet) have any direct impact on the practice of German and European companies. On the one hand, this is due to the fact that a final decision in the EU trilogue is still pending. On the other hand, EU directives generally do not have any direct legal effect on companies and individuals. Instead, the Member States must transpose the contents of the adopted directive into national law within a scheduled implementation period of two years. In Germany, this means that a corresponding law must be enacted, or the German Supply Chain Act (LkSG) must be amended accordingly. This process is not expected to be completed before 2025.
Although the tightening of the European directive will probably not take effect for several years, they nevertheless point in a certain direction. It is therefore advisable that German companies already now deal with the due diligence requirements of the LkSG as well as the developments on the European level and prepare themselves accordingly for the changes.
BECEPTUM prepares your company for the Corporate Sustainability Due Diligence Directive and supports with the implementation.
