Future EU directive on corporate sustainability due diligence (CSDDD) even stricter than the German Supply Chain Due Diligence Act

The (german) Supply Chain Due Diligence Act (LKSG), which came into force on 1 January 2023, should be be known by companies in Germany now. From 1 January 2024, it will apply to companies with at least 1,000 employees and their suppliers. The supplied company at the end of the supply chain must have its head office, principal place of business, administrative headquarters or registered office in Germany. In a nutshell, it lays down due diligence obligations for companies to ensure the protection of human rights and environmental standards in global value chains. The due diligence obligations - with clearly defined responsibilities - include carrying out a risk analysis, defining preventive measures and setting up a complaints mechanism as well as the regular publication of an annual report.

Now, at European level, there is also the so-called EU Corporate Sustainability Due Diligence Directive (CSDDD). On 14 December 2023, the Council and the European Parliament reached a provisional agreement on this, a decisive step towards the adoption of the future directive, even if many key points remain unresolved.

The scope of application of the CSDDD would be far wider than that of the LKSG.

Companies with more than 500 employees and a global turnover of over €150 million would already be covered.

However, companies with more than 250 employees would also be covered if they have a turnover of more than €40 million and have generated at least €20 million of this in certain risk sectors, for example production and wholesale of textiles, clothing and shoes, agriculture and fishing, food production, extraction and wholesale of mineral raw materials.

It should not matter whether the companies are based in the EU, but the turnover must have been generated to a significant extent on EU markets.

Similar to the LKSG, the CSDDD will oblige the companies covered to identify sustainability risks, take preventative measures and remedy any damage. Larger companies must also draw up a plan to ensure that their business model and strategy are compatible with the Paris Agreement on climate change.

In order to enforce the obligations, the supervisory authorities of the member states are to be authorised to conduct investigations into companies.

The supervisory authorities are authorised to impose fines of 5% of global turnover (maximum 2% of annual turnover under the LKSG). Provision is also made for so-called "naming and shaming", i.e. the public announcement of companies acting in breach of due diligence. Like the LKSG, the CSDDD stipulates that companies that violate their due diligence obligations will not be considered for the award of public contracts.

A significant difference to the LKSG is that companies should also be liable under civil law for breaches of due diligence. This means that private individuals or locally injured parties can also sue companies at the end of the supply chain in Europe for damages (so-called private enforcement).

Even if the CSDDD is seen by various parties as an "important milestone" in respecting human rights in supply chains, there are also clearly critical voices that see the CSDDD as more than just an excessive bureaucratic burden for companies and therefore a competitive disadvantage compared to companies from third countries. The German Engineering Federation has labelled the project as the next nail in the coffin for international competitiveness. Others fear that companies could withdraw from Africa and foreign companies, for example from China, could fill this gap.

Still others see the CSDDD as a form of patronising African states, even to the point of accusing them of neo-colonialism.

The discussion on this has only just begun and we will see which hopes and fears will be fulfilled or confirmed by the CSDDD. It would be interesting to conduct this discussion not only from a European perspective, but also from the perspective of the countries concerned.

Addendum from 1 February 2024: The FDP (with its Ministries of Finance and Justice) refuses to approve the CSDDD. The FDP justifies its stance by claiming that the German economy is overburdened. This means that Germany must abstain from voting in the EU Council of Ministers. This in turn could mean that the CSDDD cannot come into force.

Addendum from 29/02/2024: On 28/02/2024, the CSDDD was put to the vote in the Council of Ministers. However, the Belgian Council President removed the vote from the agenda after it became apparent that the CSDDD would not receive the necessary majority in the Council. Votes in the Council are taken by a qualified majority. This requires a yes vote from 15 of the 27 EU member states, which also represent at least 65 per cent of the EU population. An abstention therefore effectively counts as a no vote. In addition to Germany and Italy, a number of other EU states would also not vote in favour of the directive.

Contrary to what is being portrayed in the media and by entrepreneurs, this is not the end of the CSDDD. The Belgian Council President is likely to use the removal from the agenda to organise a majority. How this works should be clear to anyone interested. All you have to do is get Italy on your side as a heavyweight, for example by making promises elsewhere. Add to this the odd modification and you should have a majority at the next vote. We shall see!

Addition from 18/03/2024: So now after all. On Friday, the way for the EU Supply Chain Regulation was cleared after all. The EU ambassadors adopted the regulation by a majority. Although Germany continued to abstain from voting, Italy finally voted in favour, so that the majority was achieved.

As suspected, the majority was achieved through a so-called tying deal. Concessions were made to Italy on the EU packaging regulation, in return for which Italy voted in favour of the EU supply chain regulation, after this had also been "weakened" again.

Unlike originally planned, companies with 500 or more employees and a turnover of more than €150 million are no longer affected, but only companies with 1000 or more employees and a turnover of more than €450 million. These thresholds apply after a transitional period of 5 years. The even lower thresholds envisaged for high-risk sectors such as textiles or the extraction of raw materials will also no longer apply.

The number of German companies covered by the directive is therefore lower than under the German Supply Chain Act. Germany must therefore adapt its national supply chain law accordingly.

Unlike under the German Supply Chain Act, however, companies must check their entire supply chain - including their suppliers' suppliers and their suppliers' suppliers - for violations of human and labour rights and environmental protection. The monitoring of environmental violations is also stricter than under the German Supply Chain Act.

However, the control burden is reduced by the fact that a risk-based approach applies. If a supplier is based in Belgium, for example, no inspection is actually necessary, whereas the situation is different for a supplier from the Congo.

In addition, inspection obligations are now only envisaged for the waste disposal of direct recipients; a complete "downstream" inspection is no longer envisaged.

The comprehensive civil liability of companies already provided for in the original draft, i.e. the possibility for victims of violations of human rights or environmental protection requirements to sue, remains in place. However, for companies based in Germany, German tort law now applies and no longer that of the country in which the violation occurs. Companies will also only be liable if they have wilfully or negligently neglected their obligations to monitor supply chains. According to the Belgian compromise, trade unions and non-governmental organisations can also bring claims, but only if they do so directly on behalf of victims.



The agreement must now be adopted by the Council of Ministers. This will probably happen at one of the next meetings. The European Parliament must also give its approval, which is also expected.

Gerhard Greiner