On Dec. 14, the Council and the European Parliament agreed on a preliminary version of the Corporate Sustainability Due Diligence Directive (CSDDD) and drafted a much stricter law than the German Supply Chain Due Diligence Act (LkSG), which already applies to large companies. As a result, human rights are anticipated to be strengthened worldwide once the directive has been adopted and becomes effective.
According to the European Council’s press release, the CSDDD will apply to companies with more than 500 employees and a global annual net turnover of €150 million. The CSDDD will also apply to non-EU companies if they achieve a net turnover of €150 million in the EU three years after the entry into force of the CSDDD. To ensure clarity and transparency, the European Commission will publish a list of non-EU companies falling within the scope of the CSDDD.
A temporary exclusion of the financial sector from the scope of the CSDDD is also foreseen in the agreement. However, this is not intended to be a final decision. Instead, the CSDDD will include a review clause for possible future inclusion of this sector based on a sufficient impact assessment.
Larger companies (with more than 500 employees and a turnover of at least €150 million) must draw up a plan to ensure that their business model and strategy are compatible with the Paris Agreement on climate change. According to the planned rules, companies are responsible for their business chain, i.e., also for the company’s business partners and, in some cases, for downstream activities such as distribution or recycling.
In addition to a civil liability clause, the European authorities have also agreed on other sanctions. Companies that fail to comply with their due diligence obligations may be subject to sanctions by national supervisory authorities (including fines of a minimum maximum of 5 percent of their worldwide annual net turnover). The agreement also stipulates that compliance with the CSDD due diligence obligations may be used as a criterion for awarding public contracts and concessions.
The EU’s supply chain law thus goes further than the previous German regulation and is a so-called directive that the German federal government must implement into national law (unlikely to happen before 2025/2026). Until then, the proposed CSDDD does not (yet) directly impact the practice of German and/or European companies. With the EU law, German companies will be liable for breaches of due diligence, which is currently excluded in the German Supply Chain Act. This means that companies could be held liable under civil law, and, for example, claims for damages could be asserted.
The German Federal Association of the Sporting Goods Industry (BSI) welcomed the agreement and its stringency. The only thing the BSI considers less than ideal is the temporary exclusion of the financial sector. Green investments are a key instrument for driving the necessary socio-ecological transformation of the European economy, so the exclusion of the sector must be regretted. However, the agreement contains a clause that allows this exclusion to be reviewed.
