Cross-sector supply chain due diligence obligations underway

EU supply chain law or national hotchpotch - where is the German EU Council Presidency heading?

As described in our newsletter "Corona versus CSR" in April, plans for a German supply chain law are currently on hold until the second round of monitoring of the National Action Plan on Business and Human Rights ("NAP") is completed. This is not due to the corona crisis but to the heated debate that has already flared up over the introduction of binding supply chain due diligence obligations. At present, two other lines of development are increasingly drawing attention: On the one hand, the activities of the EU Commission in this area and, on the other, the German Presidency of the Council of the European Union as of 1 July 2020.

The EU Commission wants to push ahead with the project of a European supply chain law, whereas the further course of action is based on a study of several hundred pages on supply chain due diligence obligations (see Daily News 24/02/2020 of the EU Commission with the meaningful title "Commission study shows the need for EU-level legislation on due diligence throughout the supply chain on human rights and environmental impacts"). A substantial result of the study points in a similar direction as the first round of the German NAP monitoring: EU-wide, only one in three companies carries out assessments on human rights and environmental impacts. Voluntariness as a concept is therefore not sufficient in the view of EU Justice Commissioner Didier Reynders who is now addressing two issues: A public consultation in 2020 following the study and the presentation of a legislative proposal for a European supply chain law in 2021. According to Didier Reynders, the legislative proposal will provide for sanctions in the event of "non-compliance" and, if necessary, the possibility of legal action for parties concerned. "A regulation without sanctions is no regulation", said Reynders. The EU Commission's deliberations could thus move in the direction of the French "Loi de Vigilance" (2017), which to date is considered worldwide to be the toughest national law in connection with human rights due diligence obligations, as it imposes not only reporting obligations on companies (though only large French companies with 5,000 employees in France or 10,000 employees worldwide) but also extensive obligations to act, which are also sanctioned (see our "Update Corporate Social Responsibility: Binding CSR due diligence obligations on the rise" of July 2019).

Many companies support a regulatory approach at EU level to cross-sectoral, binding supply chain due diligence obligations. For instance, Bayer Group has only recently advocated an EU-wide supply chain law. "We support a supply chain law but one at European level, not only in Germany," says Matthias Berninger, Global Head of Public Affairs & Sustainability of Bayer Group. As early as December 2019, 42 German companies had already signed up to the law, and a further 19 companies have now joined the list. The signatories include Hapag-Lloyd, Nestlé Deutschland, Ritter Sport, Tchibo and Vaude. However, in light of the heated debate about a national supply chain law, it cannot be argued that this would be in line with the "mainstream" in the economy.

Now the German EU Council Presidency comes into play. Although the cornerstones of the EU Council Presidency are known from an organisational point of view, the specific contents, also and especially in the area of sustainability, are less known. The programme which will also be coordinated with Portugal and Slovenia (the so-called "Trio EU Presidency"), will be published soon. It remains to be seen whether, with regard to corona follow-up topics such as the European Reconstruction Programme, the focus will be on what "must be dealt with in a legally binding manner until the end of 2020" (said European Minister of State Michael Roth). Is there room for human rights due diligence obligations in the supply chain? Moreover, although the governing parties had agreed in the coalition agreement to bring forward a national supply chain law, the results of the current second round of German NAP monitoring are not expected to be known until during the German EU Presidency. Hence, according to the letter of the coalition agreement, the point at which the German government would actively support an EU-wide regulation would not have been reached by the beginning of the German EU Council Presidency, especially since - as mentioned - the national German draft law is on hold. It is thus doubtful whether the German activities during the Council Presidency will result in the promotion of European initiatives for more sustainability in the supply chain - and this prominently at the top for the next six months. However, it is not to be expected that the EU Commission will allow itself to be held back by a lack of support from Germany and stop the process already initiated. Rather, the clear message is likely to be that the EU Commission is taking the lead in the process and does not want to hand over the reins.

It is therefore highly probable that the plans for a European supply chain law will materialise in 2021. Avoiding a national hotchpotch is also an understandable concern, a reliable framework that is a "level playing field" for everyone. It should thus not be a question of "whether" but of "when" and "how" a European solution is to be structured. It remains to be seen whether the EU Commission will base its legislative proposal on the French "Loi de Vigilance" model.

Companies would therefore do well to keep an eye on this further development and to prepare themselves for the introduction of binding supply chain due diligence obligations. The first sector-specific due diligence obligations will come into force anyway at the beginning of 2021 as a result of the Conflict Minerals Regulation (see our "Update Corporate Social Responsibility: Binding CSR due diligence obligations supply chain for conflict minerals" of November 2019).

The actual layout of a European supply chain law project would also have an impact on the existing compliance structures of companies. Companies would then also have to map human rights and environmental impacts with a supply chain due diligence. Which companies will be covered by the new regime that are trusted to be able to afford mandatory and sanctioned due diligence processes and compliance structures is another issue with potential for conflict.

Dr André Depping

Dr Matthias Etzel

Dr Daniel Walden

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