Initial situation

Companies are currently facing a multitude of changes and uncertainties: a tense geopolitical situation, a volatile global economy, difficult external economic conditions (including US tariffs, resource bottlenecks, etc.), domestic economic stagnation and digital transformation. Dealing with these issues alone is challenging enough. According to a recent economic survey, one in three companies in Germany plans to cut staff in 2026, and investment is also likely to decline in 2026. In terms of sustainability, there is also the ESG backlash in the US, new targets set by the current EU Commission in the Clean Industrial Deal, uncertainties about or resulting from changes to sustainability-related laws that have emerged from the implementation of the previous Green Deal, such as the Directive on Sustainability Reporting (Corporate Sustainability Reporting Directive, CSRD), the EU Supply Chain Act (Corporate Sustainability Due Diligence Directive, CSDDD) and the EU Deforestation Regulation (EUDR), to name but a few. In this environment, does it even make sense to continue focusing on sustainability?

Desire for stability

Stable legal and economic conditions are usually seen as a key locational advantage for the economy. Of course, the opposite is also true. From a macroeconomic perspective, uncertainty is not exactly a growth driver. Of course, not every uncertainty can be resolved single-handedly. However, IW Director General Hüther recently criticised in the heute journal, a German news program, that the German economy lacks planning security for a green transformation and that there are investment brakes that need to be removed (see here: Hüther: "Müssen uns Klimaschutz leisten"). Of course, there is no consensus on whether climate protection is a competitive advantage or exactly the opposite. All of this is open to political debate.

The decision-making criteria for companies and their management

This does not help companies at all at present. So what can be done? Managers are not politicians. Their actions are subject to clear legal guidelines.This can certainly help here. The general diligence requirements for board members and managing directors are regulated in Section 93 of the German Stock Corporation Act (AktG) and Section 43 of the German Limited Liability Companies Act (GmbHG) (largely identical in content). According to Section 93 AktG, board members must "exercise the care of a prudent and conscientious manager in their management of the company". And further on it says that they should make business decisions "on the basis of adequate information for the benefit of the company". Being guided solely by political trends can prove problematic in this context. It is also inadvisable to make decisions based on sweeping judgements.

Rather, it is advisable to create an appropriate basis for decision-making and, building on this, to make commercially justifiable decisions. This means that board members and managing directors should give appropriate consideration to all aspects that are objectively relevant to the specific situation. Otherwise, in the event of an unfavourable development of the company, there is a risk of allegations of breach of duty and, as the case may be, personal liability of the managers for damages incurred. Regardless of the sustainability laws currently under discussion, all sustainability aspects that are relevant to the company in question in the respective decision-making situation should thus also be taken into account in the decision-making process (see Walden, NZG 2020, 50 et seq. for details: "Corporate social responsibility: rights, obligations and liability of the board of directors and supervisory board"). Of course, board members and managing directors are not expected to have magical abilities. If uncertainties cannot be clarified further, they must make upcoming decisions – as usual – under conditions of uncertainty.

Appropriate consideration of sustainability aspects continues to be sensible

Dismissing sustainability aspects as insignificant from the outset in view of current political developments could therefore prove to be a dangerous bias. This is evidenced, for instance, by the fact that the banking supervisory authority continues to regard ESG risks as a challenge to the security and stability of banks. Thus, it considers it necessary for banks to (also) take these risks into account in their risk management. It stands to reason that this also makes sense for companies in the real economy, not least because the measures taken by banks have a foreseeable impact on their customers – the companies in the real economy. Companies should consider this when making decisions. The same applies to the identification and exploitation of opportunities that may arise for the company in connection with sustainability. This is also reflected in the sustainability-related recommendations of the German Corporate Governance Code (DCGK) which remain relevant today and which the vast majority of DAX, MDAX and SDAX companies comply with, as evidenced by their declarations of conformity (see our blog post Nachhaltigkeit ist out! Oder doch nicht? Ein Faktencheck. | ADVANT Beiten). It therefore makes perfect sense, for instance, to make internal efforts to "understand the financial effects on the undertaking over the short- medium- and long-term of risks and opportunities arising from the undertaking's impacts and dependencies on climate change " (to quote one of the objectives set out in ESRS E1) – regardless of whether or not the company is required to report on this externally in accordance with CSRD. Incidentally, the EU insurance supervisory authority EIOPA already warned years ago about a concentration of sustainability-related liability risks among insurance companies and – similar to the banking supervisory authority in its area – called for appropriate risk management measures.

Compliance obligation on top

Furthermore, management is and remains obliged to comply with applicable laws – regardless of whether these are considered "good" or "bad". Compliance with applicable laws is not at the discretion of management and is thus particularly liability-sensitive. Management should also keep an eye on the risks arising from legal uncertainties, especially in the area of sustainability. This applies not only to new sustainability laws (e.g. the above-mentioned European legal acts, as soon as and to the extent that they apply) but also to general legal norms that also apply to sustainability-related issues (see, for example, our blog post Climate Change Litigation Update: Are Companies Liable for CO₂ Emissions? | ADVANT Beiten), and finally also sustainability-related contractual agreements.

Conclusion: Balancing short-term and long-term considerations

In the end, decision-making in times of uncertainty remains particularly complex. However, a systematic approach to problem-solving based on proven methods, as ultimately suggested by the diligence requirements applicable to management, is helpful. In other words: Understand the problem accurately, break it down into its constituent parts, gather the relevant information and arrive at a synthesis based on an assessment and weighting. In our view, it is particularly important (and equally challenging) to find an appropriate balance between short-, medium- and long-term aspects, i.e. to reconcile "today" and "tomorrow" as well as possible.

Dr Daniel Walden
Jole Inserra
Dr Andé Depping

Statement of accounts 2024 of the BAFA

The BAFA has published its current Statement of Accounts 2024 on the LkSG (as of: October 2025) (BAFA - Overview - Statement of Accounts). In its report on the audits completed in 2024, it states "that most companies take their due diligence obligations under the LkSG extremely seriously and can demonstrate good to very good implementation." The "willingness to cooperate shown by the companies audited in each case" should be particularly emphasised. In 2024, the BAFA therefore initiated administrative fine proceedings only in "a few exceptional cases". However, the BAFA "did not evaluate or review in detail" the companies' reports on the fulfilment of their due diligence obligations pursuant to section 10 (2) LkSG in 2024, insofar as such reports were submitted at all. Background: In spring 2024, the BAFA had announced to review the availability of these annual reports for the first time as of 1 January 2026.

Immediate facilitations for addressees of the LkSG

In addition, a reference to "simplifications for companies in the Supply Chain Act" can be found on the website of the BAFA concerning the LkSG (BAFA - Overview) since 1 October 2025. The corresponding draft bill to amend the LkSG (more on this below) has not yet been passed through parliament. Nevertheless, the BAFA already announced that the audit of LkSG reports (already postponed until the beginning of 2026) will be discontinued with immediate effect. Furthermore, due to the lapse of the public interest in prosecution, all administrative offence proceedings relating to fines, which are to be deleted under the current draft bill, are to be discontinued. In view of the small number of administrative fine proceedings initiated to date (see above), this will not affect many companies but will certainly provide relief.

Reduction of the number of addressees of the Act only with future implementation of the CSDDD

Otherwise, the LkSG remains unchanged for the time being. This applies both to the group of addressees of the LkSG (cf. section 1 LkSG, in brief, companies based in Germany with more than 1,000 employees in Germany) and to the due diligence obligations of the relevant addressees provided for in the LkSG. Amendments in this regard are only expected in connection with the transposition of the European Corporate Sustainability Due Diligence Directive (CSDDD for short) into German law. This will presumably only take place once the revision of the CSDDD, among other things, which was initiated by the omnibus package on sustainability (see our blog post on this Omnibus Package on Sustainability: The Planned Amendments | ADVANT Beiten) has been completed. It is currently becoming apparent in the trialogue negotiations that the provisions of the CSDDD should in future only apply to companies with more than 5,000 employees and a worldwide turnover of more than EUR 1.5 billion. With the announced "seamless replacement" of the LkSG "by a law on international corporate responsibility that transposes the CSDDD into national law", the group of addressees of the Act in Germany is therefore likely to be considerably reduced in future. It is not yet clear exactly when this will happen. After setting a new deadline, the CSDDD is to be transposed into national law as of 26 July 2027 and has to be implemented as of 26 July 2028. Of course, even after such a transposition law came into force, many companies (especially European ones) would still be indirectly affected in their role as suppliers to companies subject to the CSDDD.

Continued compliance obligations for the time being and open question concerning benefits of the companies through implementing the LkSG

The LkSG thus remains applicable law for all previous addressees of the Act for the time being. It would therefore not be a good idea to disregard the LkSG now, even if the majority of the fines are deleted in the near future with the adoption of the LkSG Amendment Act as planned. On the one hand, inadequate fulfilment of the continuing LkSG due diligence obligations (such as refraining from a risk analysis) may trigger one of the remaining fines. On the other hand, and above all, the board of directors or management of the addressees of the LkSG are still (also) obliged to observe the provisions of the LkSG due to their general compliance obligation, irrespective of the deletion of the fines (see our blog post from December 2024 on the question: Why we (in particular the management) need to continue to take the German LkSG seriously and how it (also) relates to the pending implementation of the CSRD | ADVANT Beiten). 

Speaking of CSRD: According to the current status of the trialogue negotiations, companies with 1,000 employees and an annual turnover of EUR 450 million are likely to be obliged to submit sustainability reports in the future. In these reports, the respect for human rights in the supply chain, among other things, must also be reported. Although the planned simplification of the CSRD (Corporate Sustainability Reporting Directive) and of the ESRS (European Sustainability Reporting Standards) also promises simplifications in this respect, the basic reporting obligation remains unchanged in this respect. The topic of human rights in the supply chain will therefore not disappear completely from the "mandatory agenda" of most LkSG addressees in the future.

Apart from this, the question arises as to whether the implementation of the LkSG - and thus in particular the establishment of a human rights risk management system - has brought any benefits for the addressees in terms of content, apart from the high administrative costs, which are also due to the many uncertainties of the Act, and if so, what benefits? It would then be an obvious question for the companies that are likely to fall outside the scope of application in the future with the implementation of the CSDDD as to which of these benefits the company can and wants to maintain with reasonable effort - also with a view to the possibly continuing obligation to sustainability reporting in accordance with the CSRD.

More details on the Statement of Accounts 2024 of the BAFA

In 2024, the BAFA carried out a total of 851 ex officio audits, thereof 638 risk-based controls and 39 occasion-related audits. In addition, there were 314 processes from complaints and suggestions, of which 48 had an LkSG reference.

The focus was in particular on:

• determining the responsibility for risk management,
• establishing effective complaints procedures and
• first audits on the regular risk analysis and on the policy statement.

This revealed that many companies - particularly in the new size category of 1,000 employees or more - still faced challenges in the organisational separation of implementation and monitoring of human rights risk management and in the barrier-free design of complaints channels.

The occasion-related controls of the BAFA concerned, among other things:

• the transport sector (reasonable wage),
• the textile industry in Pakistan (child labour, occupational safety, freedom of association, unequal treatment, reasonable wage),
• the palm oil production in Central America (land grab, environmental offences) and
• the soybean cultivation in Brazil (land grab, environmental offences).

The BAFA names the following other countries affected: China, Germany, Morocco, Serbia, South Africa, Turkey and the USA.

Despite the increased audit activity of the BAFA, the number of sanctions in 2024 remained low:

• 18 administrative fine proceedings were initiated,
• 9 warnings were issued,
• no fines were imposed.

Backgrounds for the facilitations announced by the BAFA

It was already clear from the coalition agreement between the CDU, CSU and SPD that the "abolition" of the national LkSG announced there under the heading "Bureaucracy reduction" was to take place in two steps: (1) Immediate abolition of the reporting obligation under the LkSG and no sanctioning of the applicable due diligence obligations (with the exception of massive human rights violations), (2) Replacement of the LkSG in the course of implementing the European Corporate Sustainability Due Diligence Directive (CSDDD) with a "law on international corporate responsibility" (cf. Coalition Agreement-2025-1.pdf, there lines 1909 et seq.).

To implement the first step, on 3 September 2025, the German Federal Government presented the "Draft Act to Amend the German Supply Chain Due Diligence Obligations Act - Relieving the burden on companies through application and enforcement-friendly implementation" (see Act Amending the German Supply Chain Due Diligence Obligations Act - BMAS). According to this, the annual reporting obligation pursuant to section 10 (2) LkSG - which had previously been effectively postponed until the end of 2025 by the BAFA's announcement - will no longer apply with retroactive effect from 1 January 2023. In future, only those breaches of duty that the legislator has deemed to be particularly serious under the LkSG will be subject to a fine, i.e.:

• violations of the obligation to take preventive measures (section 6 (1) LkSG),
• violations of the obligation to take remedial measures (section 7 (1) sentence 1) and to develop concepts (section 7 (2) sentence 1 and section 9 (1) LkSG),
• violations of the obligation to establish a complaints procedure (section 8 (1) sentence 1 and section 9 (1) LkSG).

Even in these cases, the imposition of fines should be the last resort (cf. RefE, justification for Art. 1 number 6). The provision on increased fines for legal entities in section 24 (3) LkSG is apparently to remain in place - apart from consequential changes to the offences for which fines are imposed.

According to a press release of 26 September 2025, the Federal Ministry for Economic Affairs and Energy (Bundesministerium für Wirtschaft und Energie, BMWE) in coordination with the Federal Ministry of Labour and Social Affairs (Bundesministerium für Arbeit und Soziales, BMAS) has instructed the Federal Office of Economics and Export Control (Bundesamt für Wirtschaft und Ausfuhrkontrolle, BAFA) to "exercise restraint with regard to the Supply Chain Act" (BMWE - Immediate relief for companies - BMWE instructs BAFA to exercise restraint with regard to the Supply Chain Act). This instruction might be the reason for the current information on the website of the BAFA. sein.

Dr. Daniel Walden
Jole Inserra
Dr. André Depping

Climate lawsuits against companies: Status quo

In Germany at least, there are still no legally binding court rulings on the liability of companies for damage caused by climate change that could be generalised. And, to date at least, this issue is also separate from the new sustainability laws (LkSG, CSRD, CS3D, Deforestation Regulation, Ecodesign Regulation, etc.). Rather, the question still needs to be clarified: Can CO₂ emitters be held liable for climate damage under general civil law principles? It is even more unclear what consequences such liability on the part of the company would have for the liability of board members and supervisory board members or managing directors, and to what extent there would be cover for this under the relevant liability insurance policies.

The RWE case before the Hamm Higher Regional Court

One prominent example is the case brought by Peruvian farmer Saúl Luciano Lliuya against RWE. After almost ten years, the Hamm Higher Regional Court dismissed the case at second instance in May 2025. Media reports emphasised that the court considered the fundamental responsibility of large CO₂ emitters for the consequences of climate change to be obvious. However, the lawsuit failed in the end due to the circumstances of the individual case.

The dismissal of the action can thus not be generalised. On the contrary, the Hamm Higher Regional Court's decision is also not a blueprint for new climate lawsuits. A closer look reveals that the Higher Regional Court of Hamm has left central questions unanswered and has taken legal positions that even create new uncertainties. Hence, there can be no question of clarifying the question of liability. Details on this can be found in my (German language) article: "Tidal wave ahead? What Lliuya vs. RWE means for CO₂ emissions, liability and D&O, corporate liability and human rights violations" (ZIP 2025, p. 2218 et seq.).

What remains is legal uncertainty - also internationally

Essential questions regarding liability and coverage thus remain unresolved. This applies not only to Germany but also to other legal systems. This is also relevant for German companies (and vice versa) because in cross-border situations such as climate change, the first question that arises is: Which national law is applicable at all? In the RWE case, the Higher Regional Court of Hamm applied German law because the parties were in agreement on this and there was thus a binding choice of law. However, this will not be the case in every instance.

Parallels: Holcim lawsuit in Switzerland

A case in Switzerland raises similar questions: Residents of the Indonesian island of Pari are suing the Swiss cement company Holcim. They hold Holcim responsible for rising sea levels and the resulting threat to their livelihoods. The plaintiffs are demanding from Holcim:

• Compensation for loss of income (e.g. tourism),
• a reduction in CO₂ emissions,
• financing of protective measures (the Peruvian farmer Lliuya had also demanded this from RWE).

As with the lawsuit against RWE, NGOs are also supporting the plaintiffs here and attracting media attention. According to German broadcasting news platform „Tagesschau“, Holcim referred to the competence of the legislator in a statement when asked by the German news agency dpa: "In our opinion, who is allowed to emit how much CO₂ is a competence of the legislator and not a question for a civil court." This assessment is probably based on the following key question.

The key question: Where does liability begin - where is the threshold?

The Indonesian islanders point out that, according to the "Carbon Majors" database, Holcim is one of the largest historical CO2 emitters in the world. The Peruvian farmer Lliuya also pointed out that RWE is one of the largest historical CO2 emitters worldwide. However, compared to RWE, Holcim is likely to have caused lower CO2 emissions due to its industry and is therefore further down the "ranking list" of "carbon majors". This leads to the interesting question: At what point is a company (jointly) liable for the consequences of climate change due to its CO2 emissions? Does it only include the top 10, the top 100, or even more major CO2 emitters? The only thing that seems to be clear is that liability ‘from everyone against everyone’ cannot be reasonable in any way. The Higher Hamm Regional Court has also clearly rejected such liability for every small or large CO2 emitter. However, the Hamm Higher Regional Court has not defined a precise threshold at which such liability should be considered.

Conclusion: It is now up to the legislator

The actual reason for this is that general civil law apparently does not provide any clear guidance on where such a liability threshold should ultimately be set. The historical legislator did not think about climate change (which was not even known at the time) and its consequences and the resulting question of liability. In our abstract legal system, this does not fundamentally prevent us from subjecting circumstances that were not apparent in the past to legal assessment. However, the phenomenon of climate change and its consequences is so special that there are obviously no other constellations that can in fact be compared with it. The usual legal toolbox thus reaches its limits here.

And this is precisely where we come full circle to Holcim's press statement. After all, if it is not possible to reliably determine from the applicable general civil law when CO2 emissions give rise to liability, then it would obviously be up to the legislator to set such thresholds in the first place.

In Switzerland, however, the first question is whether the Indonesian plaintiffs are even allowed to sue in Swiss courts. The development remains exciting.

First of all: BAFA's explanations are not a law, but the legal opinion of the supervisory authority, which may not always be correct. It is therefore worth seeking expert advice when you are confronted with requests for information from BAFA as the addressee of the Supply Chain Act in order to set the right priorities. This is all the more important in view of the new reporting channel created by BAFA for suppliers feeling that they are being treated inappropriately by those bound by the Act. It would almost be a miracle if this new reporting channel, which can be used anonymously, did not lead to a large number of incident-related enquiries from BAFA to the addressees of the LkSG. But more on that further below.

According to BAFA, the FAQ paper is primarily meant to 'complement' the guidances on risk analysis, on collaboration in the supply chain and on appropriateness (BAFA - Guidances) with the aim of 'explaining how companies can effectively implement their due diligence obligations'. Whether BAFA has actually achieved this goal with the FAQ paper is a matter of personal judgement. The new FAQ paper clearly builds on the existing guidances, in particular on collaboration in the supply chain, so that companies subject to the obligations will find much familiar information in it.

• Companies are expected to obtain an overview of their suppliers, identify risks using an abstract risk analysis based on general sources and only then, if necessary, examine the risks so identified in detail with the suppliers concerned.
• Companies are to prioritise those risks on the basis of the appropriateness criteria and do not need to address all risks.
• Companies cannot simply replace the risk analysis by referring to contractual assurances or corresponding certificates of risk-free supply chains from suppliers.
• Suppliers not included in the 'general risks' identified during the abstract risk analysis of the company's supply chain do not need to be examined in the detailed risk assessment.
• General and indiscriminate enquiries to a supplier not falling within the identified general risks are inappropriate.
• Confronting suppliers with prevention measures such as training, contractual obligations or codes of conduct on an indiscriminate basis, regardless of the identified risk exposure, may be deemed inappropriate and generally ineffective by BAFA.

BAFA's desire to protect SMEs, as those indirectly affected by the LkSG, from unreasonable efforts is evident. However, BAFA is also emphasising the advantages for the actual addressees of the Act: they have much leeway in deciding which risks to tackle first, which measures make sense and which (high-risk) suppliers to focus on. They can and should prioritise. The LkSG does not stipulate a specific minimum or maximum number or a specific percentage. It is also an advantage for the addressees of the Act to have to deal with a much smaller number of supplier responses.

That is certainly true in principle. In reality, it is not uncommon for large companies to have more than 10,000 direct suppliers. The abstract risk analysis alone requires much effort here and even if abstract risks were identified for only 10% of these direct suppliers, it would still be an almost insurmountable mammoth task to examine the abstract risks in concrete terms and, if specific risks were identified, to agree individually customised preventive measures with hundreds of direct suppliers, as BAFA apparently expects according to the guidance and the FAQ paper. BAFA emphasises that companies should deploy their resources in a targeted manner but leaves it open which resources the business must use in order to be able to fulfil the mammoth task of a specific, individualised approach. As though this were not enough work, BAFA also states that companies should, as a rule, favour direct contact with those indirect suppliers in the deeper supply chain who are most likely to pose risks given the results of the risk analysis. Any company that has ever tried to contact raw material producers outside Europe across several stages of the supply chain knows that this is more of an adventure than part of normal business. That is, if you get the contact details of the indirect supplier at all. In its guidance on risk analysis, BAFA stated that companies are 'encouraged' to 'successively endeavour to increase transparency in the supply chain'. Although this sounds sensible at first, it leaves essential questions unanswered, for example as to the legal basis for the requirement and the scope of the successive endeavours that may be required.

What does all this mean for the addressees of the LkSG? Suppliers for which no risks are apparent when analysing industry and origin should not be bothered with questionnaires or codes of conduct. This is certainly a relief. Beyond that, however, it becomes difficult to give a recommendation. We believe that the key must unavoidably be the depth of the specific risk analysis and a strict prioritisation of a handful of truly relevant risks that the company can realistically tackle with the ambition and expectation of improving the situation. Wait, wasn't that actually the aim of the LkSG? Extensive organisational work with questionable benefits in terms of the rights to be protected by the Act certainly was not.

The FAQ paper also fails to explain how to sensibly proceed as suggested. Instead, when considering specific risks, the paper simply states that it is 'at the discretion of the company to choose an appropriate and effective method for obtaining information when determining the risks'. General and indiscriminate enquiries to a supplier beyond the identified general risks would not count as such. What would? General and indiscriminate enquiries to all suppliers within an identified general risk area? Or even asking individualised, specific questions to all suppliers within the general risk areas? Encouraging the addressees of the Act to limit themselves to realistically manageable queries and data volumes with a view to the aforementioned objective should clearly look different. A modular system for questionnaires might be an option, from which only certain modules will be used, depending on the industry and region of origin, once the suppliers have been clustered according to abstract risks. But even then, the company is likely to be confronted with a substantial data volume as a result. But what for if only a few priority risks will be left for the subsequent prioritisation anyway?

More trouble is looming when it comes to preventive measures. It is our belief that companies should continue to agree supplier codes of conduct, which are used by most of the addressees of the Act and beyond, at least with their high-risk suppliers. Customisation does not appear to be practical or necessary in this respect, even though BAFA apparently takes a different view. Standardised supplier codes of conduct were used in the market long before the LkSG came into force and were widely recognised as being effective. What exactly should be unreasonable or inappropriate about obliging your direct suppliers to respect fundamental human rights? After all, BAFA has not (yet?) challenged companies' internal practice of having employees sign a code of conduct with comparable obligations as being inappropriate. It is clear, however, that the supplier code of conduct must not go beyond the intended purpose and impose duties of care on suppliers that have originally been imposed only on the addressees of the Act, such as the implementation of a risk management system, in particular for the purpose of communicating the results of the risk analysis to the client/addressee of the Act or a complaints procedure. How the agreement of a customised supplier code of conduct is to be successfully agreed on an ad hoc basis in an ongoing contractual relationship as a preventive measure for identified specific risks relating to a supplier, and what the advantage is compared to an abstract general commitment to essential human rights, remains BAFA's secret.

Yet, BAFA also uses the FAQ paper to announce the key topic for the next inspections of companies: from now on, it will pay particular attention to the implementation of the risk-based approach by companies in its inspections and sanction any infringements. 'Anyone who fails to take a risk-based approach or who attempts to pass on their due diligence obligations to other companies is neither acting adequately nor acting effectively on a systematic basis and is therefore not fulfilling their own obligations.'

And it gets even better: Suppliers who are contacted by a contractual partner bound by the LkSG on a blanket and non-risk-related basis can now report this to BAFA (also anonymously) at the following contact address: LKSG.Kontrolle@bafa.bund.de. BAFA may use such information to initiate an audit by sending a written request for information to the company. Disputes with suppliers over the completion of standardised questionnaires and excessive codes of conduct may therefore fall back badly on the addressee of the Act in the form of a request for information from BAFA. The problem is that not every tip-off from a supplier is automatically justified.

Although the information provided by BAFA in the guidances and FAQs, as already said, is not legally binding and no court rulings have been handed down on the issues raised, it is unpleasant enough for companies to have to undergo intensive investigations by BAFA and to possibly be fined, even if the decision is later revoked by a court.

But it does not have to come to that. At least the last sentence in BAFA's FAQs sounds reasonable for the addressees of the Act: 'BAFA will appropriately consider plausible presentations of the risk-based approach with a view to the company’s efforts to meet the corporate due diligence obligations.' This means that companies know what they have to do, at least in principle: if they have not already done so, they should document and implement a coherent concept in which, based on the risk analysis, a large part of their suppliers remain unaffected and suppliers with clearly identified risks are required to comply with a moderate supplier code of conduct and, where necessary, are subjected to additional preventive measures such as targeted training and checks.

Dr André Depping
Dr Daniel Walden

The first omnibus package contains the following steps:

• Make sustainability reporting more accessible and efficient  (relates to the Corporate Sustainability Reporting Directive – CSRD, more on it below)
• Simplify due diligence to support responsible business practices  (betrifft die Corporate Sustainability Due Diligence Directive – CSDDD bzw. CS3D, more on it below)
• Strengthen the carbon border adjustment mechanism for a fairer trade 
• Unlock opportunities in European investment programmes

For details see: Commission proposes to cut red tape and simplify business environment - European Commission

The individual steps are described more precisely on the linked pages. Regarding the first two steps, the EU Commission emphasises the following:

„Making sustainability reporting more accessible and efficient 

Specifically, the main changes in the area of sustainability reporting (CSRD and EU Taxonomy) will:

• Remove around 80% of companies from the scope of CSRD, focusing the sustainability reporting obligations on the largest companies which are more likely to have the biggest impacts on people and the environment;
• Ensure that sustainability reporting requirements on large companies do not burden smaller companies in their value chains;
• Postpone by two years (until 2028) the reporting requirements for companies currently in the scope of CSRD and which are required to report as of 2026 or 2027.
• Reduce the burden of the EU Taxonomy reporting obligations and limit it to the largest companies (corresponding to the scope of the CSDDD),  while keeping the possibility to report voluntarily for the other large companies within the future scope of the CSRD. This is expected to deliver significant cost savings for smaller companies, while allowing businesses that wish to access sustainable finance to continue that reporting.
• Introduce the option of reporting on activities that are partially aligned with the EU Taxonomy, fostering a gradual environmental transition of activities over time, in line with the aim to scale up transition finance to help companies on their path towards sustainability.
• Introduce a financial materiality threshold for Taxonomy reporting and reduce the reporting templates by around 70%.
• Introduce simplifications to the most complex “Do no Significant harm” (DNSH) criteria for pollution prevention and control related to the use and presence of chemicals that apply horizontally to all economic sectors under the EU Taxonomy – as a first step in revising and simplifying all such DNSH criteria.
• Adjust, among others, the main Taxonomy-based key performance indicator for banks, the Green Asset Ratio (GAR). Banks will be able to exclude from the denominator of the GAR exposures that relate to undertakings which are outside the future scope of the CSRD (i.e. companies with less than 1000 employees and €50m turnover).

Simplifying due diligence to support responsible business practices

The main changes in the area of sustainability due diligence will:

• Simplify sustainability due diligence requirements so that companies in scope avoid unnecessary complexities and costs, e.g. by focusing systematic due diligence requirements on direct business partners; and by reducing the frequency of periodic assessments and monitoring of their partners from annual to 5 years, with ad hoc assessments where necessary.
• Reduce burdens and trickle-down effects for SMEs and  and small mid-caps by limiting the amount of information that may be requested as part of the value chain mapping by large companies;
• Further increase the harmonisation of due diligence requirements to ensure a level playing field across the EU;
• Remove the EU civil liability conditions while preserving victims' right to full compensation for damage caused by non-compliance, and protecting companies against over-compensation, under the civil liability regimes of Member States; and
• Give companies more time to prepare to comply with the new requirements by postponing the application of the sustainability due diligence requirements for the largest companies by one year (to 26 July 2028), while advancing the adoption of the guidelines by one year (to July 2026).“

For details see: Commission simplifies rules on sustainability and EU investments

The proposals that have just been published will now have to be analysed more closely.

Please note: These are proposals for legislation by the EU Commission. The Commission has announced that it will submit these proposals to the European Parliament and the Council for examination and decision-making. So it remains to be seen when and with what specific content the EU Commission's proposals will ultimately be adopted.

Dr Daniel Walden
Dr André Depping

The underlying analysis by Commission President Ursula von der Leyen at a press briefing is interesting: "Our business model has basically relied on cheap labor, from China presumably, cheap energy from Russia and partially outsourcing security and security investment. These days are gone."

The consequence of this: the EU Commission's plans for the three core areas of action: innovation, decarbonization and security, which are based on the recommendations of the Draghi report and described in more detail in the Compass. The Commission's aim is to make Europe the place where tomorrow's technologies, services, and clean products are invented, produced and marketed, while staying on course for climate neutrality. The Compass thus provides a first perspective on the question of whether the ESG topic is facing an end in light of the current political developments in the EU (for some basic thoughts on this, see our blog post Is this the End for ESG? | ADVANT Beiten). At least from the perspective of the compass, it appears rather unlikely that the transformation of the economy as such will be put on hold for the time being.

What is obviously set to change significantly, however, are the means: In the Compass, the EU Commission describes five so-called "horizontal enablers for competitiveness" with which it intends to achieve its goals in the three pillars of innovation, decarbonization and security. The first enabler, "simplification", is particularly relevant from a regulatory perspective, as it aims to drastically reduce regulatory and administrative burdens. This simplification is complemented by the reduction of barriers to the Single Market, the idea of a "European Savings and Investment Union" to finance the whole project, the promotion of skills and quality jobs and better coordination of policies at EU and national level.

The aspect of simplification mentioned in the Compass obviously requires a fundamental change. The EU Commission itself wants to make progress here and has already announced a first series of "Simplification Omnibus packages" for February 2025. One - and also the first - omnibus is to cover far-reaching simplification in the fields of sustainability finance reporting, sustainability due diligence and taxonomy. This refers to the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CSDDD) and the Taxonomy Regulation. The EU Commission had already announced facilitations in this regard following the Budapest Declaration on the "New European Competitiveness Deal" last fall. According to the agenda for the upcoming Commission meeting on February 26, 2025, Commission President Ursula von der Leyen herself is now responsible for the corresponding agenda item "Omnibus package: Chapeau communication and omnibus proposal" alongside Vice-President Stéphane Séjourné. This may reflect the political importance of this project and the many demands made on it (e.g. by the EPP as well as the German and French governments).

A first indication of the content of this "first omnibus" can already be found in the Compass: In order to ensure that regulation is proportionate to the size of the company, the EU Commission intends to propose a definition for a new category of company, the so-called "small micaps". These are to be companies that are larger than SMEs but smaller than large companies. The EU Commission announces that "thousands of companies in the EU will benefit from a tailored regulatory simplification in the spirit as SMEs". This could mean that the scope of application of the CSRD, which currently includes all large corporations as defined in Section 267 (3) of the German Commercial Code (HGB) from January 1, 2025, will be narrowed accordingly.

What does this mean for companies? As a rule, the implementation of the announced simplifications by the respective legislator alone will not be sufficient. In a second step, these simplifications will have to be implemented by the individual companies. The extent to which the processes set up by the respective company can and should be adapted in a meaningful way will have to be examined. The mere removal of a legal requirement does not automatically render an established process obsolete. To illustrate: If, for example, the obligation of the management board of a listed stock corporation to establish an appropriate internal control system (ICS) and risk management system (RMS), which was included in Section 91 (3) of the German Stock Corporation Act (AktG) in the wake of the Wirecard scandal, were to be repealed, it would be unwise to immediately abolish the ICS and RMS completely. However, it remains useful and necessary to keep an eye on what regulatory simplifications will result from the changes announced by the EU Commission over time, and how these can then be translated into corresponding simplifications in internal processes. Companies would have more room for maneuver, at least as long as it is ensured that decisions can be made on the basis of appropriate information, including ESG aspects where relevant. It therefore seems unlikely that ESG issues will cease to play a role for companies. On the contrary, the transformation of the economy and the resulting opportunities and risks for the business models of almost all companies remain on the agenda.

Dr Daniel Walden
Dr André Depping

The year 2025 will be at least as dynamic as the years before when it comes to energy law. It remains unclear what impact the upcoming elections in February and the changing geopolitical situation will have on the direction and objectives in the energy sector. The following is a brief overview of what is already known to be introduced in 2025.

1. Obligation for meter operators to install smart metering systems pursuant to section 34 (2) sentence 1 no. 1 of the German Metering Point Operation Act (Messstellenbetriebsgesetz, MsbG)

As from 2025, every household may receive a digital electricity meter. Essentially anyone with an annual electricity consumption of more than 6,000 kWh, solar systems with an output of more than 7 kW and/or controllable heat pumps is eligible. Starting at the beginning of this year, metering point operators are obliged to equip, on request, metering points and submeters installed in a customer system and not requiring accounting with 15-minute smart metering systems (pursuant to section 2 no. 7 MsbG) earlier, but beware, the term 'customer system' has been fundamentally called into question by the ECJ ruling of 28 November 2024 (Case C-293/23) (you can read about this in our article in the December 2024 issue of the newsletter Focus on the Public Sector (available in German only)). The installation of smart meters used to be voluntary but is now mandatory within four months of being commissioned. This is another step in the 'smart meter rollout' announced by the legislature, which has made only slow progress in recent years.

2. Obligation for electricity suppliers to offer dynamic electricity prices pursuant to section 41a (2) of the German Energy Industry Act (Energiewirtschaftsgesetz, EnWG)

From 1 January 2025, all electricity suppliers will be obliged to offer end consumers electricity contracts with dynamic electricity rates, provided these consumers have smart meters. According to section 3 no. 31d EnWG, dynamic rates mean they that reflect the price fluctuations of the energy exchange. This allows end consumers to be flexible in their consumption of electricity and optimise it to coincide with periods of low electricity prices. Electricity suppliers must furthermore comprehensively inform their customers about the dynamic rates and offer information about the installation of a smart metering system.

3. Obligation for electricity suppliers to guarantee a change of supplier within 24 hours

Under ruling BK6-22-024 of the German Federal Network Agency (Bundesnetzagentur), electricity suppliers will be obliged as of 4 April 2025 to guarantee an accelerated change of supplier within a maximum of 24 hours on every working day if end consumers wish to do so.

4. Obligation for system operators to guarantee marking and lighting of wind turbines at night pursuant to section 9 (8) of the German Renewable Energy Sources Act (Erneuerbare-Energien-Gesetz, EEG)

From 1 January 2025, onshore wind turbines must be equipped with aircraft detection lighting systems (ADLS) where this is required under aviation law. If system operators fail to comply with this obligation, they will have to make payments to the grid operator in accordance with section 52 (1) no. 3 EEG.

5. Increased CO2 price for end consumers pursuant to section 10 (2) sentence 2 no. 5 of the German Fuel Emissions Trading Act (Brennstoffemissionshandelsgesetz, BEHG) 

On 1 January 2025, the price per emissions certificate in national emissions trading will increase to EUR 55. With the higher CO2 price, the legislature wants provide incentives for end consumers to switch to low-CO2 or even CO2-free technologies. This marks the beginning of the last year of the fixed-price phase, in which the price of an emissions certificate is determined by law. From 2026, the price of an emissions certificate will be determined by auction, similar to the European emissions certificate trading system. A price corridor will limit the price of a certificate to range between EUR 55 and a maximum of EUR 65 in 2026.

6. Obligations for owners of combustion plants after the expiry of the transitional provisions in the German Federal Immission Control Regulation (Bundesimmissionsschutzverordnung)

The Federal Immission Control Regulation stipulates that owners of furnaces burning wood, coal and other solid fuels are obliged to adhere to specified carbon monoxide and particulate matter limits. The last transition period for compliance with these requirements ended on 31 December 2024. Owners of a furnace not meeting these legal requirements must make the necessary adjustments or take the furnace out of operation if these requirements cannot be met. Anyone who fails to do so will face fines.

7. Obligations for developers and owners regarding building automation pursuant to section 71a of the German Building Energy Act (Gebäudeenergiegesetz, GEG)

If a heating system or a combined heating or air conditioning and ventilation system with a rated output of more than 290 kilowatts is installed in a non-residential building, this non-residential building must be equipped with a building automation and control system as from 1 January 2025. The requirements for this digital energy monitoring technology are listed in section 71a (2) and (3) GEG. According to the legislature, building automation helps adjust operating times or prevents simultaneous heating and cooling. This Act transposes Article 14 (4) and Article 15 (4) of Directive (EU) 2024/1275 (EPBD).

8. Expiry of the innovation clause (section 103 GEG)

The innovation clause allows owners and developers to apply (usually with the lowest building authority and until 31 December 2025) for an exemption from certain requirements of the GEG on the basis of using innovative solutions. For the time being, this technology-neutral approach has been extended until the end of the year. Given the current, uncertain political situation, however, especially with regard to the GEG, it is impossible to say whether a further extension can be expected. It could therefore be worthwhile for project developers to start implementing innovative projects as early as 2025 and apply for an exemption under section 103 GEG.

9. Waste heat reporting obligation for companies under section 17 (2) of the German Energy Efficiency Act (Energieeffizienzgesetz , EnEfG)

Companies must report data on their waste heat quantities to the Federal Agency for Energy Efficiency (Bundesstelle für Energieeffizienz) for the first time on or before 1 January 2025. From this year onwards, such reports must be submitted every year on or before 31 March. Therefore, companies who report data on their waste heat quantities for the first time in 2025, will have to file two reports in 2025. This obligation applies to companies with a total annual energy consumption of more than 2.5 GWh within the past three years. Anyone who fails to comply with this reporting obligation could be liable to a fine, see section 19 (1) no. 9 EnEfG. This reporting obligation is meant to support mainly district heating network operators and other heat consumers: they will be able to view potential sources of waste heat in order to leverage any efficiency potential. Companies must reuse their waste heat to save energy to the extent this is possible and reasonable.

10. Rulings of the German Federal Network Agency; industrial grid charges and grid capacity

With its key issues paper of 24 July 2024, the Federal Network Agency (Bundesnetzagentur, BNetzA) initiated a reform of industrial grid fees. A new ruling of the BNetzA is meant to create new incentives for electricity-intensive companies. To make this possible, the band load privilege is to be abolished. The purpose of the band load privilege is to provide incentives for electricity-intensive end consumers to keep constant base loads.

In addition, the BNetzA has initiated a procedure to create uniform standards for the allocation of grid capacity above low-voltage level. The relevant consultation process ended on 31 December 2024, meaning that the BNetzA is expected to make a decision in 2025.

Dr Malaika Ahlers
Anton Buro

All of this could be criticised as a hectic back and forth which seems to be rather far from the goals of clear and efficient guidance, predictability, and planning security. At the same time, the question is how this potential 'chopping and changing' on the part of the legislature may be perceived by the companies concerned. However, regardless of the ongoing political debate about the new ESG regulations, there are also some legal determinants for the ESG issue which can be expected to continue to be there in any scenario:

Laws already in force must of course be observed ('compliance') for as long as they will be in force. The mere possibility of a law being repealed is no justification for not abiding by it before this happens. This is true, for example, for the German Supply Chain Due Diligence Act which has been German law since 1 January 2023 (see our above-mentioned blog post). Applicable laws, however, also include the traditional general duty of care of board members and managing directors, where modifications − particularly with regard to the legal consequences of a breach of duty in the form of liability for damages - are discussed from time to time, but not their complete abolishment: 'In managing the affairs of the company, the members of the management board are to exercise the due care of a prudent manager faithfully complying with the relevant duties', section 93 (1) sentence 1 of the German Stock Corporation Act (Aktiengesetz, AktG). And sentence 2 of the provision makes it clear that entrepreneurial decisions are to be taken on the basis of adequate information and in the best interests of the company. What does this mean for entrepreneurial decisions − and especially key decisions on the corporate strategy and the business model, for which (also) ESG aspects are relevant and, therefore, part of the adequate information base? The management board should take adequate account of these ESG aspects when taking a decision (in addition to all the other relevant aspects) if it does not want to be exposed to allegations of breach of duty and liability claims later in the event of an unsatisfactory development of the company. And this regardless of CSRD, Taxonomy Regulation, CSDDD and the announced omnibus regulation (for details see Walden, NZG 2020, p 50 et seq: 'Corporate Social Responsibility: Rights, Duties and Liability of the Management Board and Supervisory Board').

Another closely related issue can be found in the field of banking supervision. Some years ago already, the supervisory bodies emphasised the relevance of ESG risks and the need to identify them in traditional risk management. Meanwhile, the minimum requirements for risk management of the German Financial Supervisory Authority (Mindestanforderungen an das Risikomanagement, MaRisk) contain numerous detailed provisions in this regard. And only on 9 January 2025, the European Banking Authority (EBA) published its 'Guidelines on the management of environmental, social and governance (ESG) risk' (Final Guidelines on the management of ESG risks.pdf). The executive summary states:

'ESG risks, in particular environmental risks through transition and physical risk drivers, pose challenges to the safety and soundness of institutions and may affect all traditional categories of financial risks to which they are exposed. To ensure the resilience of the business model and risk profile of institutions in the short, medium, and long term, the guidelines set requirements for the internal processes and ESG risk management arrangements that institutions should have in place. […] Institutions should integrate ESG risks into their regular risk management framework by considering their role as potential drivers of all traditional categories of financial risks, including credit, market, operational, reputational, liquidity, business model, and concentration risks.' (Emphasis added by the author)

This implies two things for companies in the real economy: Firstly, if ESG risks are relevant for financial institutions, then they are also relevant, and even more so, for their clients because ESG risks of the institutions often are the result of ESG risk of their clients, for instance where such a risk is passed on to the institution as a credit risk. Therefore, not only the institutions, but also the companies in the real economy do well to consider ESG risks in their traditional risk management systems (a legal requirement for listed companies under section 90 AktG since the Wirecard affair) in order to possibly avoid potential negative effects of any missing or inadequate consideration of ESG risks for the company. And secondly, regardless of the structure of the companies' own risk management, a 'trickle-down' effect can also be expected as the institutions must try to obtain relevant information from their clients for their own risk management processes and their clients are therefore confronted with corresponding requests for information. Thus, the inclusion of ESG aspects in the loan processes of institutions has already begun.

On the other hand, board members and managing directors should keep an eye on possible ESG opportunities in addition to ESG risks. For many companies, the transformation of the economy may also offer new business opportunities which need to be treated like any other business opportunities. 

All this, of course, applies primarily to the classic outside-in perspective of companies, but in some circumstances also indirectly to the inside-out perspective addressed by the CSRD from the point of double materiality, i.e. the impacts of business activities on the environment and society. This is because such negative impacts can reflect on the company if they are seen in a critical light by relevant reference groups such as (potential) customers and employees. And finally, looking into the supply chain is also nothing new, at least since the coronavirus and increasing geopolitical uncertainties.

As a result, dealing with the ESG risks and ESG opportunities relevant for the specific company appears to be appropriate with a view to the general duty of care of management board members and managing directors, even regardless of the CSRD. Interestingly, the Chief Sustainability Officers (CSOs) of more than 400 French companies who are members of the French C3D organisation have recently addressed the EU Commission regarding the EU Commission's omnibus plans and emphasised that 'ESG reporting and value chain assessment' are essential 'for resilience' as well as 'for survival, growth, and long-term competitiveness' of European companies. In addition, it would strengthen Europe's sovereignty by European norms setting global standards instead of leaving this to other, competing jurisdictions (presumably referring to what is known as the Brussels Effect). The French CSOs therefore advise the EU Commission to take practical measures to improve the clarity and effectiveness of the regulations without jeopardising their strategic goals. As has already been made clear at the beginning, there certainly are enough voices advocating the opposite view and seeing an unchanged continuation as a serious competitive disadvantage.

So, it definitely will be interesting to see how this discussion will develop. Neglecting relevant ESG aspects 'only' for this reason could prove risky for company managers. Making well-considered decisions on an adequate information basis is the be-all and end-all (also) in this respect.

Dr Daniel Walden
Dr André Depping

The LkSG, which was passed in 2021 by the grand coalition government of the time and deals with companies' obligations to protect human rights, has now been in force for almost two years. Nevertheless, it once again is the subject of many a political debate. Mostly in connection with the topic of red tape and red tape reduction. One could almost get the impression the LkSG had been identified as the main cause of the German economy's problems and that everything would be fine once it was removed. It was suggested that the LkSG 'had to go' (Federal Chancellor Olaf Scholz). There was even talk of chain saws to 'cut away' the Act (Economics Minister Habeck). Beyond the pithy political statements, however, there was some confusion as to the details of what should actually be implemented and how. The 'growth initiative' of the traffic-light coalition initiated in the summer of 2024, which is now a thing of the past, could certainly be understood to merely restrict the scope of the LkSG's application (see Initiative for Growth of the Federal Government of 5 July 2024). According to this initiative, only those companies that must be registered under the requirements of the CSDDD as of 2027 should be subject to the LkSG. In 2028 and 2029, the LkSG's application should then be expanded again in line with the requirements of the CSDDD.

The growth initiative also referred to the fact that the law on the implementation of the Corporate Sustainability Reporting Directive (CSRD) planned for the second half of 2024 would remove the specific reporting obligation set out in the LkSG for companies that prepare a sustainability report in accordance with the CSRD. The corresponding draft bill of the German government was submitted to the Bundestag, the German parliament, in September 2024 (see BT-Drs. 20/12787 (available only in German)). Although the EU Commission has already initiated infringement proceedings against Germany for not having transposed the CSRD into national law in Germany in time (i.e. by June 2024), it is unclear whether this bill will still be passed in the current legislative period after the German traffic-light coalition has failed. This has unpleasant consequences for all those companies that have prepared themselves to produce a mandatory sustainability report in accordance with the CSRD for the first time for the 2024 reporting year. As the CSRD reporting obligation can probably no longer be introduced retroactively for the 2024 reporting year in 2025 (at least according to the IDW in a newsletter to its members dated 14 November 2024 (only available in German)), companies may have to re-plan at short notice and submit a 'non-financial report' again for 2024 to comply with the still existing legal situation. This would render companies' extensive preparations for CSRD reporting obsolete for the time being. Also, the originally planned liberation from parallel reporting under the German LkSG would not materialise either, with the result that these companies would have to prepare an LkSG report for 2024 in addition to the non-financial report. This 'back and forth' is highly unlikely to generate any enthusiasm in corporate circles. 

The Bundestag is now once again addressing the issue of a complete abolition of the LkSG, after a draft by the CDU/CSU parliamentary group for a 'Supply Chain Due Diligence Obligations Cancellation Act' ('Lieferkettensorgfaltspflichtenaufhebungsgesetz') (BT-Drs. 20/11752 (available only in German)) failed only two months ago (in October 2024) due to the opposition of the former traffic-light coalition, after the AfD parliamentary group's attempt had been unsuccessful in early 2024. Following the end of the traffic-light coalition, the CDU/CSU parliamentary group has reintroduced a draft for a 'Supply Chain Due Diligence Obligations Cancellation Act' ('Lieferkettensorgfaltspflichtenaufhebungsgesetz') (BT-Drs. 20/14015 (available only in German)). And now that it has left the Federal Government, the FDP parliamentary group has also introduced a draft bill to repeal the LkSG with the meaningful name 'Supply Chain Freedom from Bureaucracy Act' ('Lieferkettenbürokratiefreiheitsgesetz') (BT-Drs. 20/14021 (available only in German)). The drafts were discussed in the Bundestag in first reading on 5 December 2024 and referred to the relevant committees (for more details see German Bundestag - discussion of drafts to repeal LkSG (available only in German)). It will be interesting to see the outcome of these two current drafts within the short time left of the legislative period, and of the draft CSRD Implementation Act (CSRD-Umsetzungsgesetz), which is already slightly more advanced in the legislative process, (and the numerous other ongoing legislative procedures). 

Even if, in our experience, most of the companies affected have basically come to terms with the LkSG, upgraded their personnel and implemented the necessary due diligence measures, a very dangerous potential earthquake fissure is opening up in day-to-day business. Driven by current political statements, the view that the LkSG does not need to be taken so seriously (any more) is evidently growing at management level. After all, it has already been announced at the highest level that the LkSG is 'going away', especially as there seems to almost be a rare cross-party consensus on this. The situation with the LkSG is, however, somewhat different to that relating to the CSRD Implementation Act. This is because sustainability reporting in accordance with the CSRD still has to be transposed into national law; there will be no mandatory sustainability reporting before then. The LkSG, on the other hand, has been national law for some time, with the result that the addressees of the regulations must fulfil the human rights and environmental due diligence obligations set out therein. And this will remain the case, regardless of the current political discussion, until the Bundestag has passed a law to repeal the LkSG and such law has come into force. However, for the reasons outlined above, it is uncertain whether this will happen in the short term.

For the management, the LkSG will therefore remain part of their general compliance obligations until further notice. In other words, the management is responsible for ensuring that the laws applying to the company (including, for the time being, the LkSG) are indeed observed by the company. If, however, in view of the current political discussion and the expected or anticipated future repeal of the LkSG on this basis, the management now lets go of the reins and company-internal measures to implement the LkSG are no longer pursued with the necessary vigour, it risks coming into conflict with its obligation to comply with the LkSG, which definitely is still currently in force. The (debatable) prediction that the LkSG will soon be repealed does not make any difference in this context. This is because the LkSG contains ongoing obligations, i.e., for example, that the company must perform an event-based risk analysis at any time a reason to assume such risk arises. Preventive measures, too, must be implemented on an ongoing basis. 

Inadequate implementation of the LkSG may constitute an administrative offence and accordingly lead to a fine of up to 2% of annual global sales. If such a fine were to be imposed, the question (that has not yet been answered from a legal perspective) would immediately arise as to whether the company can (and possibly must) seek recourse against the individual members of the management on the ground of inadequate implementation of the LkSG, which may have caused the fine. Even if D&O insurance cover is in place, the defence against such a liability claim by the company is not exactly a pleasure for the defendant director. Not to mention other consequences beyond any personal liability. A prudent and conscientious director (according to the legal model of section 93 of the German Stock Corporations Act (Aktiengesetz, AktG) should therefore ensure implementation of the LkSG for as long as the current political discussion remains a discussion and the LkSG remains applicable law.

The potential hope that the supervisory authority responsible for monitoring the implementation of the LkSG (Federal Office for Economic Affairs and Export Control, Bundesamt für Wirtschaft und Ausfuhrkontrolle, BAFA) will no longer so intensely engage with the LkSG in view of the current political discussion and that any insufficiencies will therefore not lead to a fine seems unfounded to us in this generalisation. In September 2024, the Ministry of Labour and the Ministry of Economic Affairs announced the implementation of an 'Immediate programme for sub-legislative measures for the practical application of the LkSG' ('Sofortprogramm für untergesetzliche Maßnahmen zur praxisnahen Anwendung des LkSG')(for more information in German please follow this link). However, this does not affect the statutory monitoring of compliance with the LkSG by BAFA. Nor the fact that BAFA is said to have meanwhile initiated some 40 (!) administrative offence proceedings in connection with the LkSG.

Dr. Daniel Walden
Dr. André Depping