European Parliament in support of plans for an European Supply Chain Due Diligence Act

On June 1, 2023 the European Parliament resolved by large majority vote to adopt its position for the upcoming negotiations with regard to the proposed Corporate Sustainability Due Diligence Directive (CSDDD). In this respect, it has expressed its support for tightening up many aspects of the EU Commission's proposal for a Directive on Corporate Sustainability Due Diligence submitted on February 23, 2022 (see our blog post at that time).

Core topic: Human rights and environmenal supply chain due diligence

The proposed directive includes in particular human rights and environmental due diligence duties for companies, which are similar to the due diligence duties regulated in the German Supply Chain Due Diligence Act (see our flyer on this Act). The core elements of these duties are the identification, prevention, mitigation or termination of current or potential negative human rights and environmental impacts in the company's own operations, in its subsidiaries and in the value chain of the company.

Extended scope of application for EU and non EU companies

According to the resolution of the European Parliament, the due diligence obligations shall apply to all companies based in the EU with more than 250 employees and a global turnover of more than 40 million euros, as well as to parent companies with more than 500 employees and a global turnover of more than 150 million euros. This is a considerable extension compared to the proposal of the EU Commission, according to which the first-mentioned thresholds would only apply to companies operating in certain high-risk sectors. For the remaining companies, those thresholds would apply which, according to the resolution of the European Parliament, should apply consolidated to ultimate parent companies. The proposal of the EU Commission does not provide for any attribution within a group of companies.

Second, similar to the EU Commission's proposal, the due diligence requirements should also apply to non-EU companies with a global turnover of more than 150 million euros but only if at least 40 million euros are generated in the EU.

The CSDDD would therefore contribute significantly to a "level playing field" from the perspective of German-based companies. This is because the German Supply Chain Act is applicable only to companies domiciled in Germany or with a branch office in Germany but not to other foreign companies. However, considerably more companies would also affected in Germany due to the CSDDD, as up to now the aforementioned companies are directly affected by the German Supply Chain Act only if they have more than 3,000 employees in Germany (or from January 1, 2024 more than 1,000 employees in Germany).

Further topic: Sustainability and Climate Change

In addition, companies shall in future develop and implement a plan to ensure that their business model and strategy is aligned with the objectives of the transition to a sustainable economy and with the limiting of the global warming to 1.5 °C in line with the Paris Agreement and the objective of climate neutrality until 2050. For directors of companies with more than 1,000 employees, meeting the plan's targets shall have an impact on variable compensation.

Assessment and next steps

The Council already decided on its negotiating position in November 2022, contrary to the Parliament calling for some easing compared to the EU Commission's proposal. Now that the European Parliament has defined its negotiating position, the way is clear for the trilogue negotiations to begin.

It is still not possible to predict with certainty what the content of the CSDDD will ultimately be. This particularly applies to the topics of sanctions and liability. Even before and even more so after the publication of the EU Commission's proposal, there were fierce political discussions about the regulatory project. Even on the day before the European Parliament passed its resolution, attempts were made to stop the negotiated compromise. It can therefore be expected that the political discussion about the regulatory project will continue.

In all likelihood, however, the companies affected will have an implementation period of several years in some cases.

However, it does not imply that no further measures are necessary for the time being. The CSDDD is not a stand-alone measure. Rather, it is one of several steps that the EU Commission had already planned in its Action Plan on Sustainable Finance in 2018. Other steps such as the EU Taxonomy and, above all, the new sustainability reporting have already been implemented or only need to be transposed into national law. For example, the Corporate Sustainability Reporting Directive, which came into force at the beginning of 2023, will lead to a considerable widening of the range of companies subject to the new sustainability reporting. In Germany alone, around 15,000 companies will be affected in the future, and in total more than 50,000 companies, including non-EU companies (for more details, see our blog post on the new sustainability reporting).

For more information on the European Parliament's decision on the CSDDD (with altogether 381 (!) amendment proposals), reference is made to the Parliament's press release and the documents linked therein.

Dr Daniel Walden

This blog post also appears in the Haufe Business Law Newsletter.