Today, the European Council gave its final green light for the so-called EU Corporate Sustainability Due Diligence Directive (CSDDD or CS3D) which is the European sister of the German Supply Chain Act. EU member states will have to transpose the CSDDD into national laws within two years after its entry into force (probably already in June 2024).

Which companies will be affected?

The EU CSDDD will apply to companies both from the EU and third countries and holding companies that have more than 1000 employees and a turnover of more than 450 million euro, as well as to companies that have entered a franchising agreement and have a turnover of more than 80 million euro, where royalties account for at least 22.5 million euro of this turnover.

The CSDDD foresees generous transition periods. Thus, irrespective of the transposition into national laws within the next two years, the new obligations may have the following staggered application:

• For companies with more than 5,000 employees and 1.5 billion in turnover: three years after the entry into force of the CSDDD (i.e. in summer 2027)
• For companies with more than 3,000 employees and 900 million in turnover: four years after the entry into force of the CSDDD (i.e. in summer 2028)
• For companies with more than 1,000 employees and 450 million in turnover: five years after the entry into force of the CSDDD (i.e. in summer 2029).

But even if your company does not meet the above criteria, it will be indirectly affected by the CSDDD if it is part of the relevant supply chain of the above mentioned companies (the CSDDD uses the term "chain of activities" which mainly refers to the upstream part of the supply chain). This is because the CSDDD will require companies to reach out to their business partners in their chain of activities with regard to human rights and certain environmental prohibitions.

And in terms of time, direct and indirect effects of supply chain legislation are already apparent today due to national laws that have already come into force independently of the CSDDD – such as the German Supply Chain Due Diligence Act which applies to companies domiciled in Germany with more than 1,000 employees in Germany (turnover is not a criterion insofar).

Further information

For more information on the CSDDD, reference is made to the today's press release of the European Council Corporate sustainability due diligence: Council gives its final approval - Consilium (europa.eu) as well as our previous blog post on the CSDDD EU Corporate Sustainability Due Diligence Directive - Agreement and Text | Advant Beiten (advant-beiten.com).

The final text of the resolved CSDDD can be found here: pdf (europa.eu)

German Supply Chain Act as a blue print

Irrespective of the differences between the EU and the German Supply Chain Act, the implementation of the latter can serve as a blue print for the implementation of the former. German companies that have already implemented the German Supply Chain Act will therefore definitely have a head start in terms of knowledge and processes. For more information on the German Act, please refer to our respective flyer: The German Act on Corporate Due Diligence Obligations in Suppy Chains | Advant Beiten (advant-beiten.com)

Dr. André Depping
Dr. Daniel Walden
 

The new EU Regulation banning the sale of goods produced using forced labour had just been adopted on 13 March 2024 (see our blog post, EU Regulation banning forced labour products is coming (and the EU Corporate Due Diligence Directive too?)), when the live ticker announced two days later: after much back and forth, sufficient EU Member States voted in favour of the (even more watered down) draft of the EU Corporate Sustainability Due Diligence Directive (Corporate Sustainability Reporting Directive, in short: CSDDD or CS3D).

On 14 December 2023, the chief negotiators from the Parliament and the Council announced that an – informal – agreement had been reached on the content of the EU CSDDD (see our blog post, EU Corporate Sustainability Due Diligence Directive on the home stretch). In Germany, the coalition government was unable to approve the text as the FDP vetoed the results of the trialogue negotiations. Accordingly, Germany abstained in the vote in the Council of the EU. As other Member States were hesitant, the necessary majorities were initially not achieved. Attempts by the Belgian Presidency of the Council to broker an agreement failed. However, following the agreement on the EU Regulation banning forced labour, a new compromise text paved the way for the necessary majorities on the EU CSDDD.

Despite the continued abstention from Germany, the compromise was confirmed at the Meeting of the Permanent Representatives on 15 March 2024. On 19 March 2024, the Committee on Legal Affairs in the European Parliament voted in favour of the modified CSDDD draft - 20 votes in favour and four against. You can find the press release of the European Parliament here. The issue is now on the agenda for the European Parliament meeting on 24 April 2024.

Final adoption will probably take some time, as the so-called corrigendum procedure will apply if the translations are not finalised in time. In this case, the European Parliament will have to vote again on the Directive after the European elections, followed by a final vote in the Council. The agreed text will need to be assessed in detail, subject to the final resolutions. The following cornerstones have been reported.

Personal and material scope

The EU CSDDD will now apply to companies from the EU and third countries and holding companies that have more than 1000 employees and a turnover of more than 450 million euro, as well as to companies that have entered a franchising agreement and have a turnover of more than 80 million euro, where royalties account for at least 22.5 million euro of this turnover. The lower thresholds for high-risk sectors have been deleted.

In addition, the compromise text foresees generous transition periods. The new obligations, which must still be transposed into national law, will have the following staggered application:

• For companies with more than 5,000 employees and 1.5 billion in turnover: three years after the entry into force
• For companies with more than 3,000 employees and 900 million in turnover: four years after the entry into force
• For companies with more than 1,000 employees and 450 million in turnover: five years after the entry into force.

A narrower definition of chain of activities now applies; it was adjusted to be consistent with the term supply chain in the German Act on Due Diligence for the Prevention of Human Rights Abuses in the Supply Chain (LkSG).

Transition plan

The draft also requires companies falling under the scope to adopt and implement a transition plan for bringing their business model into line with the upper limit of 1.5°c for global warming under the Paris Convention. However, the Directive no longer contains financial incentives to encourage companies to implement their plan and comply with their obligations not to exceed such thresholds.

Civil law liability and fines

According to the press release of the European Parliament, companies will still be liable, where they fail to comply with their duties of care and must fully compensate victims. In addition, companies must establish complaint mechanisms and cooperate with individuals and groups adversely affected by their actions. According to the Belgian Presidency, Member States will have greater flexibility when implementing these provisions.

The draft tasks supervisory authorities in each EU Member State with overseeing compliance with the due diligence obligations. Fines of up to 5% of the worldwide net turnover can be imposed on a company which fails to fulfil its obligations. Foreign companies must also name an authorised representative, who has their registered address within an EU Member State in which the company is active, and who can communicate with the relevant supervisory authority in the company’s name about compliance with the due diligence obligations.

Transposition into national law

As explained above, the EU CSDDD will need to be transposed into national law after its adoption at EU level. In Germany, appropriate amendments are expected to be made to the LkSG, which has applied since 1 January 2023. Since 1 January 2024, companies located in Germany with more than 1,000 domestic employees fall under the scope of this Act. German legislators are unlikely to exempt such companies from compliance with the Act until the (maximum) transitional periods for the EU CSDDD have expired. However, it will all become clear in the future.

Dr Daniel Walden
Dr André Depping

The agreement reached now needs to be formally confirmed by the Parliament and the Council. Only then will there be final certainty about the content of the new directive. Once it comes into force, the CSDDD will then have to be transposed into national law by the EU member states. For Germany, this will in all likelihood take place via corresponding amendments to the German Supply Chain Due Diligence Act, which already came into force on 1 January 2023 (for more details, see our respective flyer The German Act on Corporate Due Diligence Obligations in Supply Chains_ADVANT Beiten.pdf (advant-beiten.com)).

Addressees of the new EU regulation shall be:

(i) EU companies and parent companies over 500 employees and a worldwide turnover higher than 150 million euro.

(ii) EU companies with over 250 employees and with a turnover of more than 40 million euro if at least 20 million are generated in one of the following sectors: manufacture and wholesale trade of textiles, clothing and footwear, agriculture including forestry and fisheries, manufacture of food and trade of raw agricultural materials, extraction and wholesale trade of mineral resources or manufacture of related products and construction.

(iii) Non-EU companies and parent companies with equivalent turnover in the EU.

The companies concerned will have to introduce a human rights risk management. In addition, companies, including the financial sector, must adopt a plan to ensure that their business model is consistent with limiting global warming to 1.5°C.

As with the LkSG, fulfilment of the CSDDD requirements will in future be monitored by a national supervisory authority in each EU member state. The supervisory authorities can initiate investigations and impose sanctions on companies that violate the regulations. This includes naming and shaming and the imposition of fines of up to 5% of global net turnover. In addition, compliance with due diligence obligations is to be included as part of the award criteria for public contracts and concessions.

Finally, the CSDDD - in contrast to the LkSG - will apparently also contain explicit provisions on companies being liable for breaches of their due diligence obligations and victims having the right to compensation.

Further details will emerge from the correspondingly revised regulatory drafts.

Dr Daniel Walden
 

Dr André Depping

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.