CSDDD: Agreement on the EU Supply Chain Directive

The EU member states agreed on the CSDDD, the EU Supply Chain Directive, on March 15, 2024. Germany abstained from the vote.

Negotiators from the EU Parliament and the member states had already agreed on a preliminary draft of the EU Supply Chain Directive (Corporate Sustainability Due Diligence Directive, CSDDD for short) during the trilogue negotiations in December 2023. However, after this failed to gain a sufficient majority in the Council of the European Union, the Belgian Council Presidency submitted a watered-down version of the CSDDD for approval, which has now been adopted. The approval of the European Parliament is still pending.

The compromise that has now been reached means a number of changes compared to the last version from the trilogue negotiations. In particular, the scope of application, i.e. the group of companies affected, has been significantly reduced.

Companies with more than 1,000 employees and a net turnover of 450 million euros affected

The scope of the directive now includes EU companies with more than 1,000 employees and a worldwide net annual turnover of more than 450 million euros. Non-EU companies with a net turnover within the EU of more than 450 million euros are also affected. A company that is the ultimate parent company of a group that reaches the above thresholds is also to be covered by the directive. An exemption option upon application only applies if the purpose of the parent company is solely to hold shares in the subsidiaries and a subsidiary in the EU also fulfills the obligations of the parent company.

The conclusion of franchise or license agreements with independent third-party companies may also result in a company being covered by the Directive.

Regulated financial institutions are not generally excluded from the scope of the provision. However, their relationships withdownstream business partners who receive services and products from regulated financial institutions are not to be covered. However, certain AIFs and UCITS are excluded from the scope of application.

Contrary to the Commission’s draft, commercial partnerships (OHG and KG) also generally fall within the scope of application.

The CSDDD regulates due diligence obligations along the activity chain

While the German Supply Chain Due Diligence Act focuses on the upstream supply chain, the so-called “chain of activities” is to be the determining factor for due diligence obligations under the CSDDD. Thus, the human rights and environmental due diligence obligations primarily cover the upstream supply chain of the company and its subsidiaries. The concept of the “chain of activities” must be interpreted in a product- or service-oriented manner.

With regard to downstream business partners, the scope of application is now more limited compared to the Commission draft, namely to activities in connection with the distribution, transportation and storage of products and also only in relation to direct business partners, while the upstream chain of activities continues to include indirect business partners.

Implementation is staggered according to the types of companies affected

For affected EU companies or groups with more than 5,000 employees and a worldwide net annual turnover of more than 1,500 million euros, the due diligence obligations are to apply from three years after the directive comes into force, i.e. probably in 2027. Non-EU companies or groups with a net annual turnover of more than 1,500 million euros generated in the EU are also to be affected after just three years.

The requirements are expected to apply in 2028: EU companies with more than 3,000 employees and €900 million net turnover worldwide or for all other third-country companies with a net turnover of more than €900 million in the EU.

For all others, a period of five years is envisaged, i.e. application is expected from 2029.

The latest compromise gives most companies significantly more time for implementation than previous drafts had provided.

Companies must introduce a plan to mitigate climate change

According to the final draft, companies will be required to develop a climate plan. This plan should include a strategy for how the company will contribute to achieving the 1.5°C target. The CSDDD refers to the European Climate Law, which sets out phased climate neutrality targets through 2050. The directive also provides specific guidelines for the climate plans that companies must develop: For example, it should set time-bound reduction targets for the period from 2030 to 2050, outline actions to achieve these reduction targets, and define the role of senior management. A link to the compensation of senior management members has been omitted.

Fines can amount to up to 5 percent of annual turnover

Member states are to provide for penalties and other sanctions for breaches of national law implementing the directive. The fines are to be calculated on the basis of global net turnover. In line with the EU Parliament’s previous proposal, they are to amount to up to 5 percent of global net turnover.

The agreement also provides for civil liability on the part of companies and full compensation for the persons affected in the event of a deliberate or negligent breach of due diligence obligations. However, according to the latest compromise, the company should not be liable if the damage was caused exclusively by business partners in the company’s chain of activities. Overcompensation is also to be excluded. Under certain conditions, national courts should also be able to order companies to provide evidence. The limitation period should not be shorter than five years.

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