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19.03.2024 | Business Performance & Resilience, KPMG Law Insights

CSDDD: Provisional 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 some 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-mentioned thresholds is also to be covered by the directive. An exemption option upon request 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 can also lead to a company being covered by the directive.

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

Contrary to the Commission’s draft, commercial partnerships (OHG and KG) are also generally included in 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 due diligence obligations under the CSDDD are to be based on the so-called activity chain. The human rights and environmental due diligence obligations therefore mainly cover the upstream supply chain of the company and its subsidiaries. The term “chain of activities” is to 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 three years.

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

For all others, a deadline 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 climate change mitigation plan

According to the final draft, companies will be obliged to draw up a climate plan. This should include a strategy on how the company will contribute to achieving the 1.5°C target. The CSDDD refers to the European Climate Law. This contains step-by-step climate neutrality targets up to 2050. The directive also sets out design requirements for the climate plan to be drawn up by companies: For example, it should specify time-bound reduction targets for the period from 2030 to 2050, actions to achieve the reduction targets and the role of company management. There is no link to the remuneration of the members of the company management.

Fines could amount to up to 5 percent of annual turnover

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

In addition, the agreement provides for civil liability on the part of companies and full compensation for those affected in the event of intentional or negligent breaches 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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