Agreement on EU Supply Chain Directive: What needs to be done now?

After long negotiations, agreement has now been reached on the final text proposal for the EU Supply Chain Directive (Corporate Sustainability Due Diligence Directive, “CSDDD”). The directive brings extensive due diligence obligations along the supply chain and is intended to come into force before the EU elections in June 2024. Although the immediate scope of application has recently been restricted once again, the CSDDD will still have significant impacts on many smaller companies.

Who does the EU Supply Chain Directive directly apply to?

The EU Supply Chain Directive applies directly to companies based in the EU, regardless of their industry, with 1,000 or more employees and a minimum global annual turnover of 450 million euros. Third-country companies (outside the EU) fall directly within the scope of the EU Supply Chain Directive if they themselves or their parent company in the EU achieve a minimum annual turnover of 450 million euros. Furthermore, there are special regulations for corporate groups and franchise companies.

What are the implications for smaller businesses?

The companies directly affected must ensure that the due diligence obligations are complied with along the value chain. The value chain is divided into “upstream” and “downstream.” Upstream refers to one’s own suppliers. In this case, both direct and indirect suppliers are affected, including those suppliers with whom there is no direct contract. The “downstream” category only includes immediate contractual partners in the areas of distribution and storage.

As experience with the German Supply Chain Due Diligence Act has already shown, this will lead in practice to the directly affected companies passing on the due diligence obligations to their business partners along the value chain. For this reason, SMEs should also promptly address the upcoming obligations.

“Companies, regardless of their size, should already be proactively addressing their risks along the value chain. Only those companies that set up their own compliance structures, which also take supply chains into account, are in a position to minimize risks and generate competitive advantages.”

Thomas Baumgartner, Attorney-at-Law and certified Compliance Officer

What due diligence obligations exist?

The due diligence obligations are extensive, as they cover actual and potential impacts on human rights and environmental aspects. Therefore, companies must scrutinize and manage their suppliers based on risks. If companies identify negative impacts on the environment or human rights, they are obliged to take action and, in extreme cases, terminate the contractual relationship.

Furthermore, companies are obliged to come up with a plan to mitigate climate change. It must be ensured that the business model and corporate strategy are compatible with the Paris Climate Agreement goals for limiting global warming.

What are the penalties for violations?

The specific penalty provisions are subject to national legislation. However, the EU stipulates that fines and reputational penalties (“naming and shaming”) must be defined. Anyone who violates the EU Supply Chain Directive faces a fine of 5% of global turnover. In addition, civil liability claims for damages may be brought by those affected, NGOs or competitors.

What needs to be done now?

Companies – regardless of whether they are directly or indirectly affected –should use the time until national implementation to prepare for the upcoming obligations in the best possible way. Depending on the individual risk situation, we recommend the following measures in particular:

• Conducting a risk-based screening of contractual partners along the value chain as a starting point for all further measures
• Establishing appropriate compliance structures (company policies, risk management systems, audits, etc.) or adapting existing processes to ensure compliance with due diligence obligations
• Consideration of due diligence obligations in the on-boarding process for new business partners as well as in the continuous monitoring of existing business relationships
• Revision of your own Code of Conduct and implementation of a Code of Conduct for suppliers
• Contractual regulations for standard supply contracts (information, control, compensation and termination rights, supplier declarations, etc.)
• Training to raise awareness and prepare employees
• Documentation of the measures taken and establishment of reporting processes

Our team of experienced experts will be happy to support you with a customized implementation of risk-based compliance measures.

Disclaimer

This article is for general information only and does not replace legal advice. Haslinger / Nagele Rechtsanwälte GmbH assumes no liability for the content and correctness of this article.

 

28. March 2024

 

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