The Planned European Supply Chain Law – Significant Expansion of Due Diligence Obligations

It concerns child labor, inhumane working conditions, wages far below the subsistence level, life-threatening safety standards, handling of toxic substances, and last but not least, environmental protection. The avoidance of degrading working conditions is gaining increasing importance.

The significant difference in the EU draft is that certain companies are intended to be obligated to assess their entire supply chain, including both direct and indirect suppliers. In contrast, the German Supply Chain Due Diligence Act only applies to direct suppliers.

The directive applies to the following EU companies:

Group 1: Companies with at least 500 employees and a net turnover of at least 150 million euros.

Group 2: Smaller limited liability companies in the EU with at least 250 employees, generating their global net turnover of over 40 million euros, at least half of which comes from one of the specified high-risk sectors:

• Textile and leather industry
• Agriculture and forestry
• Food production
• Extraction of raw materials
• Processing of metallic and non-metallic products
• Wholesale trade in mineral resources

The obligations from this directive are intended to take effect for Group 1 two years after the directive's enactment. For companies in Group 2, this deadline is extended to four years.

Additionally, the directive is also intended to apply to third countries operating in the EU, generating turnover equivalent to Group 1 and 2 within the EU.

The EU Corporate Sustainability Due Diligence law aims to achieve the following objectives:

• Fair trade
• Increased due diligence: Examination of origin, manufacturing processes, and impacts on climate and the environment
• Improvement of risk management through early detection of problems and risks
• Legal certainty for companies and interest groups regarding behavior and liability
• Accountability of companies for adverse impacts
• Improvement of access to remedies for those affected by human rights violations and environmental impacts caused by the company
• Expansion of comprehensive due diligence obligations

The EU Commission envisions companies establishing a due diligence system as an integral part of their compliance policy to document compliance with due diligence obligations. This means that the consequences for human rights, climate change, and the environment should be considered in all business decisions. The due diligence obligations outlined in the directive encompass comprehensive monitoring of the entire value chain without specific cause. In case of non-compliance, affected workers should have the opportunity to assert civil liability before the competent courts. This imposes a significant burden of examination and documentation on the companies.

Planned regulations include:

• Implementation of due diligence becoming an integral part of corporate policy
• Identification of actual or potential negative impacts of the supply chain on human rights and the environment
• Prevention or mitigation of potential impacts
• Prevention of actual impacts or reduction to a minimum
• Establishment of a complaint procedure
• Monitoring the effectiveness of strategies and measures to fulfill due diligence
• Public communication about the perception of due diligence

Successes or violations of due diligence are expected to influence the variable remuneration of executives.

Additionally, companies in Group 1 are obligated to consider the limitation of global warming to 1.5°C in line with the Paris Climate Agreement in their business strategy.

National authorities designated by the member states are expected to supervise companies, and in case of violations of due diligence obligations, impose fines based on the turnover of the respective company. In the event of violations, civil liability is also provided for.

Conclusion

With the new EU Supply Chain proposal, the standards for fair trade are being redefined. No child labor, no forced labor, and no environmental pollution. This represents a significant step towards a fair and sustainable economy. However, the implementation of the directive proposal is expected to have significant impacts, especially on medium-sized businesses. It is crucial to act promptly and integrate the planned measures comprehensively within the company.

In the next step, the EU Parliament and EU Council will negotiate the law. If both bodies approve the directive, member states will have two years to transpose it into domestic law. For Germany, this means significantly tightening its own law.