Supply chains are becoming increasingly long in our globalized world. Companies frequently turn to service providers in other countries, not only for production but also for data management. Environmental protection and working conditions are frequently neglected in today’s supply chains. European firms are global leaders in terms of sustainability performance. Despite this, companies are making slow progress in integrating sustainability, particularly human rights and environmental due diligence, into corporate governance processes. In an effort to provide greater end-to-end protection of human rights along global value chains,on February 23, 2022, the European Commission presented its proposal for a law on corporate sustainability obligations referred to as the EU Supply Chain Law.
The Corporate Sustainability Due Diligence Directive (CSDD) proposed by the European Commission holds companies directly responsible for any environmental harm and human rights violations that occur along their supply chain, including their own business operations, and it goes far beyond existing national legislation. Companies will be required to identify and mitigate the negative effects of their activities on human rights, such as child labor and worker exploitation, as well as the environment, such as pollution and biodiversity loss. Companies that manufacture in another country must follow the same rules and standards from the point of manufacture to the point of sale. The regulations that apply within the EU will also apply outside of the EU for data storage.
The proposal will be presented to the European Parliament and the Council for approval. Once adopted, Member States will have two years to transpose the Directive into national law and communicate the relevant texts to the Commission.
- Consequences: Violations of due diligence obligations are subject to fines and are based on the company’s turnover. In the event of breaches of due diligence obligations, civil liability is also provided for – it is not yet clear whether responsibility can be contractually transferred to suppliers.
- Additional condition: Group 1 companies are obliged to take into account the limitation of global warming to 1.5 °C in their business strategy in accordance with the Paris Agreement.
- Responsibility of the director: To ensure that due diligence becomes part of the whole functioning of companies, directors of companies need to be involved. This is why the proposal also introduces directors’ duties to set up and oversee the implementation of due diligence and to integrate it into the corporate strategy. In addition, when fulfilling their duty to act in the best interest of the company, directors must take into account the human rights, climate change, and environmental consequences of their decisions. Where companies’ directors enjoy variable remuneration, they will be incentivized to contribute to combating climate change by reference to the corporate plan.
- Providing support: The proposal also includes, accompanying measures, which will support all companies, including SMEs, that may be indirectly affected. Measures include the development of individually or jointly dedicated websites, platforms, or portals and potential financial support for SMEs. In order to provide support to companies the Commission may adopt guidance, including about model contract clauses. The Commission may also complement the support provided by Member States with new measures, including helping companies in third countries.
- Liability of companies: The four conditions that have to be met in order for a company to be held liable when failing to comply with CSDDD are– a)damage caused to a natural or legal person b)a breach of the duty c)the causal link between the damage and the breach of the duty d)a fault – either intentionally or by negligence.
The member states have agreed on a phased-in approach, meaning that at an early stage, the new rules would only apply only to “very large companies” that have more than 1000 employees and €300 million net worldwide turnover. Only non-EU companies with €300 million net turnover generated in the EU would have to comply with the new rules at the outset. The Council also highlighted that non-EU companies do not need to have a branch in the EU to be covered by the proposal. Three years after the directive’s entry into force, the obligations would be extended to all businesses meeting the criteria the Commission proposed.
- EU companies:
Group 1: EU limited liability companies of substantial size and economic power (with 500+ employees and EUR 150 million+ in net turnover worldwide). This affects approximately 9,400 companies.
Group 2: Other limited liability companies operating in defined high impact sectors, which do not meet both Group 1 thresholds, but have more than 250 employees and a net turnover of EUR 40 million worldwide and more. For these companies, rules will start to apply 2 years later than for group 1. This affects approximately 3,500 companies.
- Non-EU companies active in the EU with turnover threshold aligned with Group 1 and 2, generated in the EU.
- Small and medium-sized enterprises are indirectly affected by the EU Supply Chain Act, because in the medium term, large companies will also oblige their suppliers to comply with due diligence obligations.
- The following legal entities are to be covered by this regulation: stock corporations, partnerships limited by shares, limited liability companies, regulated financial companies and insurance companies.
The industries/sectors that are mainly included are textile, leather industry, forestry and mining.
- For businesses, these will bring a level playing field. Companies have to adapt their legal framework (for instance, their general purchasing and sales terms and conditions agreed with every one of their suppliers and service providers) to reflect the new requirements.
- For consumers and investors, they will provide more transparency.
- The new EU rules will advance the green transition and protect human rights in Europe and beyond.
- Companies that fall far below the threshold value will not be affected by the regulation as a result.
- An increasing burden for affected companies who have also suffered as a result of the Covid-19 pandemic, as well as an enormous amount of control and bureaucracy. There can also be competitive disadvantages due to too much regulation.
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