The EU Supply Chain Directive

Nicole Quirke

Nicole Quirke

Guest author from activeMind AG

The EU Supply Chain Directive (Corporate Sustainability Due Diligence Directive – CSDDD) commits companies to fulfil their responsibilities throughout the supply chain with regard to respecting internationally recognised human rights and certain environmental standards. Companies can be held liable in European courts if they violate the policies, which are also known colloquially as EU supply chain law. 

In a nutshell

  • The EU Supply Chain Directive will be transposed into national law and the existing German Supply Chain Act will be amended.
  • Companies with 1,000 or more employees in the EU and a turnover of at least EUR 450 million are affected.
  • Suppliers must be recorded in a risk management system in order to ensure that human rights and environmental regulations are observed throughout the entire supply chain.

Current status of the EU Supply Chain Directive

After around three years of negotiations, the EU member states have agreed on a joint directive. On 24 April 2024 – exactly 11 years after the disaster at the Rana Plaza textile factory in Bangladesh – a majority of MEPs voted in favour of one of the most far-reaching regulations on corporate due diligence in the EU Parliament.

The EU member states still have to approve the EU Supply Chain Directive. However, this is considered certain as a consensus was reached in previous negotiations.

The member states then have two years to transpose the EU Supply Chain Directive into national law.

Who is affected by the EU Supply Chain Directive?

The EU Supply Chain Directive applies to all companies with at least 1,000 employees and an annual turnover of at least EUR 450 million.

A policy that had previously been controversially discussed by the federal states, according to which the limit should already apply to companies with more than 500 employees and a turnover of at least EUR 150 million, did not prevail.

Please note: Since January 2023, companies in Germany with at least 1,000 employees must comply with the requirements of the German Supply Chain Duty of Care Act (LkSG or Supply Chain Act). This applies to companies with their head office, principal place of business, administrative headquarters, registered office or branch office in Germany. The law also applies to German branches of foreign companies.

What does the EU Supply Chain Directive stipulate for companies?

The EU Supply Chain Directive establishes due diligence obligations to comply with existing international agreements on human rights and environmental standards. These obligations exist within the limits of reasonableness, giving companies a certain amount of room for manoeuvre and extending to direct and sometimes indirect suppliers in addition to their own business operations.

Supply chain risk management system

Among other things, companies must establish a comprehensive risk management system and carry out regular risk analyses with regard to their business areas, suppliers, and other subcontractors in order to meet the legal requirements. Risk management must be integrated into the respective business processes, such as supplier selection.

All risks in the company’s own business area and at its direct suppliers as well as risks from indirect suppliers that are likely to entail a high risk of injury and should therefore also be included in the risk analysis.

Risks can arise, for example, from the product, production location, political or labour law conditions at production sites, etc. Companies must therefore consider all relevant information and sources on human rights and/or environmental risks in relation to (indirect) suppliers that harbour a potential risk or violation of rights.

Documentation obligations and complaint channels

The requirements of the EU Supply Chain Directive also include extensive documentation obligations as well as specific reporting requirements, whereby companies must present risks in the supply chain, planned and implemented countermeasures and external effects for future activities.

In addition, specific complaint and reporting channels must be set up and made transparent.

What’s next for the EU Supply Chain Directive?

The EU member states must now officially approve the law. A sufficient majority of EU member states had already signalled their approval in March 2024. It can therefore be assumed that this is a formality.

The subsequent transposition into national law means that the German Supply Chain Act must be revised accordingly. Until then, however, it remains fully valid.

Companies should prepare themselves promptly in order to fulfil the requirements of the EU Supply Chain Directive. Legal advice is urgently recommended for this, as it is not yet clear how the requirements can best be implemented in practice.

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