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Professionals in the field of sourcing goods and materials, and selling these in, among other countries, Germany, are by now familiar with the acronym “LKSG”, the Lieferkettenschutzgesetz. This German law provides that a company is responsible for its supply chain and must ensure that certain universal rights are protected in this supply chain. We have written about this law prior, please click here and here for the relevant articles on our website. Similar supply chain related laws exist in other countries, such as Australia, France, UK, the Netherlands, USA, Norway, etc., and meanwhile the European Union has also followed suit. This article points out some of the differences to keep in mind, as compared to the LKSG.
Author: Stefan Schmierer, Managing Partner
On 24 April 2024 the European Parliament passed the “European Corporate Sustainability Due Diligence Directive (CSDDD)”, and all EU member states must implement this directive into national law within the next two years, i.e. on or before 2026. Unlike a “Direction”, which immediately after its passing becomes binding law in the entire EU, a directive is an order from the EU to all member states to implement certain regulations into national law. The implementation is thus left to the national states, and it is important to point out that the regulations found in the Directive pose only the minimum requirements on the member states. This means that each member is free to implement harsher and more stringent regulations in its national law, but a member state can never implement a national law that possesses reduced or more lenient content compared to the Directive.
As other supply chain laws, the new CSDDD applies only to companies that reach a certain size (Art. 2). From 2027 CSDDD related laws will be applicable to companies with at least 5,000 employees at first; by 2029 a reduction of the threshold is expected to to 1,000 employees. However, unlike the German LKSG, which only applies to entities that are founded or have a place of management in Germany, the CSDDD applies indiscriminately to companies from third states as well, outside of the EU (Art. 2(2)).
The protected rights under the CSDDD are comparable to the LKSG and other similar laws and are listed in Annex 1 and Annex 2 of the CSDDD as published by the European Parliament. Instead of listing these rights one by one, the CSDDD in its Annexes refers to several international conventions and should pose no surprises to people familiar with already existing laws. A new aspect is brought in by Art. 22 which does contain provisions related to climate change.
A significant change and elongation of existing laws is the definition of “business partner” and “chain of activities” in Art. 3 (1). Looking at the LKSG, the LKSG puts an obligation on its addressees to supervise their suppliers from whom the companies source goods or raw materials (upstream business partners). However, the LKSG does not put any obligation on the downstream business partners, i.e. to which the company is selling goods or services. This is now changing with the CSDDD which in Art. 3 (1) (f) lists the downstream market as protection area for companies, which extends the application of the CSDDD significantly.
Other significant differences to the LKSG are the obligations a company has towards indirect business partners. Whereas under the LKSG, the obligations towards direct business partners are strictly regulated, the obligations towards indirect business partners are less so, and only apply once a company has knowledge of a rights violation at indirect business partners (i.e. no active duty to check indirect business partners). The new CSDDD however does not seem to make a difference regarding obligations towards a direct or indirect business partner so that companies should consider checking their indirect business partners as carefully as their direct business partners.
Breaches of the CSDDD shall be reported to the national authorities who are then obliged to investigate and put sanctions on the violator. In addition, Art. 29 provides for civil liability in case of a CSDDD violation, which means that a person suffering damage as a result of the violation while protected by one of the listed international conventions, can not only report this to the authorities but can directly bring a civil claim against the company that is responsible under the CSDDD. Further, the CSDDD provides for a period of limitation of five years, starting from the date when the person knows about the right to bring legal action (Art. 29 (3) (a) and provides for a discovery process (Art. 29 (3) (e), which is a process that is rather unknown to the legal systems of continental Europe.
In summary, it can be said that the CSDDD does not present major surprises, considering that the Directive has been in the making for several years now. Companies familiar with and already subject to the obligations under the LKSG or similar laws, should be able to quickly adapt to the additional requirements of the CSDDD. However, noting the additional requirements under the CSDDD, it is quite sure that the administrative strain on concerned entities is set to increase further.
As with any change in regulation, especially in a territory as vast as the EU and in a piece of regulation as extensive as the CSDDD, partnering with a law firm is highly advantageous. Ravenscroft & Schmierer, with our proven track-record in cases where attention to regulatory nuances made all the difference to our clients, can guide companies already doing business in the EU or looking to do business there, through the intricacies of the new CSDDD.
Our partnership approach allows us to gain proper understanding of our clients’ businesses and through that assist in establishing compliance mechanisms, ensuring accuracy in disclosures, and mitigating legal risks. This proactive approach allows businesses to focus on their core operations, confident in their compliance status.
Once compliance is reached, we can stay on retainer to ensure our client maintains it. In this way, compliance becomes less of a hurdle and more of a standard operating procedure, integral to the business’s growth and success. This collaboration can be instrumental in a company’s journey towards sustainable growth, bending supply chain compliance from a challenge into an opportunity.
Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.
For specific advice about your situation, please contact:
Managing Partner
+852 2388 3899
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