EU draft directive on due diligence in the supply chain – stay alert!

Daniel Wuhrmann

In June 2021, the German Bundestag passed the Supply Chain Due Diligence Act ("LkSG" or the "German Due Diligence Act"), which will come into force on 1 January 2023.

After repeatedly postponing the deadline for a proposed directive on corporate accountability and due diligence, the European Commission now published the draft directive on corporate due diligence for sustainability  ("Draft Directive") (PDF) on 23 February 2022. The consequences of the European development for the companies affected in accordance with the German Due Diligence Act depend not only on whether and with what content the directive actually enters into force, but also on whether and to what extent it will go beyond the requirements of the national law.

What's in store for companies?

At first glance, the contents of the German Due Diligence Act and the draft directive are similar. On closer inspection, however, it becomes apparent that the draft directive provides for significantly more stringent regulations in some areas. This is because it not only increases the group of companies affected, but also the scope of the (due diligence) obligations to be complied with.

This follows if only from the enlarged (personal) scope of the draft directive, which requires compliance from companies with more than 250 employees, whereas the German Due Diligence Act currently only encompasses companies with at least 3,000 employees.

In addition, the draft directive (in contrast to the German Due Diligence Act) requires affected companies to comply with due diligence obligations not only through the "supply chain", but through the "added value chain". The term supply chain essentially refers to the actions of the company itself as well as its (in)direct suppliers whose actions are "necessary" for the manufacture of the products. Furthermore, the concept of added value chain includes all activities "related" to the production of the products, i.e. not only upstream, but any business relationships (whether upstream or downstream).

More extensive due diligence obligations based on the draft directive are also noticeable in the measures that companies must take to prevent or stop any violation of human rights and the environment. In accordance with Article 7 of the draft directive, companies must install concrete preventive measures for this purpose. In this context, affected companies may be required not to enter into (new) business relationships or to terminate existing business ones. Whereas in accordance with § 7(3) of the German Due Diligence Act, the "termination" of a business relationship may only be considered in the event of a serious violation of the protected interests, affected companies will probably have to review their business relationships much earlier in the future and adjust or terminate them if necessary.

In addition, the German Due Diligence Act does not directly impose climate-protection requirements on companies, while the draft directive explicitly addresses climate change mitigation as well. In accordance with Article 15 of the draft directive, companies must adopt a plan that ensures the compatibility of their business model with the 1.5 degree target. Accordingly, in the future, companies will also have to pay more attention to climate-friendly structuring of their business activities and, in some cases, obligate their contractual partners accordingly.

The draft directive also goes one step further than the German Due Diligence Act in establishing (additional) civil liability. This is because, while § 3(3) of the German Due Diligence Act expressly rejects such a provision, Article 22 of the draft directive requires companies to ensure civil liability in the event of certain violations.

Outlook

Companies should continue to monitor legal developments closely, with support if necessary. In particular, they should review whether the (transposition) laws apply to them and how they might (re)structure their business relationships and contractual landscape to ensure compliance with the obligations that apply to them.

It remains to be seen whether and with what content the directive will actually enter into force. However, if it is adopted with the proposed content, German legislators would have to tighten up the German Due Diligence Act and the companies affected would have to (re)consider and contractually secure the measures and structures they have implemented to date.

[March 2022]