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

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.

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