European supply chain law (CSDDD)

The draft law obliges companies to take a careful approach to human rights standards and environmental protection along their supply chains. This includes both direct and indirect suppliers.

On 14 December 2023, the European Council and Parliament adopted a preliminary draft of the Corporate Sustainability Due Diligence Directive (CSDDD or CS3D). The agreement still requires confirmation by the Parliament and the Council, but this is considered a formality. EU member states now have two years to transpose the directive into national law. The basic points of the long-discussed law have therefore been established and provide certainty as to which requirements companies are expected to meet from the beginning of 2026.

• European companies as well as from third countries operating in the EU with at least 500 employees worldwide and a net turnover of 150 million euros or more are primarily affected.
• The regulations also apply to companies with a net turnover of 20 million euros generated from specific resource-intensive sectors (trading companies in the textile, clothing and footwear industries, the food industry, agriculture and forestry, fishing, mining and the construction industry) with more than 250 employees and a global net turnover of more than 40 million euros
• Companies from non-EU countries are also subject to the directive if they have an annual net turnover of more than 150 million euros in the EU three years after the law comes into force. This is intended to guarantee the competitiveness of European companies in the EU economic area.
• Small and medium-sized enterprises (SMEs) are not directly included in the scope of application. However, they are indirectly held accountable as suppliers to larger companies.
• The current draft of the EU bodies excludes areas of the financial sector, in particular its investment and lending activities, from the CSDDD Directive. A clause added following numerous objections guarantees that the matter will be re-examined in the coming years.

In addition to compliance with human rights standards, the Corporate Sustainability Due Diligence Directive also aims to protect the climate and the environment. Limiting global warming to 1.5 degrees Celsius in accordance with the Paris Climate Agreement must be taken into account in the business strategy of large companies.

To ensure their responsibility, companies can be guided by fundamental workers' rights, such as the core labour standards of the International Labour Organization (ILO) (e.g. prohibition of child and forced labour, freedom of association, etc.), human rights (freedom and security of persons, equality before the law, etc.), the protection of biodiversity and ecosystems, water and air quality, as well as the fight against climate change.

As part of their duty of care for people and the environment, companies must analyse risks and implement preventive and corrective measures:

• Identifying negative impacts with regard to human rights and the environment and deriving measures to prevent, mitigate or remedy them.
• Integration of due diligence obligations into corporate policy and management systems.
• Establishment of grievance mechanisms for stakeholders along the supply chain and initiation of corresponding procedures.
• Checking and monitoring the effectiveness of the measures.
• Presentation and implementation of a climate transformation plan to meet the reduction targets in accordance with the Paris Climate Agreement.
• Transparent and public communication on due diligence.
• Linking variable remuneration with compliance in supply chains.

The national supervisory bodies of EU member states will be responsible for monitoring companies and can impose penalties if the law is breached:

• Non-compliant companies face a fine of up to 5% of global net sales.
• Publication of a transparent list of companies that violate the regulations.

The CSDDD does not merely issue penalties, but also provides incentives to prioritise compliant companies in public tenders.

The German law came into force in January 2023 and has affected companies with more than 1,000 employees since the beginning of 2024. It only applies to direct suppliers and therefore does not take into account the entire value chain, including its users and disposers.

With the obligation to track entire value chains without cause, CSDDD represents a much stricter and more comprehensive regulation compared to the German law. The German version is limited to human rights and only considers environmental protection indirectly.

Following the official adoption of the EU directive, the German law will probably have to be adapted to the requirements of the European directive by the beginning of 2026.

In the medium term, large companies will also hold their suppliers from the SME sector to account. SMEs must therefore position themselves clearly at an early stage. For small companies with limited resources and a low contribution to causation, it can make sense to join cross-company co-operations. Preventive measures do not necessarily have to be implemented single-handedly. If necessary, the costs incurred by SMEs to comply with the requirements should be subsidised with state aid.

In a global economy, the law should give people the rights they need to purchase industrial and consumer goods worldwide while conserving resources as much as possible. Companies must therefore link sustainability to their future business success. Digital technologies for tracking and tracing or the design of products in circular loops can help them achieve this.

At inloop, we draw on extensive experience from many projects in the manufacturing industry and offer you the appropriate process and technological expertise to jointly define your roadmap for sustainable and resilient business.