EU corporate sustainability due diligence directive enters into force

Today (25 July 2024), the Corporate Sustainability Due Diligence Directive (Directive (EU) 2024/1760 of the European Parliament and of the Council, "CSDDD" or "Directive") enters into force. This extends and intensifies in some points the German Supply Chain Due Diligence Act ("LkSG"), which entered into force on 1 January 2023, on which we reported (LkSG Part 1, LkSG Part 2). In particular the following aspects are relevant:

In deviation from the LkSG, the scope of the CSDDD for companies established in accordance with the laws of a non-Member State does not refer to a threshold in terms of the number of employees, but covers them if a net turnover of EUR 450 million is generated in the European Union. If the company does not have a branch in a Member State or has branches in several member states, the Member State in which the highest net turnover was achieved in the last completed financial year within the European Union or worldwide (depending on the law governing its incorporation) is responsible. Furthermore, companies that conclude franchise or licence agreements in the European Union, have generated net turnover of more than EUR 80 million within the European Union or worldwide (depending on the law of its incorporation) and have generated more than EUR 22.5 million in licence fees in the financial year are also included.

The due diligence obligations within the CSDDD also apply to downstream activities such as distribution. This includes direct and indirect business partners in upstream and downstream supply chains. The obligation to analyse the risks of indirect business partners is not limited to cases where there is substantiated knowledge (as is the case for indirect suppliers in the LkSG). Instead, the obligations extend to the entire supply chain.

One of the major differences to the current German law are the legal consequences ordered by the CSDDD: The pecuniary penalties shall have a maximum limit of at least 5% if the worldwide net turnover. The LkSG provides for EUR 800,000 or 2% of the average yearly turnover. In addition the Directive demands the introduction of civil liability for damages. The limitation period shall be at least 5 years.

Member States are also required to ensure that the companies covered draw up and implement a plan that sets out how their business model will be geared towards climate neutrality and achieving the 1.5 degree Celsius target.

The CSDDD must be transposed into national law by the Member States by 26 July 2026. According to its wording, the CSDDD may not be used as a ground for reducing stricter national levels of protection of human rights, employment and social rights or environmental and climate protection. A relaxation of the LkSG on the occasion of the implementation of the Directive, as is being considered by parts of the Federal Government, would therefore not be possible without a different justification. We will report on further developments.

A detailed description of the CSDDD and the expected implementation schedule can be found here. For further information, please contact the authors of both articles.