After four years of intensive negotiations, the Corporate Sustainability Due Diligence Directive (CSDDD) was officially adopted at EU level in June. This supply chain directive aims to oblige companies at European level to take responsibility for their supply chains and thus reduce human rights and environmental impacts. Similar laws already existed in France (Loi de Vigilance) and Germany (Lieferkettensorgfaltspflichtengesetz, LkSG). The CSDDD is now intended to standardize these across Europe. Once the CSDDD has been adopted, the member states have two years to transpose it into national law. In Germany, this is to be implemented by adapting and extending the LkSG . In this blog post, we will take a brief look at both directives, highlight the differences and provide practical tips for affected companies.
Table of contents
- What is the Corporate Sustainability Due Diligence Directive (CSDDD)?
- What is the difference between the Corporate Sustainability Due Diligence Directive (CSDDD) and the Supply Chain Due Diligence Act (LkSG)?
- What steps need to be taken now?
- Conclusion
1 What is the Corporate Sustainability Due Diligence Directive (CSDDD)?
But before we get to the details of the impact of the CSDDD on the LkSG, let’s first take a look at the CSDDD itself. There has never been a directive for international supply chains on this scale before. Although the scope of the directive has already been reduced so that all parties could agree on it, it is still the most comprehensive attempt to regulate international supply chains.
Across Europe, more than 5,000 companies will be affected by the directive, as it includes European companies with more than 1,000 employees and €450 million in net sales as well as non-European companies with more than 1,000 employees and €450 million in net sales in the European market. A gradual introduction of the directive is planned from 2027, which should initially make it easier for smaller companies to adapt to the new requirements.
German companies will therefore continue to be subject to the Supply Chain Due Diligence Act until it is introduced. However, the German government has already announced that the requirements of the LkSG will initially be weakened in order to ensure consistency with the European directive. In any case, it will be an advantage for German companies to deal with the supply chain in detail now.
2. what are the differences between the Corporate Sustainability Due Diligence Directive (CSDDD) and the Supply Chain Due Diligence Act (LkSG)?
Scope of application: While the LkSG will apply to German companies with more than 1000 employees from 2024, the CSDDD will only apply to companies of this size from 2029 and only on condition that net turnover exceeds € 450 million.
Scope of due diligence obligations:
The LkSG focuses primarily on direct suppliers and only includes indirect suppliers if they are aware of grievances. The CSDDD, on the other hand, concerns entire supply chain.
The LkSG defines 13 risk areas relating to human rights and the environment. The CSDDD expands the scope to include chemical-related obligations as well as those for the protection of biodiversity, endangered species, specially protected areas and the oceans.
The CSDDD also requires the submission of a climate transition plan in accordance with ESRS E1. Coordination with other EU directives also goes beyond existing national laws. While the LkSG leaves room for the elimination or minimization of actual and potential impacts (namely only to the extent that this is possible), the CSDDD is stricter and obliges the elimination or minimization of impacts.
Liability and sanctions: The financial consequences of violations of the CSDDD have not yet been precisely defined. However, the CSDDD is also stricter than the LkSG in this respect. This is because the EU directive stipulates both civil liability in the form of compensation for injured parties and appropriate fines based on global net turnover. The LkSG previously excluded civil liability and limited fines to up to €800,000.
The graphic below provides a clear overview of the differences.
3. what steps need to be taken now?
Overall, it turns out that German companies that will be subject to LkSG and later also CSDDD reporting requirements should start dealing with this now, if they have not already done so. We recommend taking the following steps:
- Defining internal responsibilities and bringing teams together
In many companies, environmental and human rights are the responsibility of different teams. It makes sense to establish links between these teams as early as possible and to define clear responsibilities for supply chain due diligence. In addition, links should be established with those responsible for sustainability reporting – especially for ESRS reporting companies, as they can cover supply chain reporting with the ESRS sustainability statement.
- Get in touch with suppliers
You should establish good connections with your immediate suppliers now so that you can add suppliers further down the supply chain later. The earlier you establish a reporting system and regular exchanges with suppliers, the more stable your network will be when you need it.
- Establishing the basis for a risk management system
Defining responsibilities and checking supplier relationships are just the first steps. The LkSG requires the establishment of a risk management system. With such a management system, you can permanently monitor suppliers and risks and prevent breaches. It therefore makes sense to start looking at the elements required for a risk management system now.
- Dealing with the risk analysis
Unlike traditional financial risk analyses, the LkSG and the CSDDD clearly state that companies should focus their risk analysis on the affected communities and environment. This means that you should consider how risks to people and the environment are to be classified locally. This requires new methodological assessments, which you should familiarize yourself with now.
- Prepare risk management measures
Even if the individual risks are not yet known, you can already start looking at which measures are already being taken in your company and which should be introduced in the future. For example, it may make sense to define human rights and environmental expectations of suppliers now and apply them as selection criteria for new suppliers (see also LkSG § 6 (4) 1.). In addition, you can already establish training courses on these topics in your own business area (see also LkSG § 6 (3) 3.). Preventive measures can save a lot of effort in the future.
4. conclusion
The CSDDD proves that it will no longer be tolerated to simply leave supply chains to their own devices. Due to the reduced number of companies affected by the reporting obligation, European governments will have more capacity to comprehensively audit reporting companies. It is therefore highly advisable to take the supply chain issue very seriously and take the steps to monitor and manage risk. Our supply chain module can provide you with significant support. Simply arrange a brief consultation to get an idea of our module.
