The Council of the European Union has published its negotiating position on the so-called EU Supply Chain Act

On December 01, 2022, the Council of the European Union (Council) published its negotiating position for the proposed EU directive on Corporate Sustainability Due Diligence (often referred to as the "EU Supply Chain Act").

Status of the project so far

On February 23, 2022, the European Commission submitted the "Proposal for a Directive on Corporate Sustainability Due Diligence " in response to a request from the European Parliament (EP). We reported on this in our Law Blog.

While this proposal was being discussed in politics, the media and not least among stakeholders, the project was pushed forward at the European level: On November 8, 2022, the rapporteur of the Committee on Legal Affairs of the European Parliament, Lara Wolters, presented a draft report on the EU Supply Chain Act, which in some cases includes significant tightening compared to the Commission's proposal.

The reaction of the Council was not long in coming: On December 1, 2022, the Council agreed on a "General Approach" and published a compromise text, which clarifies the positions of the Member States and serves as the Council's negotiating position for the upcoming trilogue with the EP and the Commission.

The draft report by Lara Wolters

Besides some clarifications, Lara Wolters also calls for significant tightening of the directive text. In particular, a larger group of companies should be covered by the EU Supply Chain Act¹:

EU companies:

• > 250 employees and worldwide net turnover > EUR 40 million or
• > 50 employees and worldwide net turnover > EUR 8 million, provided that at least 30% of the turnover was generated in one or more of the listed high impact sectors

Third country seated companies

• Net turnover in the Union > EUR 40 million or alternatively
• Net turnover in the Union > EUR 8 million (but not more than EUR 40 million), provided that at least 30% of the worldwide net turnover was generated in one or more listed high impact sectors.

According to Wolters, also listed companies should fall within the scope of the EU Supply Chain Act, provided they have an average of 50 employees and generate a worldwide net turnover of more than EUR 8 million per year.

By reducing the thresholds (number of employees / annual turnover), not only large companies but also an increasing number of "medium-sized companies" would be directly covered.

This would in turn mean that SMEs, which would only be indirectly affected by the provisions of the EU Supply Chain Act, would have to make more contractual commitments to comply with due diligence obligations.

Further, the circle of high impact industries is to be expanded. If Lara Wolters has her way, parts of the financial sector would be classified as high impact sectors - much to the dismay of some member states and industry representatives. This would mean that a large proportion of financial institutions would be directly covered by the scope of application.

According to the position of Lara Wolters, the material scope of application should also be expanded. Accordingly, the due diligence obligations along the supply chain should apply to all business relationships and not only - as proposed by the Commission - to "established" business relationships (i.e. business relationships of a certain duration or intensity).

Wolters also wants to tighten up on the civil liability of companies by anchoring a reversal of the burden of proof directly in the EU Supply Chain Act for the benefit of persons who have been harmed because of a breach of due diligence by a company. This would make it much easier to assert claims under civil law. In comparison, the Commission proposal does not provide for a corresponding regulation - it would probably be up to the member states to provide for a reversal of the burden of proof in their national supply chain laws. However, this would in turn lead to an inconsistent legal situation within the European Union - which is precisely what an EU supply chain law is intended to prevent. Stakeholders of the industry strongly criticize the stricter civil liability of companies for breaches of due diligence obligations along the entire supply chain ("upstream" and "downstream"). For others, such as NGOs, these regulations are downright essential.

The EP's final position is not expected until spring 2023. It remains to be seen whether such tightening, as demanded in the draft report by Lara Wolters, will also be found in the final negotiating position of the EP. What is certain is that the Council will have some difficulties with this:

The most essential positions of the Council

Less than a month after the publication of Lara Wolters' draft report, the Council presented its negotiating position on the EU supply chain law. There had already been heated discussions within individual member states in the run-up to this: The Permanent Representatives Committee had its hands full trying to agree internally on a "compromise text" for the upcoming trilogue negotiations.

Unsurprisingly, the Council's compromise text - in contrast to Wolters' draft report - provides for watering down the Commission's proposal. The parallels to the German "Act on Corporate Due Diligence to Prevent Human Rights Violations in Supply Chains" (Gesetz über die unternehmerischen Sorgfaltspflichten zur Vermeidung von Menschenrechtsverletzungen in Lieferketten), which comes into force on January 1, 2023, are also striking.

In terms of content, the Council dictates some interesting points in the negotiation protocol, which will certainly provide for a lively discussion in the trilogue (and also away from it). Here is a short (not conclusive) overview of the most important points in the Council's position:

In principle, the Council adheres to the thresholds and the target group proposed by the Commission:

EU companies:

• > 500 employees and worldwide turnover > EUR 150 million or
• > 250 employees and worldwide turnover > EUR 40 million, provided that at least 50% of the turnover was generated in one or more of the listed high impact sectors

Third country seated companies

• Net turnover in the Union > EUR 150 million, or alternatively
• Net turnover in the Union > EUR 40 million (but not more than EUR 150 million), provided that at least 50% of the worldwide net turnover was generated in one or more of the listed high impact sectors

However, the introduction of due diligence requirements for affected companies is to be stretched even further: While the Commission proposes that the provisions of the EU Supply Chain Act should apply to companies 2 years (or 4 years for directly affected companies in high impact sectors) after entry into force, the Council wants the EU Supply Chain Act to stagger a transition period for companies as follows:

Validity 3 years after entry into force for

• EU Companies: > 1,000 employees and net turnover of EUR 300 million worldwide
• Third country seated companies: Net tunrover of EUR 300 million in the EU

Validity 4 years after entry into force for

• EU Companies: > 500 employees and worldwide net turnover > EUR 150 million;
• Third country seated companies: Net turnover in the Union > EUR 150 million.

Validity 5 years after entry into force for

• EU Companies: > 250 employees and worldwide net turnover > EUR 40 million, provided that at least 50% of the turnover was generated in one or more of the listed high impact sectors;
• Third country seated companies: Net turnover in the Union > EUR 40 million (but not more than EUR 150 million), provided that at least 50% of worldwide net turnover was generated in one or more of the listed high impact sectors

In addition, the Council (as Lara Wolters - see above) wants to abolish the concept of "established business relationship", which in the Commission proposal is linked to the duration and intensity of a business relationship. Instead, the Council defines the term "business partner" and distinguishes between "direct" and "indirect" business partners.

The term "value chain" in the proposed text of the Commission caused heated discussions in the Council (as well as among stakeholders). In particular, the aspect proposed by the Commission that the entire "value chain" should be covered by the scope of the EU Supply Chain Act caused a lot of friction. In the end, an agreement was reached on the narrower term "chain of activities", since the "phase of use of the the company's products or provisions of services" is not covered. This would exclude such downstream activities as well as activities of "downstream business partners" in connection with the distribution, transport, storage and disposal of goods/products subject to export control (e.g. weapons or dual-use goods). It is precisely this position of the Council that is causing a lot of criticism among representatives of NGOs, who see it as essential that e.g. weapons producers should be covered by the due diligence requirements of the EU Supply Chain Act. It will be interesting to see how the term "value chain" or "chain of activities", which is extremely relevant for the scope of application, will be defined in the final version of the EU Supply Chain Act.

The inclusion of regulated financial entities in the provisions of the EU Supply Chain Act was also a major topic in the run-up. In the end, it was agreed that it should be up to the member states to regulate the provision of financial services by regulated financial entities. Financial products should not be covered (e.g. alternative investment funds and undertakings for collective investment in transferable securities). In addition, the individual member states should have the "option" to exclude pension institutions that are considered social security schemes under EU law from the scope of application. This point will certainly also be the subject of intense debates in the trilogue negotiations.

Civil liability rules for companies are also addressed in the Council's compromise text and will be significantly modified: While the Council, in line with the Commission's proposal, is reluctant to regulate the allocation of the burden of proof, the Council wants to explicitly include the requirement of fault for any liability of companies in the text of the directive and to specify the four conditions of liability (damage, breach of duty, causality, fault). Some member states were still not satisfied with this tightening or specification of the civil liability rules. For example, some member states proposed a so-called "safe harbor" regulation, which exempts companies that have obtained certain certifications or participate in certain industry standards from all civil liability. This "safe harbor" regulation was not included in the compromise text of the Council, but one can certainly expect demands in this regard.

The Council has strong concerns of the following rules, proposed by the Commission, for members of the companies’ management:

• Linking variable compensation with the contribution to the company´s business strategy and
• the mandatory (due diligence) obligations.

According to the Council the form and structure of director’s remuneration are matters primarily falling within the competence of the company and its relevant bodies or shareholders. Not least because of the Council's strong concerns that the provisions on due diligence for directors would interfere too much with national regulations, the Council argued that these provisions proposed by the Commission should be deleted.

Conclusion

While the Council has already finalized its position for the trilogue negotiations, the EP is not expected to finally adopt its position until spring 2023. However, the draft report by Lara Wolters indicates the direction the EP is likely to take.

Once the EP position is also on the table, the trilogue negotiations will be launched. This could potentially be (relatively) quick. During 2024, the EU supply chain law could already be in force.

Depending on the implementation deadline agreed upon, member states would then have 2 or 3 years to enact corresponding national supply chain laws or adapt existing laws.

In our view, however, there is a need for companies to implement the “cornerstones” of possible supply chain regulations in their compliance systems or to make appropriate internal adjustments. Small and medium-sized companies should also force this - after all, as potential suppliers or business partners of directly affected companies, they will also be bound by the due diligence requirements of national supply chain laws in the future.

As of January 1, 2023, the "Act on Corporate Due Diligence to Prevent Human Rights Violations in Supply Chains" will come into force in Germany. Although the German Supply Chain Act is not (yet) as far-reaching as the drafts of the EU Supply Chain Act, Austrian companies with business relations to Germany must have already taken initial precautions by the turn of the year or must take them as soon as possible.

Austrian companies must pay more attention to the issue of supply chains and actively take precautions.

We follow the current developments and advise companies on supply chain compliance! By the way, you can find an overview of the Commission's directive proposal for an EU supply chain law in our recently published book „Sustainability Law – Das Recht der Nachhaltigkeit“.

Please note: This blog merely provides general information and does not constitute legal advice of any kind from Binder Grösswang Rechtsanwälte GmbH. The blog cannot replace individual legal consultation. Binder Grösswang Rechtsanwälte GmbH assumes no liability whatsoever for the content and correctness of the blog.