Agreement of the EU Member States on the CSDDD

The thriller surrounding the Corporate Sustainability Due Diligence Directive (CSDDD) is probably over. On March 15, 2024, the Council (EU member states) voted in favour of the CSDDD – although in a watered-down version. The stage has now been set for a harmonized EU-wide regulation of corporate supply chains - only the European Parliament (EP) must still approve the revised text.

The process so far

On February 23, 2022, the European Commission (EC) presented its proposal for the CSDDD. After the Council and the EP published their negotiating positions, the trilogue negotiations amongst the Council, the EP and the EC started in June 2023. We already reported in our Law Blog(The Council of the European Union has published its negotiating position on the so-called EU Supply Chain Act).  After several rounds of negotiations, an agreement between the negotiating parties was announced at a press conference on December 14, 2023, but it turned out to be too hasty:

The idea was to adapt the text of the directive by the Council. However, there was no majority - the CSDDD project was in danger of failing. After several unsuccessful attempts, the Belgian Presidency of the Council presented an adapted compromise text for the CSDDD. At the last minute, the Council finally reached a decision on March 15, 2024 - the goal of agreeing on an EU Supply Chain Act before the EP elections is now within reach!

Key changes in the compromise text

Compared to the original trilogue agreement, the text of the CSDDD has been significantly weakened. We have summarized the most important changes for you:

Restricted group of addressees

The direct group of addressees has been significantly reduced. This means that "only" EU companies with more than 1,000 employees and a global annual turnover of more than EUR 450 million are directly affected. Companies based in a third country are directly affected if they generate an annual turnover of more than EUR 450 million within the EU. The following scheme for in-scope companies has also been adopted:

The concept of providing lower thresholds for companies in risk sectors and thus creating a wider scope for these companies has been abandoned (for the time being).

However, a group approach has been introduced. In addition, franchise companies will also be consolidated provided that the respective agreements ensure a common identity, a common business concept and the application of common business methods.

Definition of "chain of activities”

The term "chain of activities" now replaces the term "value chain" and includes all direct and indirect business partners related to the production of goods or the provision of services provided by the in-scope company.

This therefore includes upstream business partners, such as suppliers, as well as downstream business partners who distribute, transport or store the in-scope company's products. There are exceptions for certain products that are subject to export controls (e.g. weapons, ammunition, etc.). In addition, the disposal of products has been excluded from the chain of activities – in-scope companies are therefore no longer necessarily responsible for the disposal activities of their downstream business partners.

Sanctions and civil liability

Violations could be sanctioned with a fine of up to 5% of annual worldwide turnover.

In addition, as in previous drafts, civil liability remains in place. However, the provision has been clarified to the effect that companies are "only" liable under civil law if the damage is due to a culpable breach of the duty of care. Furthermore, an company cannot be held liable if the damage was caused exclusively by its business partners in the chain of activities.

Transition plans

The mandatory transition plans have also been retained. For example, certain in-scope companies must adopt a transition plan to ensure that their business strategy is consistent with the 1.5°C climate target of the Paris Climate Agreement and the provisions of the so called “EU Climate Law”.

On the other hand, the provisions on variable Management Board remuneration (which were linked to compliance with the transition plan) have been deleted.

Conclusion

The EU Supply Chain Directive still has to be adopted by the EP - the first vote will take place in April 2024. As the EP's Legal Affairs Committee has already given the green light, it is likely that the necessary majority will also be achieved in plenary.

Once the CSDDD enters into force, the member states will have two years to implement it into national law. As there is currently no Supply Chain Act in Austria, the legislator will have to adopt a completely new legal framework.

In addition to the CSDDD, there are other (product-related) provisions that regulate supply chains. These include the so called “Conflict Minerals Regulation”, the Corporate Sustainability Reporting Directive (CSRD) and the “Regulation on Deforestation-free supply chains”. Other relevant provisions are already in the pipeline, such as the Regulation prohibiting products made with forced labour on the EU market.

We will keep you up to date with the latest developments in the field of supply chain compliance.

Please note: This blog is for general information purposes only and in no way constitutes legal advice from Binder Grösswang Rechtsanwälte GmbH. The blog cannot replace individual legal advice. Binder Grösswang Rechtsanwälte GmbH accepts no liability of any kind for the content and accuracy of the blog.