European Supply Chain Directive adopted – Further tightening of supply chain compliance

Since the beginning of the year, companies with more than 1,000 employees in Germany have had to contend with the (German) Supply Chain Due Diligence Act (the LkSG). Affected companies must comply with certain human rights and environmental duties of care. The response has been mixed: While some companies already committed to social and environmental issues approve of the law on the grounds of equality, many criticise the bureaucratic challenges associated with the law.

EU Supply Chain Directive

These challenges will continue to increase in the future. The final vote on the Corporate Sustainability Due Diligence Directive (CSDDD) took place in the European Parliament in April 2024. As expected, the Directive has now been adopted. This ends an arduous journey from the provisional agreement at the end of last year to the final version of the directive. In recent weeks the plan has been the subject of heated debate and has been revised several times, not least due to the German government’s opposition. The Supply Chain Directive means the European legislature is pursuing the goal of better protecting the environment and human rights in the EU and worldwide. As such, a number of obligations are envisaged for the companies affected, some of which go considerably beyond the Supply Chain Due Diligence Act.

Companies affected

Originally, the intention was that companies with 500 employees or more and an annual turnover of EUR 150 million would face obligations to comply by the EU Supply Chain Directive. However, companies with more than 250 employees were to fall within the scope of application under certain further conditions if they operate in high-risk sectors. Experts estimate that this would have affected around 10,000 more companies than previously expected. The adopted version of the Directive is a far cry from this. It stipulates that companies with more than 5,000 employees and an annual turnover of more than EUR 1.5 billion initially face obligations to comply. However, by 2029 this threshold will be lowered progressively but quickly to companies with 1,000 employees and a turnover of EUR 450 million. The lowered thresholds for companies in high-risk sectors no longer exist. However, due to the consistency with the German Supply Chain Act, it is expected that the German legislature will link directly to the threshold of 1,000 employees when implementing the Directive and will oblige companies with more than 1,000 employees to comply without any further intermediate stages.

Key aspects of the Supply Chain Directive

The Directive regulates obligations along the ‘activity chain’ and thus covers business partners on the supplier side (upstream) and business partners in the area of transport, distribution and storage (downstream). The areas of consumption and disposal are not included. Business partners also include ‘indirect business partners’ who only carry out their business activities in connection with the company’s products or services.

First and foremost, companies are obliged to determine whether there are risks to the environment and human rights along this chain. Depending on the result of this investigation, they must take preventive or corrective measures. In order to avoid circumvention, all persons along the chain who could be affected by a violation of rights must be given access to a complaints procedure.

The Supply Chain Directive also refers to the Paris Agreement. Companies must draw up an independent plan on how their business model can ensure compliance with the target to limit global warming to 1.5°C. An effectiveness review must be carried out at least once a year to monitor compliance with the sustainability targets. However, controls should not only be carried out by the companies themselves. Each Member State must designate one or more supervisory authorities. They can carry out checks and initiate investigations. In the event of violations, a number of serious sanctions can be used. For example, offences can be made public by naming and shaming the company, meaning companies face an enormous loss of reputation. Fines of up to 5% of the net annual turnover can be imposed – double that from the (German) Supply Chain Due Diligence Act.

In addition, for the first time, the Supply Chain Directive threatens companies with civil liability. This can apply to both natural and legal persons and can even include negligent breaches of duty of care. The limitation period for bringing an action for damages is at least five years. In addition, access to justice is to be made easier for potentially injured parties.

Indirect commitment of SMEs

The Directive does not initially impose a direct obligation on small and medium-sized enterprises (SMEs). However, SMEs in the supply chain of a larger company will be obliged by the latter to also comply with the requirements and to provide the client with the information required by the latter. SMEs will therefore also be confronted with new challenges in terms of supply chain compliance in the future.

Conclusion and outlook

The Supply Chain Directive has been adopted. Within two years of the directive coming into force, the national legislature must implement it. Companies are therefore likely to be confronted with the new challenges by spring 2026. This entails considerable bureaucratic and financial burdens. There is a high degree of legal uncertainty with regard to the civil liability imposed. In particular, issues relating to the attribution of breaches of duty and damages have not yet been sufficiently clarified. Together with the possible sanctions, the European legislature has created a sharp sword to ensure compliance with the sustainability goals. Companies – including SMEs – are therefore strongly advised to prepare for possible developments at an early stage.