Supply Chain Act / EU Supply Chain Directive (CSDDD)

On April 24, 2024, the European Parliament adopted the Corporate Sustainability Due Diligence Directive (CS3D), the EU Supply Chain Act. Under this regulation, companies must review their supply chains to ensure that no human rights violations or environmental damage occur. Companies will need to prepare to meet these requirements shortly thereafter.

The scope of the law is determined by the number of employees and the company’s revenue. The original draft of the EU Supply Chain Act was intended to apply to companies with 500 or more employees and annual revenue exceeding 150 million euros. The law now applies to EU and non-EU companies with 1,000 employees that generate more than 450 million euros in global net revenue.

First, EU member states must transpose the directive into national law by 2026. The law (the directive) will enter into force in several phases. After a 3-year transition period, the EU Supply Chain Directive (CS3D) will apply starting in 2027 to companies (corporations such as AG, KGaA, KG, OHG, and GmbH) with more than 5,000 employees and annual revenue exceeding 1.5 billion EUR.  As early as 2028, the directive will apply to companies with 3,000 or more employees and annual revenue of 900 million. Starting in 2029, the directive’s full scope of application will take effect. The threshold will then be a company size of more than 1,000 employees, and annual revenue must exceed 450 million. 

The scope of the Supply Chain Directive is aimed at strengthening human rights and environmental protection worldwide. The law is intended to ensure that European companies uphold human rights and environmental standards in their supply chains. In this way, the EU aims to combat child labor, exploitation, and environmental pollution.

CS3D’s due diligence obligations—or “scope of due diligence”—apply in particular to its own business operations, subsidiaries, and direct suppliers. They also extend to indirect suppliers, as well as the use and disposal of the respective products.

The due diligence obligations under the EU Supply Chain Directive consist of six steps set forth in the OECD Guidelines on Due Diligence for Responsible Business Conduct, which outline the due diligence measures that companies must take to identify and address adverse impacts on human rights and the environment.

Specifically, the due diligence obligations that must be integrated into corporate policy and day-to-day business operations are as follows: Identification and assessment of adverse human rights and environmental impacts, as well as their prevention, cessation, or minimization. Remedial measures taken must be evaluated for their effectiveness and communicated.

The CS3D also includes a comprehensive reporting and complaint management system. This means that a complaint management system covering the entire value chain must be established. The effectiveness of the measures must be regularly monitored and communicated through a reporting system. An “authorized representative” must be designated to serve as the point of contact for the regulatory authorities.

Violations of the CS3D are to result in substantial fines based on revenue. The details are to be regulated by national laws.

In Germany, the Supply Chain Due Diligence Act has been in effect since 2023 and was further tightened in 2024. It applies to all companies with more than 1,000 employees in Germany.  Key differences from the new EU regulation include the fact that it applies to all companies regardless of their legal form. It applies only to a company’s own business operations and its direct suppliers. Indirect business relationships are relevant only if there are concrete indications of non-compliance. The current regulation provides for fines of up to 8 million euros or 2% of annual revenue.