Mid December 2023 the Council and the European Parliament agreed on a provisional agreement on the Corporate Sustainability Due Diligence Directive (CSDDD). With its CSDDD, the European Union created an equivalent to the German Supply Chain Act (LkSG) and implements regulations that go beyond the current German standard. 

The directive obliges companies to assess and address adverse impacts on the environment as well as on human rights. Companies must ensure that there are no human rights violations or environmental impacts within their supply chain (upstream and downstream). If other approaches fail to end the addressed violations, companies will also be obliged to terminate harmful business relationships.

The new rules will apply to:

• EU companies with more than 500 employees and a net global turnover of more than €150 million
• EU companies in specific high-impact sectors with more than 250 employees and a net global turnover of more than €40 million 
• Non-EU companies with respective turnover generated in the EU

Besides the due diligence obligations set out in the directive, companies with more than 500 employees and a net global turnover of more than €150 million also must implement a (time-bound) transition plan to ensure that their strategy is compatible with limiting global warming to 1,5 °C.

What companies will face if they do not comply with the law is no walk in the park: The CSDDD requires member states to impose penalties on violations and in contrast to the German Supply Chain Act, the CSDDD also stipulates civil liability. Those affected by human rights violations or environmental impacts (including trade unions or civil society organisations) can bring claims against companies which have failed to fulfil their due diligence obligations. 

In sum, the CSDDD is a much-needed step to achieve the goals set in the Paris Agreement and a first step to ensure human right standards in supply chains on EU level. Even if the directive is not in force yet, companies should make use of the remaining time to set up internal systems ensuring ESG compliance. Furthermore, companies should implement ESG clauses in their contracts with customers and suppliers to ensure they have the tools to fulfil their obligations regarding their supply chains when the time comes.