The European Supply Chain Act – the important topics

last updated on 21 September 2022 | Reading time approx. 5 minutes

by Dr. José Campos Nave and Clemens Bauer

As part of its Sustainable Economy plans, the European Commission presented a draft of its new EU supply chain act on 23.2.2022. Respect for human rights and the environment is intended to be established in all global value chains also at European level. With the obligation to track entire value chains, the EU Supply Chain Act repre-sents a significant tightening in comparison to the German Supply Chain Act. German small and medium-sized companies will have to prepare themselves for increased monitoring and administrative work.

The development of the European Supply Chain Act

The idea of an EU supply chain act was launched in 2011 following the adoption of the UN Guiding Principles on Business and Human Rights. In implementation of the UN Guiding Principles, the European Council requested the EU Commission to set up an EU action plan on sustainable supply chains by 2021. This led, among other things, to the adoption of national action plans by 18 EU member states as well as isolated legislative initiatives at the European level. Examples are the French "Loi de vigilance" from 2017 or the German "Gesetz über die unternehmerischen Sorgfaltspflichten in Lieferketten – Lieferkettensorgfaltspflichtengesetz", which was last passed in 2021.

Due to the fact that only isolated legislative initiatives have been taken in the member states, the European institutions have drawn up plans to establish a supply chain legislative framework for Europe. The aim is to promote the so-called European Green Deal, the sustainability program of the European Union, as well as to prevent possible distortions of competition on the internal market through national legislation.

As a result, the EU Justice Commissioner announced plans for a comprehensive European supply chain act in April 2020, which were endorsed by the European Council in December 2020. The EU Parliament supported the legislative project by calling on the Commission to present a draft directive on supply chain due diligence on March 10, 2021, with a majority of its MEPs.

The EU legislative process came to a halt in May 2021, when the European Committee on Standardization rejected the Justice Commissioner's planned and unpublished draft directive and demanded a revision of the legislative proposal. According to media reports, the committee criticized the draft as disproportionate, censuring, among other things, its sweeping scope, which covered a wide range of climate, environmental, human rights, social and health-related issues. Furthermore, the committee felt that existing EU-level legislation and private sector initiatives did not receive sufficient attention. Exemplary, but not exhaustive, such regulations include the EU Timber Trade Regulation, the EU Conflict Minerals Regulation, and the CSR Directive. In addition to the EU Justice Commissioner, the EU Internal Market Commissioner was subsequently entrusted with the preparation of a new Commission draft.

The Commission's draft represents the first step in the European legislative process, in which the Commission submits the legislative proposal to the European Parliament (consisting of the members of parliament from the Member States) and the Council of the European Union (consisting of ministers from the Member States). Political objectives play a role in any amendments and in the subsequent decision-making process. Finally, the legislative act must be implemented by the member states.

The key topics on the EU Supply Chain Act accoring to the Commission draft

The scope of the EU Supply Chain Directive extends to companies with more than 500 employees and a turnover of more than 150 million euros (Group 1 companies). In the so-called Group 2, the damage risk of companies is taken into account, according to which companies with more than 250 employees and a turnover of more than 40 million euros are already subject to the EU Supply Chain Act if they operate in resource-intensive areas.

A significant extension of the EU Supply Chain Act is the introduction of climate and environmental protection into the due diligence catalogue. While the German Supply Chain Act focuses on compliance with human rights and only indirectly covers environmental protection, the EU Supply Chain Act explicitly includes negative impacts on the environment, e.g. through environmental pollution or loss of biodiversity, in its scope of protection. For example, Group 1 companies are obliged to take into account the limitation of global warming to 1.5 °C in their business strategy in accordance with the Paris Agreement.

The management is obligated to ensure the implementation and monitoring of the duties of care and to integrate sustainability efforts into the corporate strategy. The consequences for human rights, climate change and the environment are to be taken into account in all corporate decisions. Successes or violations of the due diligence obligations are to have an influence on the variable remuneration of executives.

The European Supply Chain Act, in contrast to the German Supply Chain Due Diligence Act, requires monitoring of the entire value chain without any further ado. Even though the measures provided for compliance with the due diligence obligations show parallels to the German Supply Chain Act, this decision against a risk-based approach creates enormous monitoring and documentation obligations for companies.

Violations of due diligence obligations are subject to fines and are based on the company's turnover. In the event of breaches of due diligence obligations, civil liability is also provided for – it is not yet clear whether responsibility can be contractually transferred to suppliers.

The impact on German SMEs

The next step is for the draft directive to be approved by the European Parliament and the Council and, once adopted by the member states, to be transposed into national law within two years.

If the draft legislation is implemented in its present form, the impact on German SMEs in particular will be severe. The European Commission is calling for the European Union to play a leading role in ecological change and is backing up this claim with a catalogue of mandatory measures which, in practice, can often only be implemented by small companies at disproportionate expense. This does not take into account the fact that German companies are already leaders in the field of sustainable business practices.

Comparison of the key topics, as of 23.2.2022

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European supply chain act	German supply chain act "Sorgfaltspflichtengesetz"
Scope
EU companies: Group 1: all EU limited liability companies of significant size and economic power (with at least 500 employees and net sales of at least EUR 150 million worldwide). Group 2: other limited liability companies operating in certain resource-intensive industries that do not meet both Group 1 thresholds but have more than 250 employees and net sales of at least EUR 40 million worldwide. For these companies, the rules apply two years later than for Group 1. Non-EU companies, operating in the EU that generate sales equal to Group 1 and Group 2 within the EU. Small and medium sized enterprises (SMEs) do not fall directly within the scope of the Commission draft	Scope of application depends on the size of the company: Companies with their head office, main branch or registered office in Germany and at least 3,000 (year 2023) or 1,000 employees (from 2024)
Range of legislative
Entire value chain	Direct business partners in the supply chain, risk-based: if there are indications of violations, also extend to indirect suppliers
Liability
Fines and civil liability for breach of due diligence obligations	Fines for violation of due diligence obligations, no civil liability
Duties of care concern potential or actual adverse impacts on human rights
Far-reaching due diligence obligations with regard to climate and environmental protection (reference to the important environmental conventions)	Environmental protection only indirectly, insofar as human rights are directly affected by environmental degradation or international environmental agreements explicitly refer to environmental protection
Measures for the implementation of due diligence Risk analysis, prevention and mitigation measures
Mandatory measures: Companies must make due diligence an integral part of their corporate policy, identify actual or potential negative impacts on human rights and the environment, prevent or mitigate potential impacts, eliminate or minimize actual impacts, establish a complaints procedure, monitor the effectiveness of its due diligence policies and measures; and communicate publicly about the performance of its due diligence.	Risk analysis as well as sequential and interlinked prevention and remedial measures, namely: Risk analysis as well as sequential and interlinked prevention and remedial measures, namely: the establishment of a risk management system (§ 4 (1) LkSG), the definition of an in-house responsibility for human rights protection (§ 4 (3) LkSG), the adoption of a policy statement (§ 6 (2) LkSG), the establishment of preventive measures in the company's own business area (§ 6 Paragraphs 1 and 3 LkSG) and vis-à-vis direct suppliers (§ 6 Paragraph 4 LkSG), the taking of remedial action in the event of a violation of a protected legal position (§ 7 (1) to (3) LkSG), setting up a complaints procedure (§ 8 LkSG) for the notification of human rights violations, the implementation of due diligence with regard to risks at indirect suppliers (§ 9 LkSG), and documentation (§ 10 (1) LkSG) and reporting (§ 10 (2) LkSG) with regard to the fulfillment of due diligence obligations.
Control and enforcement
Supervision by national authorities