Act on Corporate Due Diligence Obligations in Supply Chains: the green transformation continues despite war and inflation

In the midst of an uncertain global economic situation, the European Commission is getting serious with its draft directive on corporate sustainability obligations, widely known as the Act on Corporate Due Diligence Obligations in Supply Chains. With this companies need to extend the due diligence from their own business activities to global value chains.  Will the European supply chain law and mandatory sustainability be a locational advantage or a competitive disadvantage for European industry?

The Act on Corporate Due Diligence Obligations in Supply Chains at a glance 

With the proposal for an EU supply chain law, the Commission aims to promote sustainable and responsible corporate behavior in all global value chains and to anchor human rights and environmental aspects in business activities, value chains and the management of companies. So far so good - but what does this mean in practice for European companies? 

The due diligence obligation of companies envisaged by the Commission goes beyond Tier 1 suppliers and therefore affects not only established direct but also indirect business relationships; companies will be obliged to check their entire supply chain for violations of environmental, climate and human rights. According to the proposal, the new provisions apply to EU companies of significant size and economic strength (at least 500 employees and a net turnover of at least 150 million euros), third-country companies operating in the EU and EU companies from so-called resource-intensive sectors. 

In terms of content, the proposal provides for concrete measures such as the integration of due diligence into corporate strategy, reporting obligations, an annual review of compliance with corporate due diligence obligations and the establishment of a complaints procedure. With the obligation for companies to take into account the limitation of global warming to 1.5 °C in accordance with the Paris Agreement in their business strategy, the Commission emphasizes that economic activity must serve the interests of society as a whole. In addition to fines, companies also face civil liability for abuses along their supply chain.  

From supply chain law to an international level playing field? 

The proposed directive has been described as "a turning point for human rights and the environment"; with its paradigm shift, the Commission is redefining the standards of fair trade. By introducing far-reaching due diligence obligations for companies in their global supply chains and economic relationships, environmental and climate protection, social responsibility and thus the (non-financial) needs of third parties are moving more into the focus of corporate activity.

However, given the far-reaching obligations it would impose on European companies, as well as the associated potential penalties and civil liability, it is hardly surprising that the proposal is controversial. "Given the scale of the challenge, it is wrong to put the onus of protecting human rights and the environment on companies in this way," says the industry. The complexity of global supply chains will make it almost impossible to monitor due diligence across a company's entire value chain. 

The directive in its current form, including its strict verification requirements, will also pose massive challenges for small and medium-sized enterprises and reach them via cascading effects as part of the supply chains - even if they do not fall directly within the scope of the law. It remains to be seen whether the Commission's legislative proposal will impair the ability of European companies to remain globally competitive or help them to gain a locational advantage.  

ESG determines the transformation of the European economy 

The proposed EU supply chain law is not the only measure with which the European Union wants to radically transform companies towards sustainability and make environmental and climate protection as well as social responsibility legally binding. The draft will go hand in hand with the EU directive on corporate sustainability reporting and the EU taxonomy - the so-called "green list" of sustainable economic activities - and establish sustainable corporate governance as the norm. 

In recent years, companies have increasingly been seen as "corporate citizens" who, as part of society, have a responsibility to consider their economic activities and their consequences in the context of sustainability and ESG and to carry them out accordingly.

ESG - Environment, Social, Governance - is therefore becoming a decisive strategic and operational challenge for every company, a factor that is crucial to its success and existence. The new EU regulations and ESG are becoming the new business case for every company - if you want to continue to hold your own in the market, you need to understand ESG as the new business case and act accordingly.

What's next? 

The pressure is high for early agreement and adoption of the draft. A number of national due diligence regulations and company-level initiatives have resulted in a patchwork of inconsistent provisions. However, with conflicting interests from industry and business on the one hand, and representatives of environmental and human rights organizations on the other, it seems unlikely that an agreement will be reached soon. 

The Commission proposal will now be submitted to the European Parliament and Council as part of the legislative process and, given its ambitious and controversial proposals, will most likely be amended. Once both EU institutions agree to the proposal - which could take months, if not years - member states will have two years to transpose the EU directive into national law.