On 15 March 2024, the Council of the European Union confirmed the EU Corporate Sustainability Due Diligence Directive (CSDCD) in the Committee of Permanent Representatives (Coreper).

Following instense discussions, a significant reduction in the scope of the CSDDD in comparison to earlier drafts can be observed with only around 5,420 companies now being directly subject to the CSDDD's due diligence obligations. This is around 70% fewer than the approx. 16,400 companies that fell within the scope of the original draft.

The formal adoption of the CSDDD is still awaiting confirmation by the Members of the European Parliament and is expected for April 2024.

Changes to the content of the current CSDD draft

Reduced scope of application with fewer companies affected

The new draft of the CSDDD is now only applicable to companies with more than 1,000 employees if they generated a global net turnover of more than EUR 450 million in the last financial year. The lower treshold for high-risk sectors has been abandoned. In addition, the CSDDD also applies to franchise companies if the licence fees in the last financial year amounted to more than EUR 22.5 million and if the company or its ultimate parent company generated global net sales of more than EUR 80 million in the last financial year.

Furthermore, the CSDDD also directly affects third-country companies outside the EU if they or their direct parent company have generated net annual sales of more than EUR 450 million within the EU or are franchisors, provided that the licence fees in the last financial year amounted to more than EUR 22.5 million and the company or its direct parent company generated global net sales of more than EUR 80 million in the last financial year. For this purpose, the European Network of Supervisory Authorities, which is put together by the EU Commission, is to draw up an indicative list of third-country companies that are subject to the CSDDD.

Longer implementation periods

In addition to the significant increase in the thresholds in relation to the number of employees and net annual turnover of the obligated companies, longer implementation periods have been introduced in particular. Companies with more than 5,000 employees and a net annual turnover of at least EUR 1.5 billion are obliged to comply three years after the CSDDD comes into force - probably from mid-2027. The implementation period for companies with more than 3,000 employees and a net annual turnover of at least EUR 900 million is four years - from mid-2028 - and companies with more than 1. 000 employees and a net annual turnover of at least EUR 450 million (minimum threshold) have five years until they are obliged under the CSDDD - from mid-2029. The implementation periods for third-country companies correspond to those of EU companies, but the number of employees is irrelevant here.

Obligation to exercise due diligence in drawing up a climate protection plan

The CSDDD's human rights and environmental legal positions are congruent with those of the German Supply Chain Act (LkSG), but continue to go beyond the legal positions relevant to the LkSG. In particular, the due diligence obligations with regard to climate protection are included, but were watered down ncy during the latest negotiations. The original draft of the CSDDD stipulated that obligated companies had to draw up a climate protection plan and financial incentives in the form of bonuses for board members should be foreseen.

The current draft dispenses with financial incentives and only provides for an „effort obligation“ for companies with regard to achieving the targets of the climate protection plan ("which aims to ensure, through best efforts, that the business model and strategy of the company are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C in line with the Paris Agreement"). In addition, companies that are already obliged to draw up a climate protection plan under the CSRD are exempt from this due diligence obligation under the CSDDD.

Value chain with a focus on upstream activities

The definition of the "value chain" has also been adapted in the current draft of the CSDDD. The due diligence obligations of companies now largely focus on the upstream value chain and only partially on the downstream supply chain. Only distribution, transport and storage, but not disposal, of the product are now covered in the case of direct fulfilment for the obligated company. Indirect business relationships in the downstream sector are no longer subject to the due diligence obligations.

The structure of the due diligence obligations, particularly with regard to risk management, is similar to that of the LkSG. However, there are significant differences at the level of legal consequences.

Civil liability and higher fines and sanctions

The LkSG does not provide for civil liability of the obligated companies. However, this can still be found in the new draft of the CSDDD, subject to limited conditions. Companies can only be held liable if they have directly caused the damage themselves. There is no provision for liability outside their own sphere of influence. Compensation is based on national standards and punitive damages are not possible. In addition, there is to be an exclusion of liability if the damage was caused exclusively by a business partner, i.e. a direct supplier.

Both the LkSG and the CSDDD provide for sanctions in the event of non-compliance with due diligence obligations. The LkSG authorises fines of up to EUR 800,000. For companies with an average annual turnover of more than EUR 400 million, fines of up to 2% of the average annual turnover can be imposed. There is also the possibility of excluding companies from public sector contracts.

The CSDDD also provides for fines based on the global net annual turnover of the respective company. However, the maximum fine here is 5% of the global net annual turnover. In addition, the names of the sanctioned companies are to be published for at least five years and transmitted to the European Network of Supervisory Authorities („naming and shaming“).

Consequences for the German LkSG

The latest amendment to the Belgian compromise means that the EU law would spare more companies than the existing LkSG. Its scope of application is currently only determined by the number of employees of a company, for which the threshold has been raised to 1,000 since 2024.

Due to the double criteria for the application of the EU Supply Chain Act (annual turnover and number of employees - the latter is also 1,000 or more), 65 per cent fewer domestic companies would now be affected in Germany. This would reduce the number of German companies affected to roughly 1,500.

In the course of transposition into national law, the German LkSG will also be adapted in accordance with the requirements of the CSDDD. It can be assumed that the scope of application in particular will be reduced accordingly. However, the changes will only come into force as follows: