The “EU Supply Chain Act” is in force

On July 25, 2024, the so-called “EU Supply Chain Act” (Directive (EU) 2024/1760; hereinafter: “Directive”), which relates to the due diligence obligations of companies with regard to sustainability, entered into force. The EU member states have two years - i.e. until July 26, 2026 - to transpose the Directive into national law. Companies to which the Directive applies will then have to fulfill certain due diligence obligations with regard to compliance with human rights and environmental standards. These due diligence obligations include the identification, assessment, prevention, remediation or minimization of actual or potential adverse impacts of business activities on human rights and the environment.

Which companies are affected?

1. The Directive applies to companies in the EU that exceed the following thresholds:

• More than 1,000 employees on average in the last financial year and a worldwide net turnover of more than EUR 450,000,000;
• The ultimate parent company of a group that reached the above-mentioned thresholds in the last financial year;
• Franchisors/licensors if the license or franchise agreements provide for a common identity, common business concept and uniform business methods and (in relation to the company itself or the group if the company is the ultimate parent company of a group) license income of more than EUR 22,500,000 and a worldwide net turnover of more than EUR 80,000,000 were achieved in the last financial year.

The aforementioned turnover thresholds also apply to companies outside the EU, whereby only the turnover generated in the EU will be decisive.

2. However, companies will only have to comply with the relevant obligations from July 26, 2027, with a gradual introduction as follows:

• From July 26, 2027: EU companies with more than 5,000 employees and a worldwide turnover of EUR 1,500 million and non-EU companies with a turnover of more than EUR 1,500 million in the EU.
• From July 26, 2028: EU companies with more than 3,000 employees and a worldwide turnover of EUR 900 million as well as non-EU companies with a turnover of more than EUR 900 million in the EU.
• From July 26, 2029: All other companies that fall within the scope as described above.

Significant differences compared to the German Supply Chain Due Dilligence Act

In addition to the different scope of application, the Directive provides inter alia for the following significant differences in comparison to the German Supply Chain Due Diligence Act (LkSG) currently in force in Germany (this list is not comprehensive): 

• Civil liability:

The Directive provides for civil liability for damage caused by breach of due diligence obligations by companies to which the Directive applies (see Article 29 of the Directive)

• Naming and shaming in connection with sanctions (see Art. 27 of the Directive):

In the event of breaches of the due diligence obligations, the national supervisory authorities may also impose extensive sanctions, including fines (the maximum amount of fines is at least 5% of the company's worldwide net turnover in the last financial year). In addition, the supervisory authorities must publish the sanctions in connection with breaches and keep them publicly accessible for at least five years (“name and shame”).

• Climate change mitigation:

Companies to which the Directive applies must adopt and implement a plan to mitigate the consequences of climate change. In particular, the aim is to limit global warming to 1.5 degrees Celsius (as stipulated in the Paris Agreement).

• Relevance of the upstream and downstream “chain of activity”:

According to the Directive the fulfillment of the due diligence obligations will not only have to relate to a company's own operations and those of its subsidiaries, but also to the upstream and downstream “chain of activities”. The term “chain of activities” includes, on the one hand, the activities of upstream business partners in connection with the production of goods or the provision of services by that company, including the design, extraction, sourcing, manufacture, transport, storage and supply of raw materials, products or parts of products and the development of the product or service. On the other hand, the activities of a company's downstream business partners in connection with the distribution, transport and storage of a product are also covered, provided that the business partners carry out these activities for or on behalf of the company.

What should companies do now?

Companies within the scope of the Directive should prepare themselves in good time and implement appropriate processes.

In particular, an appropriate compliance/risk management system must be created or an existing system revised. New IT systems and cooperation with new IT partners could also be required to implement and comply with the due diligence obligations. We recommend evaluating any risk in this respect in good time. In order to identify and prioritize any actual or potential adverse impacts on human rights or the environment, the company structure should be reviewed in advance (keyword: identification of location/product-related risks; management of own chain of activities, reduction/concentration of upstream/downstream business partners, if necessary). It is also recommendable to conduct training courses and to review and, if necessary, to adapt the Code of Conduct, other company guidelines and contracts (such as general terms and conditions, sample contracts, etc.). In addition, the companies should take care at an early stage to obtain appropriate contractual assurances from relevant business partners regarding compliance with environmental and human rights standards and to reserve contractual (general and ad hoc) audit rights.