At present, supply chains and value chains are under enormous pressure from increasingly drastic sanctions on key supply markets. This development is seen by many as a brake and by some as a catalyst for efforts to achieve greater sustainability. Under the impression of the then still hot-off-the-press German Supply Chain Act with direct impact on Austria, we covered the ideas and legal development of ESG compliance across the entire value and supply chain a year ago in the blog „Who brings the Easter eggs?“. What’s new and what are the developments?

By end of February 2022, after a long consultation period, the European Commission launched a proposal for a directive on corporate sustainability due diligence (EU Supply Chain Act). This directive is intended to ensure compliance with fundamental environmental and human rights not only in Europe, but also in the global supply chains of European companies, and to anchor new due diligence obligations for companies.

Who is affected?

Companies in the European Union with at least 500 employees and a global net turnover of at least EUR 150 million are to be directly covered by the (due diligence) obligations of the EU Supply Chain Act. For particularly resource-intensive sectors such as textiles, agriculture and mining, the thresholds are significantly lowered in the draft to 250 employees and a net turnover of more than EUR 40 million. The extraterritorial effect of the new framework is also achieved, among others, by the fact that corporates from outside the Union that generate a corresponding turnover within the territories of the European Union are also to be covered. Small and medium-sized enterprises are generally exempted from the due diligence requirements of the EU Supply Chain Act. In relation to indirect business partners, liability can be avoided by the direct business partner contractually committing to comply with the code of conduct and the prevention plan of the covered company and in turn transferring these obligations to their contractual partners. A cascading effect can therefore be expected, with obligations being passed down the value chain to these small and medium-sized enterprises.

What are the (due diligence) obligations?

Companies covered by the new initiative must take into account negative impacts of their business activities on human rights and the environment in their corporate policy and identify them within their entire value chain, eliminate violations of these principles or reduce them to a minimum, and continuously monitor the effectiveness of their corresponding strategies and measures. Effective monitoring and traceability of events along the entire value chain is therefore more important than ever.

The covering of the entire value chain by the EU Supply Chain Act thereby clearly goes beyond the scope of existing legislative initiatives. On the other hand, there is already much criticism in respect to the fact that only “established business relationships” are to be the subject of the corresponding due diligence requirements, which would lead to considerable scope for interpretation and interpretation and thus also loopholes in the concrete application.

The specific human rights and environmental protection standards to be complied with by the companies covered and verified in relation to their upstream suppliers are contained in the annex to the proposed directive and include, for example, the Universal Declaration of Human Rights, the Stockholm Convention and the ILO Core Labor Standards. Companies in the European Union with at least 500 employees and a global net turnover of at least EUR 150 million must also take the 1.5 °C target of the Paris Agreement into account in their business strategy.

Monitoring and sanctions

The monitoring of compliance with the obligations associated with the EU Supply Chain Act is to be carried out by the authorities of the individual member states. In addition to administrative penalties, which will be based on the amount of the company’s turnover, civil liability is also expressly provided for. Persons who have suffered damage as a result of a breach of the duty of care are to be entitled to compensation. In this respect in particular, the proposed EU Supply Chain Act therefore goes well beyond the German Supply Chain Act.

With regard to indirect business partners, however, relief is provided whereby liability of the company can be avoided. This shall be the case, in particular, if the company’s direct business partner contractually undertakes to comply with a specific code of conduct and the a specific prevention plan of the company concerned and in turn transfers these obligations to its own contractual partners and suppliers. There is considerable criticism of this carve out mechanism. In fact, it is likely to lead to a significant expansion of the scope of application of the EU Supply Chain Act and a shift in obligations, right down to including small and medium-sized suppliers.

Next steps and need for action

Even the EU Supply Chain Act is not expected to enter into force before 2026, the high level of complexity associated with long-term contracts and planning requirements in the area of supply, value creation and supply chains means that there is already a need for forward-looking action. The proposal for a proposal for a directive on corporate sustainability due diligence undoubtedly offers guidance for the forward-planning anchoring of reporting and monitoring rights and other rights, obligations and protection (depending on the stage in the supply chain) in new contracts and adjustments to existing contracts.