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Major EU sustainability reporting reforms ‘share DNA’ with German rules

Companies should look to Germany to understand the challenges of complying with proposed new EU rules requiring businesses to monitor their supply chains for the human and environmental rights violation risks, according to one legal expert.

It comes after the European Parliament backed the European Commission’s draft Corporate Sustainability Due Diligence (CSDDD) Act last week. 366 MEPs voted in favour of the Act, with 225 votes against and 38 abstentions. On 8 June, negotiators from the Commission, Parliament and Council will begin the final talks, known as ‘trilogue’, to turn the draft Act into law.

Corporate compliance expert Dr Eike Grunert of Pinsent Masons said: “In 2021, the Germany parliament enacted the German Supply Chain Due Diligence Act (SCDDA), which came into force earlier this year. The SCDDA shares the same DNA as the EU’s CSDDD and has similar requirements.”

Grunert added: “Companies that will likely fall under the scope of the CSDDD should learn from the experiences that businesses had when the SCDDA was being implementing in Germany. Compliance will require significant efforts and lead time, as well as cross-functional collaboration within groups. Businesses are, therefore, well-advised to start this project rather sooner than later.”

Mark Ferguson

Head of Reputation, Crisis, and Client Operations

Post-Brexit, it’s really important for companies to stay alert to emerging EU legislation which may apply to them even if they don’t have a presence in the EU

The Commission initially proposed the CSDDD in February 2022 with the aim of creating a uniform approach to sustainability due diligence obligations across member states. If implemented, the CSDDD will create a single sustainability due diligence obligation across businesses registered or operating in the EU.

According to the draft CSDDD Act, all in-scope businesses will have to identify actual and potential negative impacts on human rights and the environment of their business activities and those of the businesses from which they are supplied, and prevent or significantly minimise such impacts. They will also have to monitor and publicly report on the effectiveness of the measures taken.

The directive also requires directors to consider human rights and environmental risks when deciding what is in the best interest of the company. It will also tie directors’ variable remuneration, such as bonuses, to their contribution to a company’s business strategy and long-term interests and sustainability.

Laura Ayre of Pinsent Masons said the draft legislation also applies to non-EU companies, including many headquartered in the UK, imposing significant new regulatory obligations on them. “The Commission itself assumes that around 13,000 companies in the EU and 4,000 non-EU companies would be affected by the new obligations,” she said.

While the directive would not apply to smaller enterprises, the Commission has also acknowledged that they might still have to comply with the new rules indirectly, since companies higher up in the supply chain will seek to spread their own obligations further down in accordance with the terms of the directive, Ayre added.

Under the proposed reforms, companies with more than 500 employees and an annual turnover of more than €150 million will also be required to develop a plan to ensure that their business strategy is in line with the Paris Climate Agreement goal of limiting the global temperature increase to 1.

Companies found to be in breach of the directive face administrative sanctions imposed by the relevant supervisory authority. Each member state will be able set its own sanctions, though any fines imposed must be based on an in-breach company's turnover which the EU Parliament approved should be no less than 5% of the company’s global turnover and must take into account the company’s efforts to comply with the CSDDD. Businesses can also be held liable for damages as a result of a breach of the directive.

Mark Ferguson of Pinsent Masons said: “Post-Brexit, it’s really important for companies to stay alert to emerging EU legislation which may apply to them even if they don’t have a presence in the EU. Non-EU businesses will need to designate authorised representatives that are either established or domiciled in an EU country in which they operate. The supervisory authorities of the respective member state will communicate with those authorised representatives on compliance and enforcement matters.”

Once the trilogue negotiations finish and the CSDDD Act comes into force, EU member states will have between two and four years to implement the new rules into their domestic statutes.

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