Introduction
Concept and scope of "value chain"
Scope of application of environmental obligations
Environmental due diligence required
Penalties and civil liability
On 23 February 2022, the European Commission adopted a proposal for a directive on corporate sustainability due diligence. The proposed directive provides for new European-level due diligence obligations for companies' global value chains, tightening the existing sustainability requirements under the already-adopted German Act on Corporate Due Diligence in Supply Chains (LkSG) in a number of areas. This means that the proposed directive will apply to a significantly wider range of companies than the LkSG. This article explores the key areas in which the proposed directive deviates from the LkSG with respect to the environmental requirements of each. These points also apply to the directive's human-rights-related obligations.
Concept and scope of "value chain"
With regard to indirect suppliers, the LkSG provides for significantly reduced environmental due diligence, applying the duty standard to the company's own business and direct suppliers only when there is "substantiated knowledge" of a violation of an environmental obligation.
The proposed directive goes further – the "value chain" is defined as all activities relating to the production of goods or the provision of services by a company, while the environmental due diligence obligations apply to the company's own business activities, "controlled" subsidiaries, and direct and indirect contractors in the value chain with which the company has an established business relationship.
Scope of application of environmental obligations
Unlike the LkSG, the environmental requirements of the proposed directive do not apply to all companies irrespective of their legal form. The proposed directive applies to companies that fall under its definition of "company", which is limited to explicitly specified legal forms (in particular stock companies and limited liability companies under the respective member state legislation) and regulated financial undertakings.
The environmental provisions of the LkSG apply to companies with at least 3,000 employees (or, from 1 January 2024 onwards, 1,000 domestic employees), irrespective of their turnover. The proposed directive, however, significantly lowers these employee thresholds, but also incorporates cumulative turnover thresholds.
Environmental due diligence required
In many respects, the proposed directive is more differentiated than the LkSG in terms of implementing environmental due diligence:
- companies' policies – companies to which the proposed directive apply must integrate environmental due diligence into their policies, including writing a strategy for meeting the environmental due diligence requirements and updating it annually. This goes further than the policy statement required by the LkSG; and
- identify adverse impacts – companies must identify actual and potential adverse environmental and human rights impacts. The annex to the proposed directive lists the protected objects to be taken into account in more detail. That list extends beyond the environmental objects protected by the LkSG.
The following obligations are roughly comparable to the obligations set out under the LkSG:
- prevent potential adverse impacts – companies must prevent – or at least mitigate – adverse environmental and human rights impacts – in particular, they must develop a prevention action plan with clearly defined timelines and meaningful indicators;
- end actual adverse impacts – companies must bring to an end or minimise adverse impacts;
- complaints procedure – companies must establish a complaints procedure that covers the entire value chain.
- monitoring – companies must monitor the effectiveness of the due diligence policy and measures both annually and on an ad hoc basis using appropriate indicators;
- communication – companies must communicate publicly on their due diligence. In particular, this includes publishing a statement on their website by 30 April each year on matters covered by the directive; and
- authorised representative – companies must designate a person authorised to receive notifications from the supervisory authorities. The authorised representative must be provided with the necessary powers and resources to cooperate with the supervisory authorities. This builds on the tasks of the human rights officer under the LkSG.
The European Commission's proposal provides for further environmental obligations for companies depending on their categorisation. It is expected to publish sector-specific guidance on environmental due diligence compliance.
The proposed directive provides for turnover-based fines, with the amount of the penalty and the competent national authority still to be designated by the member states. Cooperation with the authorities as well as companies' own remediation of adverse environmental impacts will have a positive effect on possible penalties. Companies that are penalised may be banned from accessing state aid.
The LkSG does not create a new basis for civil liability for the breach of environmental due diligence obligations, but it explicitly leaves any liability established independently of the LkSG unaffected. The proposed directive, on the other hand, explicitly provides for civil liability for due diligence violations to prevent potential or bring to end actual adverse impacts. Liability is not limited to the company's own violations; it is also conceivable in the case of violations by subsidiaries and suppliers.
For further information on this topic please contact Marc Ruttloff or Eric Wagner at Gleiss Lutz by telephone (+49 711 8997 0) or email ([email protected] or [email protected]). The Gleiss Lutz website can be accessed at www.gleisslutz.com.