The EU Commission is currently working on a legislative proposal on sustainable corporate governance, which has been the subject of a public consultation and is expected in Q2 2021 (read more here). Didier Reynders – the EU Commissioner for Justice – has now shared more details on his far-reaching plans in the context of discussions about a German Due Diligence Act (read more here). His remarks were certainly chosen with a view to the adoption of the German government's draft supply chain law scheduled for today – and therefore provide a surprisingly detailed insight into the current plans at EU level.

Reynders emphasised in an interview with the German newspaper F.A.Z. (paywall) that he welcomes the plans for supply chain regulation in Germany and other EU member states, yet he took the opportunity to underline that the forthcoming EU legislative proposal will go beyond the German plans.

Scope

Reynders wants to cover the entire supply chain since limiting supply chain due diligence to direct suppliers would only have a limited effect. He said things often only get tricky at the sixth or seventh stage of the supply chain where suppliers are located outside of the EU.

In addition to human rights violations, the new EU legislation is supposed to cover environmental aspects. Reynders emphasised that he wants to ensure that the Paris Climate Agreement is taken into account along the entire supply chain.

Finally, unlike the German proposal, the EU legislation shall apply to all companies irrespective of their size that are active in the EU (and not only to those that are domiciled in the EU). According to Reynders, even small companies can be expected to organise their supply chains in compliance with the forthcoming EU legislation. However, Reynders emphasised that he is not aiming at a “one size fits all” solution: larger companies and those with a very high risk of infringements shall be subject to stricter regulations than smaller, low-risk companies.

Enforcement

According to Reynders, companies will have to take specific measures to minimise the risk of violations of international labour standards, human rights, environmental protection and climate protection, and be subject to disclosure obligations. Should they fall short of these obligations, they shall face fines, criminal consequences and civil enforcement.

Reynders noted, in particular, that shareholders and affected parties, but also organisations such as trade unions, should be able to sue for damages. He referred specifically to the new EU rules on collective actions (read more on the new EU Collective Redress Directive here).

Next steps

Reynders' ambitious goal is to adopt the new rules by 2024, with a proposal expected in Q2 2021.

The European Parliament is expected to pass a resolution next week (on 8 March) with non-binding recommendations to the Commission on what it thinks the EU supply due diligence proposal should include. The Parliament is making some very far-reaching recommendations and it is unclear, at this stage, exactly how much of those recommendations the Commission will include in its proposal. However, Reynders’ comments in the German press certainly provide a useful insight into some of what the Commission’s proposal is likely to include.

It also remains to be seen how the Council, i.e. the member states, will react to the Commission’s proposal when it is published. A few member states already have or are working on supply chain due diligence acts (which they might have to amend should the Commission's proposal be adopted), while in other member states there is still no public debate on sustainable supply chains at all. Controversial disputes are to be expected, especially with regard to the associated challenges for and administrative and financial burden on businesses, and much will depend on the details.

In any case, companies are well advised to closely monitor this space and to examine and evaluate their supply chains in anticipation of the upcoming, likely to be very far-reaching EU legislation as quickly as possible (some tips on how to approach this can be found here). It can also not be excluded that on-going legislative projects at national level (such as the German initiative) will already be modelled upon the upcoming EU requirements in order to avoid adaptation at a later stage.