Mandatory Due Diligence – Threat or Opportunity?

The draft of the European Directive is all about making sure companies do their homework when it comes to human rights and the environment. EU member states must introduce legal requirements based on the OECD Guidelines and the UNGPs. It could be defined as a guide for companies to make sure they are being responsible global citizens. The Lieferkettensorgfaltspflichtengesetz (hereinafter: German Supply Chain Act) is Germany's version of a supply chain act, with its own twist. In this blog, the German Supply Chain Act will be compared to the European Directive.

Due diligence obligations under the European Directive and the German Supply Chain Act require companies to conduct due diligence in human rights and environmental areas. In the European Directive, the threshold for applicability lies at 500 employees and a turnover of more than €150 million. In addition, the Directive is also applicable to companies in ‘high impact sectors’ (textiles, agriculture and minerals), with more than 250 employees and over €40 million turnover worldwide. The German Supply Chain Act applies to companies with their administrative or statutory seat in Germany and at least 3,000 employees (lowered to 1,000 employees from 2024 onwards). Therefore, the European Directive as well as the German Supply Act do not apply to micro companies and small and medium enterprises (SMEs). However, SMEs may still be affected if they have supply relationships with companies to which the duty does apply.

The European Directive and the German Supply Chain Act differ on the scope of business activities to which the due diligence obligation extends. The European Directive covers the company’s own activities, from its subsidiaries, as well as from established business relationships in their value chain that are sustainable and not incidental. The German Supply Chain Act covers all products and services of the company (affiliated companies included), including its activities in Germany and abroad. It also includes activities of the company's direct and indirect suppliers. The concept of "enterprise" under the German Supply Chain Act is independent of legal form, as environmental and human rights risks are not dependent on the chosen legal form. The company's own operational area includes any activity related to its business purpose, regardless of location. Direct suppliers are parties to a contract for goods or services necessary for the company's product/service, while indirect suppliers are companies whose deliveries are necessary for the company's product or service. 

Under the European Directive, due diligence requirements include implementing a risk management system, defining internal responsibility, conducting regular risk assessments, issuing a policy statement, embedding preventive measures, taking remedial measures, establishing a complaints procedure, implementing due diligence for indirect suppliers, and documentation/reporting. Under the German Supply Chain Act, these due diligence requirements are more or less similar to the European Directive, but they differ for the company's own activities, activities from its direct suppliers, and activities from its indirect suppliers.

In conclusion, The European Directive and the German Supply Chain Act impose due diligence obligations on companies to conduct risk assessments and preventive measures in human rights and environmental areas. The threshold for applicability as well as the scope of activities and the requirements of due diligence differ between the two. Compliance with the obligations is essential for companies operating in the EU and Germany to ensure responsible and sustainable supply chains.