The EU’s due diligence rules vs. national laws

The Corporate Sustainability Due Diligence Directive is edging closer to adoption. But what does it mean for existing supply chain rules?

European politicians approved a new version of the EU Corporate Sustainability Due Diligence Directive (CS3D) on Tuesday, in a move that is widely seen as a sign that the embattled law will finally be adopted.

After months of political wrangling, the Legal Affairs Committee voted 20:4 in support of a revised legal text, outlining how big companies must conduct due diligence to ensure their business activities aren’t significantly harming people or nature.

If it survives the final stages of the lawmaking process, CS3D will transform the rules of the game for an estimated 5,500 companies with operations in the EU.

Global reach

“Thus far, companies in Europe have had to deal with due diligence rules in relation to a few specific commodities, products or issues,” says Joseph Wilde-Ramsing, director of advocacy at Dutch campaign group SOMO, pointing to rules on deforestation, conflict minerals and batteries.

“But CS3D covers all of those and more. It’s really a new generation of ambition.”

As well as covering more topics and activities, it also has a broader reach than other supply chain diligence rules.

Nicolas Lockhart, an environmental trade specialist at law firm Sidley Austin, describes it as “a truly global law, both in terms of the companies if affects and the environmental and social interests that it protects”.

Not only does CS3D capture companies headquartered outside the EU, if they have significant operations within the bloc, but its civil liability provisions can be used by stakeholders anywhere in the world to challenge in-scope companies through European courts.

National laws

There are numerous supply chain due diligence laws in Europe already. Switzerland has one focused on child labour, while Norway has its Transparency Act – seen by many as an implicit due diligence law, although without the kind of liability regime CS3D introduces.

The UK is also in the early stages of negotiating a human rights and environmental due diligence bill.
Within the EU, France and Germany have the most high-profile supply chain laws, but there are others set to go ahead if CS3D isn’t adopted.

The Netherlands has put its plans for a Child Labour Due Diligence Act on hold until the future of the EU Directive is decided, for example. Luxembourg has said it will introduce a national rule if CS3D is shelved, and there have been discussions about similar laws in Spain, Austria and Belgium over recent years.

“The justification for EU legislation was to avoid having supply chain due diligence laws in some countries that impose much higher costs and burdens than those in other countries,” says Lockhart.

“I think most Member States probably liked the idea of levelling the playing field with CS3D, but they were less keen on the high costs for businesses associated with compliance. That’s why we’ve seen some watering down during the political negotiations.”

The most obvious change to the law has been its scope: after pushback from European Council, the earnings threshold has been tripled, so it only captures entities with more than €450m in revenues.

German MEP Alex Voss slammed the decision to dilute the rules, arguing on social media that “the process was poisoned by the German supply chain law”.

Since January, entities with more than 1,000 employees in Germany have been obliged under national law to understand the environmental and social impacts of their direct suppliers, and be aware of violations that take place further along their supply chains. Companies must address any significant harms they identify or be held liable.

Richard Gardiner, head of EU policy at the World Benchmarking Alliance, says that one of the key things to come out of the introduction of national laws “has been the realisation of where countries source products”.

“In the case of Germany, it showed how reliant the country’s industrial economy is on Chinese imports,” he continues. “And companies are asking what leverage they’re expected to be able to exert in these areas where they see that they have little leverage.”

“From their perspective, they need these products and materials from China to stay in business, and they consider that they are currently procuring them in line with trade agreements and procedures – so why should they be held liable for existing practices?”

There has also been frustrations about how hard it is to get the data needed to comply with Germany’s rule. A 2022 study by trade body BME found that 60% of companies were struggling in this regard.

“The German law is over-bureaucratic and probably does nothing for human rights at all, which has rightly annoyed German companies,” said Voss in a post on LinkedIn earlier this month, insisting that CS3D would correct some of the mistakes rather than adding to the burden.

Julia Otten, a policy officer at public-interest law firm Frank Bold, echoes this, saying that the EU “has learned lessons” from both France and Germany when it comes to creating an effective supply chain due diligence law.

For example, German authorities are in disagreement over whether the national law covers carbon emissions, but CS3D is explicit about the inclusion of climate-related issues.

France’s courts have struggled to rule on cases using the country’s Duty of Vigilance Act, because of confusion over what it covers.

“The EU law is very helpful in this respect, because it’s unambiguous when it comes to what and who is included, and what’s expected,” says Otten, adding that this makes it easier for both companies and supervisors to uphold.

Room for change at transposition

It’s currently unclear whether, if adopted, CS3D will usurp national laws, or be bolted onto existing requirements.

“For countries that have a due diligence rule already, they will probably identify the parts of CS3D that their existing rules don’t cover and fold those in, to bring it in line with the EU requirements,” says Lockhart.

But there will be pressure on governments during the transposition process, thinks Wilde-Ramsing.
“Companies will argue that they don’t want CS3D to make them less competitive,” he predicts. “And countries are given lots of room to interpret and transpose the law differently, depending on national ambition, so lobbying is already starting to ramp up on all sides in order to influence that process.”

Otten says that the core elements of the law aren’t open to interpretation – it provides a concrete EU-wide definition of due diligence and what it requires – but there are three areas that are likely to be transposed differently: “Scope, national enforcement mechanisms, and civil liability.”

Member States like the Netherlands, which wanted CS3D to cover more sectors, could add them in, for example. But given the current economic and political mood in much of Europe, it seems unlikely that many governments will increase its ambition.

Instead, it’s possible CS3D will reduce the scope of some existing national laws.

In Germany, for instance, companies have to have a certain number of employees to be covered by the rules. Under the EU directive, a second threshold – revenues – would be added.

“So, if Germany swaps its supply chain law for CS3D, there would be significantly fewer companies that would be eligible,” says Otten.

Countries are likely to hand enforcement powers over to different domestic authorities, she adds, and there are minor differences in the way civil liability can be built into national systems.

EU Parliament will take its next vote on CS3D at a plenary session scheduled for 24 April. If it is approved, a full translation of the text into various languages will need to be voted on before the law is fully adopted.