Jump to content

The EU supply chain law is becoming a reality. On December 14, 2023, the European Council, the European Parliament, and the EU Commission made a preliminary agreement on the Corporate Sustainability Due Diligence Directive (CSDDD) during their trilogue negotiations. 

The aim of the European Supply Chain Directive, commonly known as CSDDD or CS3D (short for “Corporate Sustainability Due Diligence Directive”), is to ensure that the supply chains of relevant companies become more sustainable in the future. It seems natural to compare the European Supply Chain Directive (CSDDD or CS3D) with Germany's Supply Chain Act (Lieferkettensorgfaltspflichtengesetz, short: LkSG), which came into effect in 2023. But are these two directives truly that similar? And to what extent can we view the LkSG as a harbinger and preparatory measure for the CSDDD?

In this article, you’ll learn how your company can navigate the requirements of the LkSG and CSDDD directives, how to avoid possible penalties, and to what extent digital solutions can help you to evaluate your suppliers and implement preventative measures in the right places.

LkSG and CSDDD at a Glance

Both Germany's LkSG and the EU Supply Chain Act aim to enhance sustainability and human rights compliance throughout the value creation chain. In addition, both directives emphasize and specify the due diligence requirements that businesses must uphold.

German Supply Chain Act (LkSG)

  • Target group:
    German companies with more than 1,000 employees (since January 2024) are affected. 
  • Requirements:  
    Companies must ensure environmental sustainability and human rights compliance along their supply chain. Potential and actual risks must be identified, documented and minimized using preventive and corrective measures. 
  • Liability:  
    The act does not hold companies directly liable under civil law for damages caused by their suppliers. 

  • Sanctions:Violations could lead to fines of up to 2% of the global annual turnover and a ban from public tenders for as long as 3 years. In addition, the directive makes it possible for affected parties to file claims against companies for up to five​​ years. 

Forthcoming European Supply Chain Directive

  • Target group:

    Under the agreement from December 14, 2023, companies with over 500 employees and a global net annual turnover of 150 million euros are subject to the CSDDD. But the directive also impacts non-EU companies if they generate a net turnover of 150 million euros in the EU, starting three years after the law is enacted. The Commission will release a list of EU companies that will be subject to the CSDDD in the future. Furthermore, as per the December 2023 agreement, the obligations extend to certain companies with more than 250 employees and a turnover exceeding 40 million euros. However, these companies must have at least 20 million euros of their turnover in high-risk sectors like textile manufacturing, agriculture, mineral resources, and construction.

  • Requirements: 
    Companies must ensure sustainable practices and human rights compliance along their supply chain. Risks must be identified and eliminated. In addition, they will need to indicate what measures they are implementing to ensure compliance with the goal of limiting global warming to 1.5 °C. 
  • Liability:
    Should a company breach their duty of due diligence, the CSDDD holds it liable under civil law for damages caused. This could include direct liability for damages along the entire supply chain. 
  • Sanctions:
    Violations could result in fines of up to 5 percent of annual global turnover. The directive also allows those affected to assert claims against companies within five years. Public disclosure of companies that violate the due diligence obligations is also provided for (naming and shaming)

On December 14th, 2023, the European Council and the European Parliament reached a preliminary agreement. This agreement concerns the duty of due diligence of companies in the area of sustainability. A key aspect of the CSDDD is the requirement for companies to identify and reduce the negative impact they have on human rights and the environment. This duty of care requirement applies along the entire value chain, including upstream and downstream activities. In addition, companies must prepare climate transition plans that set binding targets for the reduction of emissions and that they are realized. 

Similarities and Differences Between the Supply Chain Acts

At first glance, the two laws show many similarities and commonalities. This is especially true when it comes to their main goal: Both the LkSG and the CSDDD seek to drive forward the transition to more ethical business practices and sustainable supply chains.  

Business activities should be in harmony with both nature and society over the long term; the supply chain must not have a negative effect on human rights or the environment.  

In general, sustainability is at the heart of both directives. However, the LkSG focuses primarily on the aspect of human rights, while the current draft of the EU Supply Chain Directive places additional focus on reducing climate change.  

Additionally, the LkSG only affects German businesses and companies that have their head office, principal place of business, or a branch office in Germany. The CS3D, on the other hand, applies to the entire European Union. But aside from their scope and geographical jurisdiction, both laws have some differences:

Concept

  • LkSG: Specifies which duty of due diligence must be upheld along the supply chain 
  • CSDDD: Requires companies to analyze their supply chain with regard to its effect on the environment and human rights violations; the CS3D defines additional specific standards of due diligence than the LkSG 

Substantive basis

  • LkSG: Human rights and environmental due diligence
  • CSDDD: Particularly environmental due diligence, environmental and human rights, conventions, and declarations on human rights, conventions on environmental and climate change mitigation 

Differentiation between direct and indirect suppliers

  • LkSG: Yes
  • CSDDD: No, the downstream supply chain is also affected by this law

Possible sanctions

  • LkSG: Financial penalties (up to 2% of the annual turnover, depending on the type and severity of the violation), exclusion from public-sector contracts 
  • CSDDD: Financial penalties (up to 5% of the annual turnover) as well as publicly announcing the violation along with the name of the company, submission of a cease-and-desist declaration with regard to other similar violations and prohibition of sales or export of products and services

Size of the affected companies 

  • LkSG: Larger companies with more than 1,000 employees 
  • CSDDD: Also, smaller companies with more than 500 employees (within two years of the adoption of the directive) or with more than 250 employees if they are active in risk sectors and generate 20 million euros in risk sectors (within four years of the adoption of the directive); the financial sector is not initially affected by the regulation 

Role of stakeholders 

  • LkSG: Less relevant 
  • CSDDD: Very important 

Liability 

  • LkSG: No liability under civil law 
  • CSDDD: Liability under civil law for damages along the supply chain 

Overall, we can see that the CSDDD will likely be more stringent than the LkSG, both in terms of its requirements and well as possible legal consequences. This is particularly true when it comes to environmental impacts and climate change mitigation.

What Companies Can Expect When the CSDDD Takes Effect

The provisional agreement, which was reached in December 2023, must now be approved by the European Council and the EU Parliament and adopted in full. As soon as the regulation is subsequently published in the Official Journal, it will enter into force publicly 20 days later. The EU member states then have two years to transpose the directive into national law and adapt laws to the provisions of CS3D.  

As the EU Supply Chain Act incorporates parts of the German Supply Chain Act, German companies can expect the corresponding LkSG regulations to be tightened. Once the CS3D comes into force, EU law will take precedence over national law. This means that companies must follow the requirements of the CSDDD – even if they are already acting in accordance with the LkSG. It is therefore important to implement the LkSG with the utmost conscientiousness now, and thus prepare optimally for the stricter regulations of the CSDDD.

Challenges in Complying With the LkSG and CSDDD Regulations

The LkSG is like peeping through a keyhole – a first glimpse at the challenges that companies will be confronted with when the CSDDD takes effect. There are a few pain points associated with the challenges presented by both the German and the EU Supply Chain Acts:

  • Documentation and evaluation of supplier information: Companies are required to collect comprehensive information about suppliers and identify potential risks in the supply chain. The challenge here is to ensure transparency across all the various suppliers. Suppliers often do business in different regions and sectors and use a variety of data formats. 
  • Engagement with a wide variety of suppliers: Because the suppliers typically come from many fields of work and sectors of industry, it can be difficult to engage with them. Language barriers, cultural differences and different business practices can hinder communication and cooperation. 
  • Continuous monitoring and adjustment: The need for ongoing risk analysis demands that the supply chain be monitored continuously and more rigorously than ever. That means that companies will need to adjust their processes on an ongoing basis. This is the only way for them to react to changing market conditions, new risks or compliance requirements.
  • Ensuring implementation on the part of suppliers: Companies are required to ensure that their suppliers adhere to the mandatory standards. This responsibility includes providing necessary support, such as training or workshops. Often, companies will need to invest in training or support to make sure their suppliers can meet these requirements. The company must also recognize its own responsibility and critically evaluate its practices. Ending a partnership with a supplier should always be considered a last resort.  
  • Implementation of new processes and tools: To improve compliance and risk assessment in their supply chains, businesses should update their operating procedures and make use of digital tools. To that end, they will need to deploy suitable software and tools and ensure that they continuously optimize their processes. This, of course, results in additional IT expenses.

MHP offers businesses a service package designed specifically for LkSG and CSDDD compliance, which includes not only consultation but practical assistance with implementation, as well. With this offer, we hope to make it possible for businesses to effectively implement both current and future measures required by the supply chain directives.  

The pain points show: Businesses must master multiple challenges in order to comply with their due diligence obligations. Implementation demands more than just a considerable allocation of resources. A fundamental redesign of supply chain processes and management will also be required to meet the regulatory demands and ensure that standards of ethics and sustainability are met all along the supply chain.

3 Tips for Successfully Meeting Supply Chain Challenges

In the face of the LkSG and the CSDDD, businesses will be forced to make some changes – but there’s no reason to be discouraged. Meeting the due diligence obligations can have a positive impact on your company’s future viability and profitability; a sustainable supply chain is often more reliable and efficient and reinforces your company’s positive reputation with customers. However, long-term planning and careful attention to the upcoming requirements will be essential. 

The following tips will help you implement measures to comply with the LkSG and CSDDD going forward: 

1. Take a systematic view of potential hurdles that must be overcome

By launching a coordinated effort to identify stumbling blocks, you will be able to implement appropriate measures early on. This allows you to solve problems before they become major obstacles. By identifying risks early on, it will be possible to introduce preventative measures such as process optimization or strategic adjustments to ensure that things keep running smoothly. 

2. Use a structured approach based on the challenges you have identified

A carefully planned approach can help your company to implement efficient processes that are precisely tailored to the risks you have identified. By analyzing and understanding the challenges within the supply chain, you can develop targeted solutions and optimize the cooperation with your suppliers using clear communication and regulated work processes.

3. Establish clear guidelines and standards for the required data

Clear specifications are critical to ensuring the quality and consistency of the information you need. They will minimize potential sources of errors or inaccuracy in the data you collect. With consistent data collection standards, your company can ensure that the data is accurate and reliable. That simplifies risk analysis and monitoring. 

Your company should also adopt a holistic perspective that includes both strategic and operative aspects. This means addressing both short-term challenges in your day-to-day business and formulating long-term goals. The task can be made easier using specialized tools and software solutions that are designed for risk analysis, data management and monitoring. This allows you to manage the complexity of your supply chain and simplify compliance with legal regulations. 

How MHP Can Assist Your Company in Complying With the Supply Chain Act

It is becoming ever more important to integrate sustainability into your organization and processes. When it comes to digital solutions, comprehensive advisory services and profound expertise in the LkSG and CSDDD regulations, MHP is a reliable expert and partner. We can help make it easier to implement measures that will help your company comply with the Supply Chain Act and ensure that they are maintained in the long-term. This is how we work: 

  1. Status quo analysis: 
    In the first step, our experts take a careful look at the current situation within your company and its supply chain. This allows them to identify any weak spots or deficits relating to the directives, which ensures that you have a solid foundation from which to implement CSDDD compliance measures in the future. In addition, the analysis provides a clear picture of the level of sophistication, legal conformity and acceptance of the LkSG act within the company. This insight makes it possible to optimize and improve processes in a targeted manner that ensures the requirements are met.
  2. Comparison of the German LkSG and the EU Supply Chain Act: 
    As similar as the LkSG and CS3D seem, they are quite different when it comes to the details. A comparative analysis of the two laws serves to identify possible differences and any gaps that will need to be filled when the more stringent CSDDD goes into effect and supersedes the German Supply Chain Act. This makes it possible to estimate the effort that will be required for implementation and allows your company to prepare effectively for the transition to the EU Supply Chain Act. 
  3. Early preparation for the EU Supply Chain Act: 
    By paying ongoing attention to the EU Supply Chain Act, we will make it possible for companies to implement compliance measures as early on as possible. This proactive approach will help to minimize any possible risks, ensuring that your company maintains not only its competitive advantage but also the trust of stakeholders and customers.  
  4. A software-based approach: 
    Software plays a critical role in successfully and efficiently meeting complex compliance requirements. MHP's LkSG-Dashboard on the Microsoft Power Platform allows you to save data from a multitude of different suppliers in a clearly organized way. A clear roles and rights concept ensures that all authorized stakeholders have access. This creates transparency throughout the compliance processes, improves clarity about the measures that are implemented and helps to avoid possible damage to a company’s reputation. In addition, it allows processes to be automated, which saves time and resources. To minimize your workload as related to the Supply Chain Act, a technical interface for SAP data management tools can also be made available. 

Using the LkSG as a Stepping Stone Towards the CSDDD

The EU Supply Chain Act will almost certainly affect more companies than the LkSG. The laws will also impact more and more SMEs going forward. Companies that are already LkSG-compliant will find that they are on the right path. However, even they will not be able to avoid extensive changes to their processes in order to comply with the anticipated demands of the CSDDD.  

The deciding factor will be the use of modern technology and data management tools, such as the MHP LkSG dashboard and SAP Ariba Supplier Risk. With the help of these tools, you can optimize supplier management processes, support stakeholders and manage supplier relationships more comprehensively and efficiently. 

Smart use of automation can also help companies save time and money, as well as allow them to make data-driven decisions based on comprehensive supplier information. With the LkSG dashboard from MHP, you will always have an overview of the supply chain and can react more quickly to potential risks. By visualizing the data, you can keep a watchful eye on even the most complex supply chain structures and ensure that your company will master the challenges that come with the LkSG and CSDDD regulations.

Our service and the personalized advice of our expert consultants will help you to design your supply chain more sustainably and efficiently, and effectively prepare your company for the coming implementation of the CSDDD. Get in touch now for a consultation.

Frequently Asked Questions Pertaining to the LkSG and CSDDD

How can I prepare my company for the CSDDD?

Ensure that you are fully, and consistently compliant with the LkSG requirements. Modern supplier management technology and tools can help. In addition, you should become familiar with the anticipated requirements of the CS3D in advance and prepare your suppliers for the coming changes. 

What does my company need to do to become CSDDD-compliant?

To act in accordance with the EU Supply Chain Act, your company will need to concentrate on fulfilling its duty of due diligence along the entire supply chain. The goal is to identify, monitor, and minimize potential risks related to human rights violations, environmental and governance standards.

When is the CSDDD expected to be passed and go into effect?

The political agreement reached between the European Parliament and Council in December 2023 still needs formal approval. The directive will go into effect 20 days after its publication in the Official Journal of the European Community. Following that, the member states will have two years in which to integrate the requirements of the directive into their national laws. 

How much overlap is there between the LkSG and the EU Supply Chain Act?

The overlap between the German Supply Chain Act and its EU counterpart is their shared goals of requiring businesses to take responsibility for the entirety of their supply chain and of preventing human rights violations and environmental harm.

How large is the gap and the effort required to transition from the LkSG to the CSDDD?

Since the wording and content of the CSDDD has not yet been finalized, we can only speculate as to the actual effort that will be required. However, it is very likely that the CSDDD regulations will be even more stringent than the LkSG.

What impact will the LkSG and CSDDD have on SMEs?

The LkSG has an indirect effect on SMEs, because they are frequently suppliers in the supply chain of larger businesses that are affected by the law. That means that it is already important for SMEs to meet the standards of the Supply Chain Act. When the CSDDD goes into effect, however, some SMEs will be influenced by the new regulations. These businesses should already begin familiarizing themselves with the duty of due diligence now.

About our author

A "better tomorrow" is not possible without:

  • the cooperation of all stakeholders involved as One Team.
  • the possibility for each individual to realize their potential and make a positive difference.
  • a holistic view of the big picture.

My heart beats faster for...:  

  • LkSG and Sustainable Operations

Nicola Noll

Senior Management Consultant

LinkedIn

About our author

A "better tomorrow" is not possible without:

  • the synergy of all actors for transformative innovations that drive both environmental sustainability and social progress.  
  • a broad perspective on sustainable innovation and global cooperation.
  • the courage for change

My heart beats faster for...:  

  • The link between Digital Advisory, the environment and humanity

Rami Agel

Management Consultant

LinkedIn