Scope of application

Compared to earlier drafts of the CSDDD, the thresholds for applicability have been increased in order to reduce the number of EU and non-EU companies that would fall under the scope of the Directive.

EU companies are in scope of the CSDDD if they have more than 1,000 employees and a turnover of EUR 450 million. The LkSG has the same employee threshold, but no turnover threshold. This leads to a narrower scope of applicability for the CSDDD than for the LkSG.

The CSDDD also addresses non-EU companies. Companies located outside of the EU are in scope of the CSDDD provided they generate a net turnover of more than EUR 450 million in the EU. This provision will need to be implemented in the LkSG: As for now, foreign companies are only subject to the LkSG if they have a branch office in Germany employing at least 1,000 employees.

Phased Implementation

• Three years after the entry into force of the CSDDD, likely in 2027, to:
  • EU companies or groups that fall had more than 5000 employees on average and generated a net worldwide turnover of more than EUR 1500 million in the last financial year preceding the three-year anniversary of the entry into force of the CSDDD.
  • Non-EU companies or groups that generated a net turnover of more than EUR 1500 million in the EU in the financial year preceding the last financial year preceding the three-year anniversary of the entry into force of the CSDDD.
• Four years after the entry into force of the CSDDD, likely in 2028, to:
  • EU companies or groups that had more than 3000 employees on average and generated a net worldwide turnover of more than EUR 900 million in the last financial year preceding the four-year anniversary of the entry into force of the CSDDD.
  • Non-EU companies or group that generated a net turnover of more than EUR 900 million in the EU in the financial year preceding the last financial year preceding the four-year anniversary of the entry into force of the CSDDD.
• Five years after the entry into force of the CSDDD, likely in 2029, to all other EU and non-EU companies covered by the CSDDD.

From Supply Chain to Chain of Activities

In its scope of responsibility, the CSDDD goes beyond the LkSG. The term supply chain, as defined in the LkSG is limited to due diligence measures within the company’s own business area and its suppliers. The CSDDD broadens this scope to the so-called chain of activities. This means due diligence requirements will cover a company’s own business activities, as well as those of its subsidiaries, extending to both the upstream and certain downstream business partner activities.

The upstream chain of activities includes all activities of a company related to product manufacturing, such as raw material extraction, and provision of services.

The downstream chain of activities does not cover all downstream activities but rather only includes activities conducted by business partners regarding distribution, transportation and storage. With the latest update to the CSDDD the downstream part of the definition has been slightly eased by deleting the references to the disposal of the product.

With this, the CSDDD goes further than the LkSG when it comes to the area of responsibility. This will likely require amendments to the LkSG.

Due Diligence measures

Along their chain of activities, in-scope companies are required by the CSDDD to adopt and implement effective due diligence measures for identifying, preventing, mitigating, and ending potential and actual so-called adverse impacts on human rights and environmental matters.

These adverse impacts are specified by reference to international treaties ratified by Member States.

Adverse environmental impacts include inter alia impacts resulting from pollution, deforestation, excessive water consumption or damage to ecosystems.

Adverse human rights impacts are defined as impacts resulting from an abuse of one of the human rights listed in several international instruments. Typical examples include child labor, slavery, and labor exploitation.

Introduction of civil liability

Another key difference between the CSDDD and LkSG that remains with the new compromise is the liability risk. While the LkSG explicitly excludes civil liability, it is included in the CSDDD. The CSDDD enables affected parties to directly file claims against companies for damages stemming from intentional or negligent violations of their obligations to ensure effective enforcement. The CSDDD also requires the Member States to provide for reasonable conditions under which any alleged injured party may authorize a trade union, non-governmental human rights or environmental organization or other non-governmental organization and national human rights’ institutions based in a Member State to bring actions to enforce the rights of the alleged injured party. The possibility for civil liability will thus need to be incorporated into the LkSG.

Stricter sanctions

Under the CSDDD the EU Member States will have to lay down rules for sanctions in case of violations of the CSDDD obligations. Fines shall be based on the company’s net worldwide turnover. Pursuant to the CSDDD the maximum limit of pecuniary penalties shall be not less than 5 % of the net worldwide turnover of the company in the financial year preceding the fining, i.e., a fine can in practice be even higher than 5 % of the turnover if a Member State decides to transpose accordingly. In contrast, the LkSG currently provides for fines up to 2 % of the net turnover.

Climate focus

The CSDDD will also require companies to adopt and put into effect a climate transition plan in line with both the Paris Agreement (and its aim to limit global warming to 1.5 °C) and EU climate targets. This climate plan must include - most notably - a description of decarbonization levers identified to achieve them (incl. where relevant, changes to products or services portfolio) and funding/budget made available for the implementation of the plan. This obligation is designed as an obligation of means (not of results) and requires company's "best efforts". Moreover, the CSDDD explains that enforcement should take due account of the complexities of climate transitioning. Nonetheless, it requires companies to align their business models with global and EU decarbonization pathways. National authorities are required to at least supervise the adoption and design of the plan and the updates thereof. A company that has complied with all the disclosure requirements under the Corporate Sustainability Reporting Directive (CSRD) will be deemed to have complied with its obligation to adopt a plan (in other words, the details of the mandatory climate plan will align on those currently only recommended under the CSRD).

Takeaway

Despite the weakened scope of application compared to earlier drafts of the CSDDD, the Directive still provides for extensions compared to the LkSG. In summary, the CSDDD provides for stricter regulations in the following areas:

• Broadening the scope of affected entities without EU presence
• Extension of the covered supply chain to parts of the downstream chain of activities
• Enhanced liability paired with stricter sanctions
• Further focus on climate considerations

The learnings from implementing the LkSG serves as a valuable practice to prepare for the new CSDDD. Companies already compliant with the LkSG’s provisions are well on their way to tackle the CSDDD’s new challenges. With the adoption of the CSDDD on the horizon, Baker McKenzie is here to help. As experts in the field of ESG, compliance and investigations, we are committed to guiding clients through the evolving landscape of corporate accountability in supply chain management.