David versus Goliath

Comparing the German Lieferkettensorgfaltspflichtengesetz versus the European Corporate Sustainability Due Diligence Directive

On December 14th, 2023, the Council and the European Parliament have reached a preliminary accord on the EU corporate sustainability due diligence directive (CSDDD), designed to bolster safeguards for the environment and human rights within the EU and on a global scale. This directive will impose responsibilities on major corporations concerning both present and potential negative effects on human rights and the environment. These obligations will pertain to the company's activities, those of its affiliated companies, and those undertaken by its business associates.

Germany has already implemented its specific rendition of a supply chain due diligence act: The Lieferkettensorgfaltspflichtengesetz (LKSG) took effect in January 2023.

Now, the critical inquiry lies in discerning the disparities between these two regulations and forecasting the fate of the German LKSG in light of the EU CSDDD. What differentiates these legislations, and what implications might the introduction of the CSDDD have on the future of the German LKSG?

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Elements covered by both LKSG and CSDDDD

Key elements of both regulations are the obligation to establish a risk management system, the creation of clear responsibilities for human rights protection, and regular reporting. Additionally, companies are required to take action upon specific indications of problems. Both the LKSG and the CSDDD are so-called information-based regulations that aim to change corporate behavior by demanding transparency. The idea is that information disclosure can affect consumer behavior and investor decisions. When customers and investors have access to information about a company's environmental, social, or governance (ESG) practices, they may choose to support or divest from the company based on their values. Firms, in turn, will adjust their behavior to meet societal expectations and retain market share or attract investment.

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Key Differences between the LKSG and CSDDDD

The EU CSDDD goes beyond the LKSG in several aspects as highlighted in the table.

• Most notably, the scope is significantly larger and includes companies with only 500 or even fewer employees.
• In Germany, approximately 4,500 companies are subject to reporting under the LKSG. Under the EU CSDDD, it would be 15,000.
• The CSDDD does not only focus on direct suppliers but extends across the entire upstream (supplier side) and downstream (customer side) value chain.
• It encompasses more areas in environmental protection, including climate emissions.
• The penalties for non-compliance are significantly more stringent compared to those stipulated in the LKSG. Moreover, the CSDDD incorporates a civil liability provision that triggers in case of detecting a violation concerning human rights or environmental protection, adding a further dimension to accountability.

Therefore, an adaptation of the LKSG to the EU Directive will be necessary.

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Disadvantages

For smaller companies, the effort of reporting is substantial. Additionally, suppliers worldwide must provide information, so they are increasingly burdened as well. Although the CSDDD differentiates a bit in reporting obligations between small and large companies, more could be done to limit the burden further. Additionally, associations or platforms could contribute to relief by simplifying data collection and distribution.

Critics of the law fear high costs, bureaucracy, and minimal positive effects, but I do not share this view. Costs are high for companies that have barely managed their supply chains so far, as they need to rebuild all structures anew. Others only need to adjust existing structures. That saves time and money.

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Advantages

Without regulation, supply chain due diligence is voluntary which causes a competitive disadvantage for responsible firms. The omission of safety measures in production, the exploitation of individuals, or the depletion of resources allow some companies to offer their products at extremely low prices in the market. The result is, at the very least, an illegitimate, often even illegal distortion of competition. In other words, companies that prioritize human rights and environmental protection in designing their supply chains incur higher costs. However, due to this distortion of competition, they are unable to pass on these costs to their customers or can only do so to a limited extent. Regulation in this domain creates a level playing field – in this case at the level of the EU. Moreover, numerous countries in the EU already have supply chain laws. An EU-wide Supply Chain Act can provide harmonization. Globally, many countries, including Canada, Australia, England, California, and other important trading partners of Germany, have enacted supply chain laws. Supply chain due diligence is simply becoming the "new normal," and the sooner companies prepare for this new world, the better.

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Global Impact: Supply Chain Regulation in the Rich North and its Effect on Working Conditions Abroad

Companies grapple with uncertainty over whether the investment justifies itself – in essence, whether the potentially precarious work conditions within the supply chain genuinely ameliorate for those directly affected. To address this upfront: Scientifically quantifying is nearly unfeasible. The primary reason being that there is simply no comprehensive tracking of modern slavery. Plus, the CSDDD and LKSG enter into force in tough economic times (pandemic, war, inflation) and it difficult to distinguish these effects.

However, there exists a less intricate area where supply chain data has long been gathered: Scope 3 climate emissions. A research undertaking delved into long-term data concerning Scope 3 emissions from 260 companies. The findings were compelling: Companies that integrate ecological criteria into supplier selection and management witness an average annual reduction of 17% in emissions compared to those lacking such strategies. Hence, sustainable procurement strategies notably manifest environmental impact. Consequently, it's plausible to deduce that implementing social criteria in procurement can similarly yield positive reverberations throughout the supply chain.

Furthermore, companies engaged in sustainable procurement experienced notable positive outcomes: amid the pandemic, their supply chains exhibited heightened resilience, translating into enhanced economic success.

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References

Eggert, J., & Hartmann, J. (2021). Purchasing's contribution to supply chain emission reduction. Journal of Purchasing and Supply Management, 27(2), 100685.?????????????

Eggert, J., & Hartmann, J. (2022). Sustainable supply chain management – a key to resilience in the global pandemic. Supply Chain Management: An International Journal, 28(3), 486 – 507.

European Commission (2022): Just and sustainable economy: Commission lays down rules for companies to respect human rights and environment in global value chains. https://ec.europa.eu/commission/presscorner/detail/en/ip_22_1145

European Council. (2023, 14 December 2023). Corporate sustainability due diligence: Council and Parliament strike deal to protect environment and human rights https://www.consilium.europa.eu/en/press/press-releases/2023/12/14/corporate-sustainability-due-diligence-council-and-parliament-strike-deal-to-protect-environment-and-human-rights/

European Parliament. (2023, 1 June 2023). MEPs push companies to mitigate their negative social and environmental impact https://www.europarl.europa.eu/news/en/press-room/20230524IPR91907/meps-push-companies-to-mitigate-their-negative-social-and-environmental-impact

Hartmann, J. (2023, 29. September 2023). Das Lieferkettensorgfaltspflichtengesetz. Handelsblatt, page 14.