The German Supply Chain Due Diligence Act (LkSG) and the EU Corporate Sustainability Due Diligence Directive (CSDDD) both aim to hold companies accountable for human rights and environmental impacts within their supply networks. But what sets them apart?
WHAT YOU NEED TO KNOW
Supply chain due diligence in the EU
Consumers today are increasingly concerned about the ethical practices of the companies they support. This has led to a growing focus on corporate sustainability and human rights due diligence.
Two important regulations addressing this issue are the German Supply Chain Due Diligence Act (LkSG), which went into effect on January 1, 2023, and the EU Corporate Sustainability Due Diligence Directive (CSDDD), which entered into force on July 25 this year.
While both the LkSG and the CSDDD share the goal of promoting human rights and environmental standards, the objectives, provisions and scope of the LkSG differ from those of the CSDDD.
The LkSG in brief
The LkSG, or Lieferkettensorgfaltspflichtengesetz, “places enterprises that have their central administration, principal place of business, administrative headquarters, statutory seat or branch office in Germany under the obligation to respect human rights by implementing defined due diligence obligations.”
This is intended to mitigate the risk of human rights violations and environmental harm linked to their operations. And it promotes responsible supply chain management through proactive risk identification and mitigation procedures.
In terms of human rights, the LkSG references specific conventions on forced labor and indigenous rights. It also mandates that companies conduct regular risk assessments to pinpoint potential environmental harms throughout their supply chains. The law specifies that these assessments should consider a wide range of environmental impacts, from pollution and waste management to climate change and biodiversity loss.
The CSDDD in brief
The CSDDD is a comprehensive, EU-wide regulation designed to drive sustainable and responsible business practices. Like the LkSG, its core objective is to compel companies to identify, prevent and mitigate potential human rights and harmful environmental impacts within their operations and supply chains.
In addition to its wider scope, the EU directive goes a bit further than the LkSG by requiring companies to conduct due diligence among their direct suppliers as well as their indirect suppliers. Under the CSDDD, businesses must also develop a climate plan.
By imposing mandatory due diligence obligations, the CSDDD aims to level the playing field for businesses, enhance consumer trust and contribute to a more sustainable global economy.
WHO THIS AFFECTS
LkSG requirements
In 2023, the LkSG applied to companies with more than 3,000 employees. In 2024, the scope expanded to include businesses with at least 1,000 employees. These companies must submit to the Federal Office for Economic Affairs and Export Control (BAFA) an annual report on how they met their due diligence obligations in the previous fiscal year. In the report, a business must state:
- Whether it has identified any human rights and environment-related risks. If it has, it must state which risks were identified.
- What it has done to meet its due diligence obligations.
- How it assesses the impact and effectiveness of the measures.
- What conclusions it has drawn from the assessment for future measures.
In addition to submitting the report to BAFA, the company must publish its report on the company website no later than four months after the end of the fiscal year.
CSDDD requirements
The CSDDD applies to large EU limited liability companies and partnerships with more than 1,000 employees and over EUR 450 million in turnover (net) worldwide. Large non-EU companies with more than EUR 450 million in turnover (net) in the EU also fall within the scope of the CSDDD.
The directive creates a corporate due diligence duty, obligating businesses to identify and address actual and potential adverse human rights and environmental impacts in their own operations, those of their subsidiaries and those of their business partners, where related to their value chain.
The directive also mandates that large companies adopt and put into effect a transition plan for climate change mitigation that is aligned with the Paris Agreement’s 2050 climate neutrality objective, as well as the intermediate targets under the European Climate Law.
ADDITIONAL INFORMATION
How enforcement and penalties differ
BAFA is responsible for LkSG enforcement, and it has a range of tools at its disposal.
- Reviewing compliance: BAFA will assess companies’ due diligence efforts and respond to substantiated complaints.
- Imposing penalties: Enterprises can be fined as much as EUR 8 million or up to 2% of annual turnover. Businesses may also be excluded from public tenders. In terms of administrative offenses, managers and compliance officers may also be held liable.
- Compliance orders: BAFA can order companies to make plans to address deficiencies and ensure compliance.
- Coercive fines: BAFA can impose additional fines to ensure companies comply with their orders.
To enforce the CSDDD, a harmonized framework for due diligence will be established across the European Union. Enforcement will be handled by individual member states, but the penalties could be significant for “… infringements of the provisions of the national law adopted pursuant to …” the directive.
- Financial penalties: “In order to ensure effective enforcement of national measures implementing this Directive, Member States should provide for dissuasive, proportionate and effective penalties for infringements of those measures.” Companies should note: “When pecuniary penalties are imposed, they shall be based on the company’s net worldwide turnover. 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 that of the decision to impose the fine.”
- Civil liability: Companies could face lawsuits from affected individuals or communities. “… Member States should be required to lay down rules governing the civil liability of companies for damage caused to a natural or legal person, under the condition that the company intentionally or negligently failed to prevent and mitigate potential adverse impacts or to bring actual impacts to an end and minimise their extent and as a result of such a failure a damage was caused to the natural or legal person.”
In addition to penalties and lawsuits, reputational damage often results from noncompliance, especially where it concerns the environment and human rights.
HOW SPHERA CAN HELP
Supporting due diligence
The LkSG and CSDDD compel businesses to improve transparency in their supply chain and renew their focus on responsible sourcing.
Sphera’s Supply Chain Due Diligence Software helps organizations identify and mitigate risks in their supply chain and collect data for regulatory reporting. The solution also provides the information they need to develop plans for a stronger, more resilient supply chain.
For more information on your due diligence responsibilities under the LkSG or CSDDD — and an introduction to Sphera’s Supply Chain Due Diligence Solution — contact us.
Sphera’s Sustainability Consultants provide guidance and advice for both the LkSG and the CSDDD. For the LkSG, our experts assist clients in understanding the challenges, reviewing existing data collection methods, conducting an initial due diligence risk analysis, identifying gaps, and integrating processes required to comply with the LkSG regulation. Our modular consulting approach to the CSDDD supports clients in conducting due diligence and risk analysis, developing CSDDD governance processes, and preparing CSDDD due diligence statements for mandatory publication.
The information provided in this blog is for general information purposes only, may not be updated in real time, and does not constitute legal advice. Please consult with your legal and other advisors to discuss your particular needs and circumstances.
