After lengthy negotiations, the EU supply chain law is in danger of failing in the short term, due to the German government's abstention in the EU Council. In its coalition agreement of 2021, the German government has expressed support for an effective EU directive. What is the aim of the Corporate Sustainability Due Diligence Directive (CSDDD)?
Michael Windfuhr: The CSDDD is intended to counteract the exploitation of people and the environment in global value chains. The directive aims to prevent products or services from being produced using child labour or under inhumane or unhealthy working conditions. There are high EU-wide requirements for products in many areas, such as the safety of medical products or toys. However, the safety of the people who manufacture products and services in the supply chain have not been adequately protected. The CSDDD aims to change this.
What influence do companies have on human rights in their supply chains?
Windfuhr: The enforcement of human rights and core labour standards is the obligation of states. But in many countries, enforcement remains inadequate because governments are too weak, incapable or unwilling. Companies have particularly benefited from this situation since the mid-1990s during a period of rapid globalisation. The idea of demanding human rights due diligence from companies arose when then UN Secretary-General Kofi Annan asked the business community at the World Economic Forum in Davos in 1999 to help enforce human rights in global supply chains. Companies should use their influence to discuss compliance with standards with their suppliers. They should seek to enforce these minimum standards to the best of their ability.
Companies have a natural influence on suppliers, especially when they act together. If many companies demand human rights standards, they can quickly make a difference. That is why a European regulation is much more effective than individual national supply chain laws.
Will the CSDDD lead to additional reporting and verification obligations for companies?
Windfuhr: No, because the reporting requirements for companies will become more standardised with a European regulation. The German government has already stipulated that reports under the CSDDD must be prepared in accordance with the reporting standard of the EU Sustainability Reporting Directive (CSRD). The CRSD came into force in 2023. It is mandatory for all European companies and corporations, but smaller companies will have more time to implement it.
German companies have to fulfil this reporting requirement anyway. The report under the CSRD can also be used to report under the German Supply Chain Act without any additional effort. If the CSDDD fails, different reporting obligations will remain under different national due diligence laws: Without the CSDDD, companies will have to report more extensively and more frequently. This is a particular disadvantage for smaller suppliers, who often have to provide evidence to larger companies in the supply chain, in addition to their own reporting requirements. A standardised reporting format for all reporting requirements would greatly reduce the burden on them.
What advantages does the CSDDD have for the German economy?
Windfuhr: When the German Supply Chain Act was being negotiated, business associations argued that the act would put German companies at a disadvantage on the European and international market. They therefore called for a European regulation. Now that it is on the table, this argument seems to have been forgotten.
Due diligence regulations already exist in some EU countries, including France, Norway and the Netherlands, in addition to Germany. The requirements as to what exactly due diligence obligations entail and who has to report on what vary from country to country. Without a standardised European framework, companies operating in Europe face different reporting obligations under the respective legislation, with large companies passing these on to smaller and medium-sized companies, which remain particularly burdened as a result.
During the negotiations on the CSDDD, the German government succeeded in incorporating much of the German legislation into the CSDDD. This proximity would make it easier for all companies that are already investing in the implementation of the German Supply Chain Act to also comply with the European regulation. Even liability does not go beyond the liability rules of the German Civil Code, which apply to German companies anyway. Without European regulation, the current legal patchwork will remain - both in terms of liability and reporting obligations.
What would a failure of the CSDDD mean for German companies that are already making their supply chains more socially sustainable?
Windfuhr: Many companies - large and small - have long since started to apply human rights due diligence and have achieved initial successes in complying with human and environmental rights along the supply chain. Companies have built up a good reputation in this area and rightly expect the same efforts from their European colleagues. But if companies are not obliged to do so across Europe, the investments of innovative companies that are pioneers in the protection of human rights and the environment could become a competitive disadvantage. This sends out the wrong message.
Companies would also have an advantage in difficult political contexts where standards are difficult to implement, for example in authoritarian countries where it is almost impossible to replace raw materials in the supply chain. A single European regulation could significantly increase the influence of individual companies, but also of industry initiatives. Even in very difficult countries, because they would be aware of the importance of a standardised European framework. If the EU regulation were to fail, the creative power of European companies would be considerably weakened, and they would be much more exposed to conditions in supplier countries.
If the German government abstains from the decision on the CSDDD in the EU Council and thus fails to achieve a sufficient majority in favour of the directive, there is a risk of a long-term unlevel playing field in Europe with negative consequences for German companies. The blockade by the FDP and some business associations would make it much more difficult for companies to implement human rights due diligence to the expense of people affected by human rights violations and environmental damage in global supply chains.
About the person
Michael Windfuhr has been Deputy Director of the Institute since 2011. He has also been a member of the UN Committee on Economic, Social and Cultural Rights since 2016.
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