Breakthrough with Obstacles

EU Parliament adopts EU Supply Chain Directive on the eleventh anniversary of the Rana Plaza disaster

Eleven years after the devastating collapse of the Rana Plaza textile factory in Bangladesh, the European Parliament has voted in favour of the EU Supply Chain Directive. This clears the way for one of the EU’s most controversial projects in the area of corporate due diligence. Formally, the European Council must now also give its approval. But after all the battles and concessions of recent months, no further obstacles are to be expected. [editorial note:The EU Council has given its final approval on 24 May 2024.]

The EU Supply Chain Directive requires large companies operating on the European market to respect human rights and environmental protection in their global supply chains. Non-European companies trading in the EU are also covered by the directive. The EU Supply Chain Directive thus heralds a paradigm shift for which trade unions and civil society actors in the EU and around the world in particular have been fighting for. They have been supported in this endeavour by progressive politicians and business leaders. Instead of voluntary self-commitment, the directive relies on binding due diligence obligations for companies, which can be monitored and sanctioned in the event of non-compliance. This is an important EU response to the worldwide outcry following the collapse of the Rana Plaza textile factory, which led to a global debate on responsibility, human rights and exploitation.

What’s in the EU Supply Chain Directive?

• In future, companies will have to carefully examine their production paths and supplier relationships. Where there are risks of human rights violations and environmental degradation, companies will have to prioritize them and take appropriate countermeasures. In the best-case scenario, damage to people and the environment will be prevented before it occurs. In 2027, national supervisory authorities will begin to monitor companies’ compliance with their due diligence obligations. In cases of violations, they can impose penalties of up to 5 per cent of annual turnover.

• The EU Supply Chain Directive strengthens the role of trade unions and civil society actors in the process of corporate due diligence. For example, companies will have to make serious efforts to involve trade unions and affected individuals in risk analysis and reparation measures.

• The directive also finally provides effective access to legal protection for those affected by human and environmental rights violations. In future, the liability regime will enable affected individuals to sue companies for damages – if the companies in question could have prevented the damage but failed to act. This also means that in future, courts will be able to require companies to present documentation of the due diligence measures they have taken. The statute of limitations has also been slightly extended to 5 years.

And what does this mean for the German Supply Chain Act?

With its own Supply Chain Due Diligence Act (LkSG), Germany is an important point of reference for many EU member countries. Social democratic forces in Germany have been particularly instrumental in driving the project forward at the European level. The European directive will now also lead to important changes in Germany:

• In future, more risks will be covered: for example, companies will have to respect individual rights such as the right to a family, the right to housing and freedom of religion. There are also important changes in the area of wages: henceforth companies will not only have to ensure a decent wage for employees in their supply chains, but also a living wage for self-employed workers.

• The scope of environmental risks will be expanded significantly.

• The regular risk analysis of companies will have to focus on all likely and serious risks in the entire chain of activities.

• In future, trade unions and civil society actors will have to be fully included.

• It is also made clear that companies cannot simply pass on their obligations to their small and medium-sized suppliers. The latter can even demand support, including financial aid, from large companies. The LkSG has not yet made this sufficiently clear.

• The Member States are now obliged to transpose the European directive into national law. Germany must therefore revise the LkSG. In doing so, Germany will also have to create a basis for claims under civil law.

Not a bureaucratic monstrosity

The process leading to the passing of the EU Supply Chain Directive took a total of three years and could only be concluded by making far-reaching concessions to its opponents. Germany also made a drastic U-turn towards the end of the negotiations and ultimately abstained in the European Council because of liberal opposition within the government. Many myths have been created in the course of these conflicts. The EU’s Supply Chain Directive is not a ‘bureaucratic monstrosity’, nor will it lead to an avalanche of civil lawsuits against companies. Instead, we must all recognize that the Directive is a long overdue attempt to adapt the global economy to the environmental and social challenges of the twenty-first century. It will make our globalization not only fairer and more sustainable, but also more resilient. The Directive is therefore also beneficial for the economic development of the EU and manufacturing countries worldwide.

Perspective ‘The EU Supply Chain Directive – Global Protection for People and the Environment’

In our publication, lawyer Robert Grabosch, LL.M., analyses in detail what obligations companies have under the EU Supply Chain Directive, the protections for people and the environment that must be guaranteed in the future, and the differences between the European Directive and the German Supply Chain Act.