Last Friday, July 5th, was an eventful day for business and human rights.
Not only did it mark the official publication of the Corporate Sustainability Due Diligence Directive (CSDDD), which will enter into force 20 days following publication, starting the period for transposition into national laws, but Germany also announced plans to significantly amend the scope of the German Act on Corporate Due Diligence Obligations in Supply Chains (LkSG).
The first development last Friday, the CSDDD’s publication, is welcome news for companies, as it creates certainty that sustainability efforts will be incentivized and a level playing field will be established in the EU. However, the changes to the LkSG have reignited uncertainty for those that need to implement the German law.
As you’ll remember, the German government withdrew its support for the CSDDD despite having introduced a national corporate sustainability due diligence law last year. Following this rather inconsistent approach to the CSDDD adoption at the EU level, different political parties in Germany debated pausing the reporting obligations, then suggested repealing the LkSG entirely. Now, it seems the three ruling parties have found a compromise in reducing the scope of the companies that fall subject to the LkSG and aligning it with the scope of the CSDDD to minimize bureaucratic burdens for companies.[1] According to the official announcement, this proposed adjustment would mean that only about one-third of the companies currently under the LkSG will be directly affected during this legislative period.
But what does this mean in practice? We have read multiple posts on Linkedin and media outlets debating whether the German government can amend the scope of the LkSG given that the text of the CSDDD explicitly restricts EU member states from reducing existing scopes – a question that suggest that the person asking it likely perceives due diligence primarily as a compliance requirement and not as part of risk management.
Additionally, corporate practitioners have approached us asking the following questions:
- Our company has been in the scope of the LkSG since 2023; how would the suggested narrower scope impact my business? Should we stop investing in human rights risk management?
- Will we still report to the BAFA under the suggested scope even though we submitted a report this year?
- When will the new plans of the German government be implemented?[2]
We recognize and empathize with the difficulty of juggling this increasingly ambiguous due diligence landscape. What do we tell clients?
Our advice: Monitor the situation, but don’t panic.
While it’s important to stay informed about these changes, the core of your due diligence operations remain the same. Here’s why:
1. Human rights due diligence is a business decision.
Human rights risks in global value chains are a reality that can impact your business. The decision, therefore, is about whether you should manage these risks to people and your business proactively. The core of human rights due diligence is for businesses to do no harm. Companies associated with human rights harms face financial, legal, reputational and stakeholder relations risks. Those that implement effective human rights due diligence establish resilient supply chains, collaborate with their business partners, maintain their social license to operate, build their brand, and support positive impacts on people and planet.
2. There is also the CSRD.
While the CSDDD targets large companies with significant business activities in the EU[3], the EU Corporate Sustainability Reporting Directive (CSRD) has a broader scope. Entered into force in 2023, the CSRD requires all large companies, companies listed on regulated markets (except micro-enterprises), and other public-interest entities with over 500 employees to submit reports by January 2025. This directive is estimated to affect nearly 50,000 companies across the EU. This means in just five months, almost 40 times more companies than those within the current scope of the German law will have to report on their corporate sustainability activities under the CSRD.
The CSRD and the CSDDD complement each other and are part of the EU’s commitment to a sustainable business environment under the European Green Deal. Together, they create a comprehensive framework for sustainability due diligence, covering everything from identifying and assessing impacts to addressing and reporting on them.
If your company falls under the CSRD, you need to conduct human rights due diligence, regardless of the changes to the scope of the LkSG.[4]
3. Corporate sustainability is here to stay.
Companies are increasingly held accountable for their human rights performance in daily operations, supply chains and business relationships. Whether they fall under the scope of a due diligence regulation or not, their human rights due diligence performance matters to shareholders, investors, governments and civil society. All of these actors increasingly expect companies to respect human rights. This trend is decisive for gaining access to finance, securing a social license to operate and attracting and retaining employees. The regulatory developments discussed so far (LkSG, CSDDD and CSRD) already have a ripple effect on companies that are not directly within scope.
In addition to these three regulations, the EU Deforestation Regulation (EUDFR), several national modern slavery acts, the EU ban on products made with forced labour and the US Uyghur Forced Labor Prevention Act (UFLPA) will undoubtedly shape the future of corporate sustainability in Europe and globally, pushing companies towards more ethical, transparent, and sustainable practices.
These three aspects demonstrate why companies’ efforts to establish human rights due diligence processes have not been in vain but rather a smart choice beyond just compliance.
In this light, the plans to adjust the LkSG scope seem more relevant for current political debates than for having actual implications on companies’ due diligence processes.
Our recommendation is to always seek guidance from international standards, namely the UN Guiding Principles on Business and Human Rights and the the OECD Guidelines for Multinational Enterprises. Current legislation, including the CSDDD, LkSG and CSRD, is based on these standards. If you’re already adhering to these guidelines, you’re on the right track.
So, in the midst of this ambiguity and political chaos, don’t panic and breathe.
But if questions continue to flood your mind, we are here to answer them: hello@peopleatcore.com We are excited to work with organizations that are ready to make a difference!
Theresa for the CORE team
[1] Find the full proposal for the initiative called “Growth initiative – new economic dynamics for Germany” here (in German).
[2] There are additional questions and debates about whether the plan to limit the scope of companies that fall under the LkSG is compatible with Article 1 para. 2 of the CSDDD, which reads as follows: “This Directive shall not constitute grounds for reducing the level of protection of human, employment and social rights, or of protection of the environment or of protection of the climate provided for by the national law of the Member States or by the collective agreements applicable at the time of the adoption of this Directive.”
[3] It applies to EU companies with more than 1,000 workers and with a global turnover surpassing €450 million as well as non-EU companies generating €450 million turnover in the EU (with no worker threshold).
[4] The new plans of the German government also include indications that LkSG reports can be replaced with CSRD reports as of January 1, 2025. Sanctions for non-compliance with reporting obligations will be waived until then.
