Fair competition and reduction of supply dependencies in the european union

Unfair competition, the Covid pandemic, military conflicts and the European economy's dependence on supplies of important goods from authoritarian or politically unreliable states have led the EU and European states to investigate and clarify supply chains, particularly with regard to the delivery of goods that have been produced in violation of internationally recognized social and ecological standards, as these distort competition, and to reduce dependence on important goods that are only available abroad. In Germany this was done, among other things

Supply Chain Due Diligence Act

and in the EU the

Corporate Sustainability Reporting Directive – EU Directive 2022/2464 (CSRD) issued.

Supply Chain Due Diligence Act

The German Supply Chain Due Diligence Act (“LkSG”) – also known as the Supply Chain Act – came into force on January 1, 2023. Since January 1, 2023, it has initially required companies based in Germany and companies with a branch in Germany (see Section 13d of the Commercial Code (HGB)) that employ more than 3,000 employees to improve and document their processes along the entire supply chain. From January 1, 2024, the obligations apply to companies with 1,000 or more employees.

The EU plans to issue an even stricter supply chain directive in 2024 that goes beyond the measures in the German Supply Chain Act. Across all sectors it should be subject to:

• Companies based in the EU that have more than 250 employees and more than 40 million euros in annual turnover worldwide;
• Companies based outside the EU should have to comply with the new regulations if they have a turnover of more than 150 million euros and at least 40 million euros of this in the EU.

As soon as the EU directive comes into force, the German supply chain law will need to be adapted to the stricter requirements of the EU directive.

Similar laws already exist in several countries, such as France and Switzerland. For branches in other countries, the local legal situation regarding supply chains should therefore be checked.

Protection of the environment and human rights

The aim of the LkSG is to enforce compliance with basic human rights and environmental standards in global supply chains worldwide. These include, for example:

• The integrity of life and health
• Protection against slavery, forced and child labor
• Fair working conditions and pay
• Environmental obligations to protect human health
• environmental Protection

Due diligence obligations of companies

Companies are held responsible for enforcement:

• They should ensure transparency in their supply chain.
• They are responsible for ensuring that suppliers along their supply chain adhere to basic human rights and environmental standards - from raw materials through the manufacturing process to the finished product.
• With the Supply Chain Act, your duty of care with regard to social and ecological risks extends to all upstream suppliers.
• With the Supply Chain Act, your duty of care with regard to social and ecological risks extends to all upstream suppliers.

Compliance with the regulations is checked by the Federal Office of Economics and Export Control (BAFA). If companies neglect or violate their duty of care and documentation, they risk being fined or excluded from public tenders.

Required measures according to the Supply Chain Act

• Check legal requirements for your own company
• Adopt a policy statement on the company's human rights and environmental strategy
• Determination of responsibilities within the company
• Identify and analyze transparency and stakeholders in the supply chain
• Determination of the working and environmental conditions at suppliers and the origin of raw materials and goods
  Set up the most efficient exchange of information with partners, for example via a central platform
• Identification of risks and introduction of supply chain risk management with suitable risk analysis procedures (e.g. supplier audits or comparison with external data sources)
• Derivation of effective measures to avoid, minimize and remedy violations of human rights, if necessary. Change of suppliers
• Establishment of a complaint management system
• Define reporting with performance measurement and prepare a report in accordance with the requirements of the EU's Corporate Sustainability Reporting Directive (CSRD).
• Check, evaluate and, if necessary, introduce IT systems to support the requirements.

CSRD for supply and value chains

The EU's Corporate Sustainability Reporting Directive 2022/2464 (CSRD) also came into force on January 1, 2023 and applies in 2023 to companies with more than 3,000 employees, in 2024 to companies with 1,000 employees and more, in 2025 to companies with 500 employees and EUR 150 million in sales and from 2027 for companies with 250 employees and more and EUR 40 million in sales. The CSRD significantly expands the obligation to report on risks and opportunities as well as on ecological and social impacts in supply and value chains. The information should cover the companies' products and services, business relationships and supply chain. Detailed requirements are regulated in the reporting standards. The CSRD therefore obliges significantly more companies to report on their supply chains and thus to check their supply chains for compliance with human rights and environmental standards.

The regulations of the CSRD and its reporting standards also play an important role for the planned EU directive on corporate due diligence obligations (so-called “EU Supply Chain Act”, “Corporate Sustainability Due Diligence Directive” (CSDDD). According to the European Commission’s proposal of February 23rd. By 2022, companies subject to both directives will have their reporting obligations under the CSDDD covered by the CSRD.

The CSRD prescribes environmental due diligence to prevent future human rights violations in supply chains.

Companies must adhere to a series of compliance and risk management standards and also demonstrate that human rights are fully respected throughout their entire production chain, including suppliers abroad.

The main measures are:

• the introduction of an internal risk management system,
• carrying out risk analyzes and
• taking preventive and possible corrective measures, including in the production process of direct and indirect suppliers.

Companies must submit annual compliance reports, which must be made freely available to the public on the company's website for a period of at least seven years. Companies must also demonstrate that they have adequate internal complaints procedures in place and the public inform about the possible negative impact of their activities on human rights.

In order to prevent human rights violations, companies are required to act. This means that inappropriate or illegal practices should be corrected. This can lead to the termination of business relationships with companies that do not meet the required standards. The focus of compliance obligations is to combat the following illegal practices:  

• Child labor;
• slave-like work;
• failure to comply with labor laws;
• disregard for freedom of assembly;
• Discrimination, including unequal treatment based on race, gender, nationality, social origin, age, health or religious belief; and Violation of environmental regulations.

Consequences of failure to comply with CSRD obligations

In addition to fines and exclusion from public contracts under the LkSG, companies that do not comply with their obligations under the CSRD are threatened with lawsuits from shareholders and competitors, withdrawal or denial of loans and stock market corporate actions.

Unfair competition

Foreign companies that produce and sell goods in disregard of international human rights and environmental standards are often able to offer their goods much cheaper in the EU due to the savings they achieve. This could potentially constitute a violation of the law against unfair competition (UWG). If this is the case, import bans, sales bans and claims for damages can be asserted, among other things.

KAU Lawyers / Attorneys