German plans to downsize national supply chain rules at odds with EU law, experts warn

2 months ago 12

Germany’s plans to reduce the scope of its national supply chain due diligence law through an early replacement with newly approved EU-wide legislation could collide with EU law, legal experts told Euractiv.

In one of the points of its “growth initiative” – part of a political deal for the 2025 budget agreed upon last week – the governing coalition of the Social Democrats, the liberal FDP, and the Greens agreed to effectively reduce the scope of the national Supply Chain Due Diligence Act (LkSG) – by replacing it through the early introduction of the EU Corporate Sustainability Due Diligence Directive (CSDDD), which is supposed to be applied from 2027.

Ulrich Hagel, a German lawyer who co-authored several articles and a book on this issue, told Euractiv that bringing forward the application of the CSDDD by two years, along with using it to scale down the scope of existing domestic rules, could breach an important provision of the EU directive.

The CSDDD text in fact says the measure, “shall not constitute grounds for reducing the level,” of existing rules for climate, employment rights, human rights or social rights protection at the national level.

“This means that where a level of protection already exists, it must not be lowered with reference to the CSDDD,” explained Hagel.

With the German government’s current legislative term ending in autumn 2025, the three parties said in their agreement they will “implement the European Supply Chain Directive (CSDDD) 1:1 during this legislative period by amending the Supply Chain Due Diligence Act (LkSG) to minimise bureaucracy.”

Scaling back the scope of national rules

Effectively, this would translate into implementing changes quicker than necessary, while additional obligations for firms would kick in at the latest date possible.

Some of the companies already complying with German legislation as of this year would see requirements lifted until as late as 2029, when the CSDDD will be fully phased in.

By the next 12 months – the timeline the government is targeting to introduce agreed changes – only companies with at least 5000 employees and a global turnover above €1.5 billion would in fact be required to comply with the new measures to prevent environmental or human rights breaches over their value chains.

This would mark a substantial lowering from the LkSG scope – which, starting from 2023, affected Germany-headquartered companies with over 3000 employees, and from January this year firms with over 1000.

In practice, the number of in-scope German companies would shrink from 5200 to “less than 1000,” according to the coalition deal.

Moreover, unlike the EU rules, the German law currently does not include a threshold for annual turnover, which means that the CSDDD’s double threshold condition could result in even more German companies being spared under the EU-wide directive compared to those that would come under national rules.

FDP ministry downplays legal risk

A similar argument was made by Anne-Christin Mittwoch, a law professor at University Halle-Wittenberg. In a legal assessment commissioned by NGOs Germanwatch and Oxfam and published on Wednesday (10 July), Mittwoch said the German government’s proposal to use the CSDDD to reduce national rules, “would be against European law.”

However, a spokesperson of the German justice ministry – whose minister Marco Buschmann (FDP/Renew) had been a vocal critic of the EU directive – told Euractiv on Thursday (11 July) that “the CSDDD is not the justification for the adjustments to the scope of application of the LkSG [German supply chain due diligence law] set out in the growth initiative.”

“Rather, the reason for the adjustment is the need to reduce bureaucracy […] to strengthen entrepreneurial dynamism,” the spokesperson said in reference to the text of the coalition’s agreement.

SPD minister signals open scenario

While Buschmann played a proactive role in the debate, the actual implementation of the rules will be overseen by the Labour Ministry of Hubertus Heil (SPD/S&D).

Asked about the legal assessment, Heil’s office told Euractiv that “it remains to be seen how the resolutions of the 5 July [the coalition deal] will actually be implemented.”

Hagel pointed out that, while legal opinions differ, “there is much to suggest that it would fall under the prohibition of deterioration [of standards] and would therefore not be permissible”.

However, he also noted that a potential legal action against Germany by the European Commission – in case the EU executive deemed the move to violate the CSDDD provision – would take time. “By then, we would probably be back to the 1,000 employees anyway,” he added.

Cutting down on a cut down

The CSDDD will be phased in over three years starting from 2027 – with companies with over 5000 employees and a global turnover above €1.5 billion will be affected from July 2027, and companies with 3,000 employees and a global turnover above 900 million affected will be affected from July 2028.

In July 2029, the directive will reach its full scope, covering companies with more than 1000 employees and a turnover of €450 million.

Due to Buschmann’s de-facto veto, Germany’s three-party government had to abstain on voting on the CSDDD in a vote of EU ministers in May.

Though at the time, Germany’s announced abstention resulted in the law initially failing to reach the necessary majority, the Belgian government – which at the time held the rotating EU council presidency – was able to negotiate a number of eleventh-hour changes to the text, ensuring that it later reached a sufficient “qualified” majority.

These included a drastic reduction of the scope of affected companies from what was envisaged in the original agreement between EU co-legislators – with the number of companies being affected by the law slashed by 67%.

The revised text of the law was finally endorsed by the European Parliament and the Council at the end of April and May, respectively, and was published in the EU’s official journal on July 5.

Despite its narrower scope, the EU law is stricter than its German equivalent in some key aspects, notably by introducing civil liability for companies failing to meet its requirements.

[Edited by Anna Brunetti/Rajnish Singh]