Kiri

Dr Marco Buschmann, MP GERMAN FEDERAL MINISTER OF JUSTICE

MOHRENSTRASSE 37

10117 BERLIN, GERMANY

PHONE 0049 30 / 18-580-9000

Trilogue agreement on the proposal for a Corporate Sustainability Due Diligence Di-

rective (CSDDD) | Position of the German Federal Ministry of Justice

Dear Sir/Madam,

Esteemed colleagues,

After over half a year of intense debate, a provisional trilogue agreement was reached on the

proposal for an EU Corporate Sustainability Due Diligence Directive (CSDDD). After careful

consideration of its stance on this agreement, the German Federal Ministry of Justice has

concluded that it is unable to endorse it. This will result in an abstention on Germany’s part.

I am aware that this is a topic of great importance to you too, and that you were deeply involved

in the debate; I would therefore like to explain this decision from the perspective of my Ministry.

The Federal Ministry of Justice supports the proposed directive’s goal of enhancing protection

for human rights and the environment in the supply chains of European companies. Neverthe-

less, an important consideration for us in the negotiations was ensuring that the resulting in-

strument:

 leads to actual improvements in terms of human rights and environmental concerns,

 creates a level playing field in Europe, and

 takes into account the early experience gained from application of the German Supply

Chain Act (Lieferkettensorgfaltspflichtengesetz, LkSG) – in particular with regard to

the avoidance of bureaucratic burdens.

Our negotiation strategy was to seek alignment of the outcome of the negotiations with these

goals throughout the negotiation process. At the same time, we were aware that at the end of

this process, a rational assessment of the result would depend on an overall appraisal of the

outcome in relation to these goals.

2

Compared to what some participants in the trilogue negotiations had hoped for, significant

progress towards the above-mentioned goals was in fact made. We would like to emphatically

highlight and applaud these achievements. Nevertheless, it is the view of my Ministry that the

trilogue agreement objectively fails to meet the requirements for a satisfactory solution. We

would like to illustrate these shortcomings by way of the following examples:

 The trilogue agreement would impose considerable civil liability on companies for any

breaches of obligations in the supply chain. The Federal Ministry of Justice has striven

– in certain respects with notable success – to achieve a more practically-oriented lia-

bility regime than those contained in many of the drafts discussed during the negotiation

process. For instance, liability is limited to breaches of provisions that have the effect

of protecting third parties.

Furthermore, the option of sharing audits and joint compliance with due diligence obli-

gations in the context of industry initiatives was introduced. Nevertheless, the liability

rules represent an additional burden compared to the German Supply Chain Act, which

does not comprise liability rules, and would place additional strain on the affected com-

panies – in particular as a result of the proposed rules on e.g. additions to the annexes,

disclosure of evidence and limitation periods.

 With regard to the environment, the trilogue agreement departs from the established

approach of specifying environmental risks in detailed, industry-specific lists, thereby

ensuring the manageability and predictability of due diligence obligations for compa-

nies. A hidden general clause under environmental law results in extensive corporate

responsibility for environmental damage, regardless of its concrete impact on people.

 Moreover, the scope of the draft directive is extremely wide, and far more companies

would be affected than is the case under German law as it currently stands, for exam-

ple. The construction sector would be classified as a “risk sector”. In a sector that has

already been hit hard by a rise in rates of construction interest, the directive’s stricter

audit and due diligence requirements could pose an indirect threat to the survival of

small and medium-sized enterprises in particular. It is our impression that many busi-

nesses simply do not have the necessary human and financial resources. It is to be

feared that the directive would result in even less construction activity in future. Not

least in light of the current housing shortage in many parts of Europe, that would be

disastrous.

3

 A further increase in liability risks would arise from the very broad conception of supply

chain that underpins the draft directive: it encompasses all downstream activities and,

under certain circumstances, even product disposal. The draft does not employ the

very sensible distinction drawn in the German Supply Chain Act between direct and

indirect suppliers.

 Just what obligations would in future involve liability for companies is also wholly un-

clear, as it has not been possible to delimit, clearly and with legal certainty, the power

of the EU Commission to expand the range of obligations on companies by adopting

delegated acts. In the view of my ministry, that power would only have been acceptable

had there been a guarantee that it would be limited to obligations that were feasible

and workable in business terms, and that Member States would have sufficient oppor-

tunity to contribute prior to a Commission decision. That, however, is not the case.

 Alongside the civil liability risk, there is also the risk of administrative penalties: the

trilogue agreement provides for generally mandatory, turnover-based pecuniary penal-

ties that are not limited to cases of serious breaches, and for the maximum limit for

those penalties to be no less than 5% of a company’s turnover. Such a rule appears

disproportionate as there is no clear exception in the regulatory text that would allow,

for example, the turnover-based calculation of pecuniary penalties to be waived if the

degree of wrongdoing is nowhere near as high as in the case of serious misconduct. It

is not clear either why such a strict rule is required alongside civil liability to ensure the

appropriate and effective enforcement of due diligence requirements.

 While well-intentioned, the relaxation of due diligence requirements for specific cases

would appear problematic from a competition policy standpoint. For example, risk as-

sessments are to take account of whether a company in the supply chain is itself sub-

ject to the directive. That is, however, generally the case for large companies. Compa-

nies could therefore feel it necessary on risk management grounds to turn increasingly

to such large companies for their supply needs.

Large companies would thus gain a competitive advantage over small and medium-

size enterprises, and we would potentially see market concentration by regulation.

 Furthermore, our companies are likely to face significant additional burdens in terms of

financial costs, human resources and bureaucracy. For example, larger companies

would have to draw up a plan – including specific emission reduction targets – to ensure

that their company strategy is compatible with the Paris Agreement (known as a “cli-

mate transition plan”).

4

They would also have to provide financial incentives to ensure that management and

supervisory bodies comply with the climate transition plan. The latter proposal is in-

compatible with the role of the supervisory bodies and constitutes a serious interference

in corporate governance, particularly as it may also affect partnerships due to the Di-

rective’s neutrality on legal structures. The costs and benefits of these measures are

disproportionate.

 Ultimately, the agreement not only violates the criteria of fair competition and low bu-

reaucracy, it also threatens to make the situation worse from a human rights and envi-

ronmental perspective. Internationally, many European companies are seen as inves-

tors and buyers with a particular sensitivity towards human rights and environmental

issues. Put simply, this is what European consumers expect of them. If European com-

panies find themselves unable to manage their liability risks properly in the future and,

as a result, increasingly withdraw from international supply arrangements and invest-

ment activities in emerging and developing countries, the damage may well be twofold:

with this type of “onshoring”, the benefits of the international division of labour will be

lost. Moreover, these companies are likely to be replaced by other companies, such as

those from China, whose human rights and environmental credentials will certainly not

improve the situation in the countries concerned.

At least since Russia’s attack on Ukraine, it can no longer be denied that the geopolitical frame-

work has changed. Diversification of supply chains (de-risking) is unavoidable.

We need greater connectivity, not more unilateralism, in our economic relations. Europe has

to find its place in the ongoing competition between the US and Chinese systems, and it needs

a strong, competitive economy in order to hold its own on the world stage. We cannot and

must not sacrifice the protection of human rights and environmental responsibility in pursuit of

these goals. On the contrary: it is precisely these values that we as the EU stand for. And our

companies should be ambassadors of these values, too. But in the fight for our values, we in

the EU also need a new sense of realism. We must not make the mistake of shackling our-

selves with bureaucratic regulations, because that would be no help to anyone.

Yours faithfully,

Dr Marco Buschmann, MP GERMAN FEDERAL MINISTER OF JUSTICE

MOHRENSTRASSE 37

10117 BERLIN, GERMANY

PHONE 0049 30 / 18-580-9000

Trilogue agreement on the proposal for a Corporate Sustainability Due Diligence Di-

rective (CSDDD) | Position of the German Federal Ministry of Justice

Dear Sir/Madam,

Esteemed colleagues,

After over half a year of intense debate, a provisional trilogue agreement was reached on the

proposal for an EU Corporate Sustainability Due Diligence Directive (CSDDD). After careful

consideration of its stance on this agreement, the German Federal Ministry of Justice has

concluded that it is unable to endorse it. This will result in an abstention on Germany’s part.

I am aware that this is a topic of great importance to you too, and that you were deeply involved

in the debate; I would therefore like to explain this decision from the perspective of my Ministry.

The Federal Ministry of Justice supports the proposed directive’s goal of enhancing protection

for human rights and the environment in the supply chains of European companies. Neverthe-

less, an important consideration for us in the negotiations was ensuring that the resulting in-

strument:

 leads to actual improvements in terms of human rights and environmental concerns,

 creates a level playing field in Europe, and

 takes into account the early experience gained from application of the German Supply

Chain Act (Lieferkettensorgfaltspflichtengesetz, LkSG) – in particular with regard to

the avoidance of bureaucratic burdens.

Our negotiation strategy was to seek alignment of the outcome of the negotiations with these

goals throughout the negotiation process. At the same time, we were aware that at the end of

this process, a rational assessment of the result would depend on an overall appraisal of the

outcome in relation to these goals.

2

Compared to what some participants in the trilogue negotiations had hoped for, significant

progress towards the above-mentioned goals was in fact made. We would like to emphatically

highlight and applaud these achievements. Nevertheless, it is the view of my Ministry that the

trilogue agreement objectively fails to meet the requirements for a satisfactory solution. We

would like to illustrate these shortcomings by way of the following examples:

 The trilogue agreement would impose considerable civil liability on companies for any

breaches of obligations in the supply chain. The Federal Ministry of Justice has striven

– in certain respects with notable success – to achieve a more practically-oriented lia-

bility regime than those contained in many of the drafts discussed during the negotiation

process. For instance, liability is limited to breaches of provisions that have the effect

of protecting third parties.

Furthermore, the option of sharing audits and joint compliance with due diligence obli-

gations in the context of industry initiatives was introduced. Nevertheless, the liability

rules represent an additional burden compared to the German Supply Chain Act, which

does not comprise liability rules, and would place additional strain on the affected com-

panies – in particular as a result of the proposed rules on e.g. additions to the annexes,

disclosure of evidence and limitation periods.

 With regard to the environment, the trilogue agreement departs from the established

approach of specifying environmental risks in detailed, industry-specific lists, thereby

ensuring the manageability and predictability of due diligence obligations for compa-

nies. A hidden general clause under environmental law results in extensive corporate

responsibility for environmental damage, regardless of its concrete impact on people.

 Moreover, the scope of the draft directive is extremely wide, and far more companies

would be affected than is the case under German law as it currently stands, for exam-

ple. The construction sector would be classified as a “risk sector”. In a sector that has

already been hit hard by a rise in rates of construction interest, the directive’s stricter

audit and due diligence requirements could pose an indirect threat to the survival of

small and medium-sized enterprises in particular. It is our impression that many busi-

nesses simply do not have the necessary human and financial resources. It is to be

feared that the directive would result in even less construction activity in future. Not

least in light of the current housing shortage in many parts of Europe, that would be

disastrous.

3

 A further increase in liability risks would arise from the very broad conception of supply

chain that underpins the draft directive: it encompasses all downstream activities and,

under certain circumstances, even product disposal. The draft does not employ the

very sensible distinction drawn in the German Supply Chain Act between direct and

indirect suppliers.

 Just what obligations would in future involve liability for companies is also wholly un-

clear, as it has not been possible to delimit, clearly and with legal certainty, the power

of the EU Commission to expand the range of obligations on companies by adopting

delegated acts. In the view of my ministry, that power would only have been acceptable

had there been a guarantee that it would be limited to obligations that were feasible

and workable in business terms, and that Member States would have sufficient oppor-

tunity to contribute prior to a Commission decision. That, however, is not the case.

 Alongside the civil liability risk, there is also the risk of administrative penalties: the

trilogue agreement provides for generally mandatory, turnover-based pecuniary penal-

ties that are not limited to cases of serious breaches, and for the maximum limit for

those penalties to be no less than 5% of a company’s turnover. Such a rule appears

disproportionate as there is no clear exception in the regulatory text that would allow,

for example, the turnover-based calculation of pecuniary penalties to be waived if the

degree of wrongdoing is nowhere near as high as in the case of serious misconduct. It

is not clear either why such a strict rule is required alongside civil liability to ensure the

appropriate and effective enforcement of due diligence requirements.

 While well-intentioned, the relaxation of due diligence requirements for specific cases

would appear problematic from a competition policy standpoint. For example, risk as-

sessments are to take account of whether a company in the supply chain is itself sub-

ject to the directive. That is, however, generally the case for large companies. Compa-

nies could therefore feel it necessary on risk management grounds to turn increasingly

to such large companies for their supply needs.

Large companies would thus gain a competitive advantage over small and medium-

size enterprises, and we would potentially see market concentration by regulation.

 Furthermore, our companies are likely to face significant additional burdens in terms of

financial costs, human resources and bureaucracy. For example, larger companies

would have to draw up a plan – including specific emission reduction targets – to ensure

that their company strategy is compatible with the Paris Agreement (known as a “cli-

mate transition plan”).

4

They would also have to provide financial incentives to ensure that management and

supervisory bodies comply with the climate transition plan. The latter proposal is in-

compatible with the role of the supervisory bodies and constitutes a serious interference

in corporate governance, particularly as it may also affect partnerships due to the Di-

rective’s neutrality on legal structures. The costs and benefits of these measures are

disproportionate.

 Ultimately, the agreement not only violates the criteria of fair competition and low bu-

reaucracy, it also threatens to make the situation worse from a human rights and envi-

ronmental perspective. Internationally, many European companies are seen as inves-

tors and buyers with a particular sensitivity towards human rights and environmental

issues. Put simply, this is what European consumers expect of them. If European com-

panies find themselves unable to manage their liability risks properly in the future and,

as a result, increasingly withdraw from international supply arrangements and invest-

ment activities in emerging and developing countries, the damage may well be twofold:

with this type of “onshoring”, the benefits of the international division of labour will be

lost. Moreover, these companies are likely to be replaced by other companies, such as

those from China, whose human rights and environmental credentials will certainly not

improve the situation in the countries concerned.

At least since Russia’s attack on Ukraine, it can no longer be denied that the geopolitical frame-

work has changed. Diversification of supply chains (de-risking) is unavoidable.

We need greater connectivity, not more unilateralism, in our economic relations. Europe has

to find its place in the ongoing competition between the US and Chinese systems, and it needs

a strong, competitive economy in order to hold its own on the world stage. We cannot and

must not sacrifice the protection of human rights and environmental responsibility in pursuit of

these goals. On the contrary: it is precisely these values that we as the EU stand for. And our

companies should be ambassadors of these values, too. But in the fight for our values, we in

the EU also need a new sense of realism. We must not make the mistake of shackling our-

selves with bureaucratic regulations, because that would be no help to anyone.

Yours faithfully,