What is it about?

The Supply Chain Due Diligence Act (LkSG) obligates companies to appropriately observe human rights and specific environmental due diligence duties in their supply chains. The duties to be fulfilled are graded according to the available possibilities of exerting influence, depending on whether the company's own business area or a direct contractual partner or a more indirect supplier are concerned.

Who does it affect?

Initially, from the beginning of 2023 onwards, companies covered by the Act are those with 3,000 employees or more that are domiciled or have a branch office in Germany. Their legal form is irrelevant. From 01 January 2024 onwards, it will affect companies with at least 1,000 employees.

What needs to be done?

The LkSG imposes an "obligation to make an effort" on the part of companies, but no "obligation to succeed”. Thus, the legislator does not demand that companies guarantee the definite prevention of infringements of human rights. However, companies must continuously strive to maintain an appropriate risk management. They must demonstrate that they have done everything possible to avoid human rights-related risks in their supply chains. The corresponding due diligence obligations of companies include:

• Risk management and risk analysis;
• Declaration of principles of the company’s human rights strategy;
• Preventive measures;
• Immediate remedial measures in case of identified infringements of rights;
• Establishment of a complaints procedure and
• Documentation and reporting obligation, including the preparation of a report on sustainability-related information.

What happens in case of non-compliance?

If companies fail to comply with their obligations to conduct a risk analysis, set up a complaints procedure, take preventive measures and effectively remedy known infringements of human rights, they may face fines of up to 8 million euros or up to 2 percent of their annual turnover. The turnover-based fine framework only applies to companies generating over €400 million in annual sales.

Similarly, companies that have violated the law can, if fined in a certain minimum amount, be excluded from public contract awards for a period of up to three years.

What is it about?

As a counterpart to the LkSG under EU law, the Corporate Sustainability Due Diligence Directive (CSDDD) now stipulates for the first time human rights and environmental due diligence obligations for companies at the European level. While both acts share the same objective, the CSDDD is further-reaching than the LkSG. The CSDDD is currently only available in draft form.

Who does it affect?

The draft CSDDD covers companies from the EU and from third countries that meet two requirements:

1. It affects companies in the legal form of a stock corporation (Aktiengesellschaft, AG), partnership limited by shares (Kommanditgesellschaft auf Aktien, KGaA) and limited liability company (Gesellschaft mit beschränkter Haftung, GmbH). The Directive will also cover regulated financial companies and insurance companies, irrespective of legal form.
2. However, due diligence obligations only apply to these companies if they reach certain thresholds in terms of their net annual turnover and number of employees. Special thresholds apply here to companies from the three high-risk sectors (i) textiles and clothing, (ii) agriculture, forestry and fisheries, and (iii) mineral resources. The latter affects about 1,400 companies in the EU. 

What needs to be done?

In addition to the LkSG, companies should already consider the planned requirements of the CSDDD, as they are much further-reaching than the national regulations in several areas.

For example, the personal scope of application of the CSDDD is already broader than that of the LkSG and increasingly includes both foreign EU companies and third-country companies operating on the European internal market. In addition, the CSDDD fundamentally extends the due diligence obligations to be observed by companies to all of their suppliers, including indirect suppliers. 

The stricter nature of the CSDDD vis-à-vis the LkSG is particularly evident in the civil liability for a breach of the due diligence obligations: while such liability expressly does not exist according to the LkSG, it is prescribed under the Directive. 

What happens in case of non-compliance?

According to the draft CSDD Directive, non-compliance with the due diligence obligations is to be sanctioned by the competent authorities of the member states with interim measures and fines. In contrast to the German Act on Corporate Due Diligence Obligations for the Prevention of Human Rights Violations in Supply Chains (LkSG), a separate criterion of civil liability is also provided for. The prerequisite for liability is that environmental or human rights violations have occurred as a result of non-compliance with the due diligence obligations, which could have been recognised and prevented if these obligations had been observed.

What is it about?

With the Conflict Minerals Regulation (Regulation (EU) 2017/821), the EU has created an instrument to regulate trade in tin, tantalum, tungsten and gold. Since its full entry into force on 01 January 2021, the Conflict Minerals Regulation obliges Union importers to comply with certain due diligence duties.

Who does it affect?

The Conflict Minerals Regulation does not regulate the entire supply chain. The jurisdictional basis for the corporate due diligence obligation is the import of minerals or metals containing tin, tantalum, tungsten or gold. This obligation is directed exclusively at Union importer of the minerals and metals in question.

The Conflict Minerals Regulation applies to companies of all sizes. Prerequisite for its applicability is that the company's import quantities exceed the quantity thresholds specified in Annex I of the Regulation.

What needs to be done?

The Union importer must create the organisational framework conditions of effective supply chain compliance for the minerals and metals in question. To ensure that these principles do not remain just lip service, the Union importer must also take a multitude of specific management measures.

The Union importer also has to identify the risks in its supply chain, assess these risks and, if necessary, react with a strategy to prevent or mitigate any negative effects.

Finally, there are monitoring and disclosure obligations. The Union importer is required to report annually on how it complies with due diligence obligations and procedures for responsible sourcing.

What happens in case of non-compliance?

The Conflict Minerals Regulation itself does not stipulate any enforcement measures. The member states are called upon to adopt the necessary regulations for this purpose. The German legislator has done so with the GermanMineral Raw Materials Due Diligence Act ["Mineralische-Rohstoffe-Sorgfaltspflichten-Gesetz, MinRohSorgG"]. According to this, the body responsible for the application of the Conflict Minerals Regulation is the German Federal Institute for Geosciences and Natural Resources [Bundesanstalt für Geowissenschaften und Rohstoffe, BGR], there the German Control Authority EU Due Diligence in Raw Material Supply Chains [Deutsche Kontrollstelle EU-Sorgfaltspflichten in Rohstofflieferketten, "DEKSOR"]. The DEKSOR is vested with extensive interventive and regulatory powers. It can penalise breaches of the due diligence obligations with penalty payments of up to 50,000 euros.

What is it about?

Through a new regulation, the EU wants to ensure that products bought, used and consumed on the EU market do not contribute to global deforestation and forest degradation. Accordingly, soy, beef, palm oil, cocoa, coffee, natural rubber and wood, as well as certain products made from them, such as leather, chocolate, printing paper and furniture, may only be imported into the EU if they were not produced from forest areas that were deforested after December 2020. To this end, companies must meet defined due diligence requirements.

The EU Regulation to Curb Global Deforestation is scheduled to come into force at the end of 2024, after an 18-month transition period.

Who does it affect?

The due diligence requirements are aimed at importers and traders who import the raw materials and products covered by the regulation into the EU for the first time.

What needs to be done?

Affected companies must prove that the goods are both deforestation-free and comply with all applicable laws in the country of their production. In addition, accurate geographic information on the agricultural land of the goods must be collected.

What happens in case of non-compliance?

The regulation obliges member states to impose effective and dissuasive sanctions. For example, it is envisaged that fines proportionate to the environmental damage and the value of the raw materials or products concerned will be set at a minimum of 4 percent of the annual turnover of the market participants in the EU. Temporary exclusion from public procurement procedures and from access to public funding is also possible.

What is it about?

As early as 2005, the Union introduced a European Emissions Trading System (EU-ETS) as a key instrument of climate protection. The EU ETS records emissions from around 10,000 plants in the energy sector and energy-intensive industry across Europe.

The basis of the EU-ETS is a so-called "Cap & Trade" system. Here, the EU sets a cap on the total amount of greenhouse gas emissions that may be emitted by plants that are subject to emissions trading. The member states issue a corresponding amount of emission allowances for these plants - partly free of charge, partly via auctions. One allowance permits the emission of one ton of carbon dioxide equivalent. The emission allowances can be freely traded on the market, creating a price for the emission of greenhouse gases. This price motivates participating companies to reduce their greenhouse gas emissions.

In December 2022, the EU Parliament and Council agreed on a reform of EU emissions trading. According to this, emissions in the ETS sectors have to be reduced by 62 percent from 2005 levels by 2030. For this reason, fewer certificates are gradually being issued. In addition, the free allocation of ETS allowances for the energy-intensive industry is being phased out. Furthermore, a second emissions trading system (ETS II) for CO2 emissions is being introduced by 2027 for the road transport and buildings sectors.

Who does it affect?

It affects companies in the energy sector and certain energy-intensive industries. Particularly energy-intensive industries include, for example, the steel and chemical sectors, large energy producers and refineries, and aluminium plants. Since 2012, it also includes intra-European air traffic.

What does this mean?

Emissions trading has introduced a host of new and complex obligations for plant operators. Since the authorities do not determine whether an existing plant is subject to an emissions trading obligation, companies need to check for themselves whether their plants fall under the EU ETS. This increases the entrepreneurial risk of being sanctioned in the event of an incorrect self-assessment.

What happens in case of non-compliance?

Failure to comply results in severe strict liability sanctions. For example, a fine is due for each ton of CO2 for which no certificate has been surrendered by the end of the annual period. In addition, in case of violations, the names of the responsible parties are published in the German Federal Gazette. 

What is it about?

Pricing CO2 emissions through the EU ETS carries the risk that EU-based companies will relocate their emissions-intensive production to sites in third countries that do not have comparable measures to reduce CO2 emissions. In this case, CO2 emissions would merely be relocated as opposed to reduced. To date, the EU has mitigated these relocation effects by allocating allowances free of charge to particularly emissions-intensive plant operators.

The end of the free allowances, combined with the significant increase in trading prices on the energy exchange, will lead to a massive increase in production costs in the emissions-intensive industry. In order to prevent the resulting relocation effects, imports of certain goods from CO2-intensive production will participate in the EU emissions trading system in the future via the Carbon Border Adjustment Mechanism, (CBAM), instead of the free allowances. In terms of CO2 pricing, the CBAM places goods imported from third countries with a particularly high CO2 relocation risk, such as aluminium, iron and steel, cement, and fertilisers, in the same position as if they had been produced in the EU.

For this purpose, importers of corresponding goods must purchase CBAM certificates, which are based on the weekly average price of the certificates in the emissions trading system. The acquired CBAM certificates must then be surrendered when the corresponding goods are imported. The aim is to bring the competition conditions for European and foreign producers of CO2-intensive basic materials into line with each other and to prevent the relocation of production to third countries.

Who does it affect?

The CBAM initially affects companies that import iron, steel, cement, aluminium, electricity, fertilisers, hydrogen, and some intermediate and downstream products (in particular iron and steel products) from non-EU countries. However, it excludes imports into the EU from Switzerland, Norway, Iceland and Liechtenstein.

What needs to be done?

The CBAM is expected to enter into force in October 2023. Affected companies should therefore familiarise themselves with the obligations that await them in good time and should review their own trading practices according to the certificates that they could potentially require.

What happens in case of non-compliance?

Violations of the obligation to surrender CBAM certificates will be punished analogously to the sanctions provided for in the EU ETS. Companies must therefore pay a fine for each CBAM certificate they fail to surrender.

What is it about?

The EU’s Waste Framework Directive contains the legal framework for dealing with waste in the EU and defines key terms of waste law. The German legislator has implemented the requirements of the Directive, in particular in the German Circular Economy Act (Kreislaufwirtschaftsgesetz, KrWG) (see also 2.).

Who does it affect? What needs to be done? And what happens in case of non-compliance?

Individual obligations and legal consequences are defined by the national implementing acts, i.e. in Germany by the KrWG.

What is it about?

The purpose of the Circular Economy Act (KrWG) is to ensure that products do not become waste in the first place or are recycled. In the best case scenario, a circular rather than linear economy is to be established.

According to the KrWG, companies that develop, manufacture, process and distribute products bear a so-called product responsibility. Product responsibility serves to motivate companies to avoid waste as early as at the manufacturing stage of the products and to ensure environmentally compatible recycling and disposal after their use.

Who does it affect?

The KrWG is aimed at producers, owners, traders, brokers, collectors, transporters, etc. of waste, but also at manufacturers and distributors of products and the waste remaining after their use.öl

What needs to be done?

In particular, companies must implement the prevention and waste management measures defined by the KrWG. When distributing their products, companies must also ensure that they remain fit for their purpose and do not become waste. This is referred to as the "duty of care" for distributed products.

What happens in case of non-compliance?

The KrWG specifies 25 offences involving fines that relate to violations of the KrWG or of legal ordinances based on it.

What is it about?

The German Act on the Marketing, Return and Environmentally Sound Disposal of Electrical and Electronic Equipment (abbreviated to: ElektroG), which was revised in the spring of 2021, transposes the European Directive on Waste Electrical and Electronic Equipment (WEEE Directive 2012/19/EU) into national law.

Who does it affect?

The Act primarily obliges manufacturers and distributors of electrical equipment. In future, the ElektroG will also cover electronic marketplaces and fulfilment service providers, as these are the ones that first enable manufacturers without a registered office in Germany or the EU to offer their goods here

What needs to be done?

Before placing electrical or electronic equipment on the market, manufacturers must register with the competent authority, the Stiftung Elektro-Altgeräte Register. Distributors and mail-order companies are, if their sales area or storage and shipping area for electrical and electronic equipment exceeds a certain size, also obliged to take back waste electrical and electronic equipment from private households free of charge. Finally, manufacturers and distributors are obliged to collect and regularly report to the competent authority on various statistical data, figures and quantities, including new equipment placed on the market and waste equipment collected and taken back

What happens in case of non-compliance?

The VerpackG contains numerous criteria for regulatory offences. Depending on the nature of the violation, the relevant federal state authorities may impose fines of up to 200,000 euros, 100,000 euros or 10,000 euros.

What is it about?

The VerpackG is also based on requirements of European law and was last significantly modified in 2021. The purpose of the VerpackG is to reduce the environmental impact of packaging waste.

Who does it affect?

Obligations under the VerpackG apply in particular to packaging manufacturers (i.e. the party who fills the packaging with goods for the first time or places it on the market in Germany when filled for the first time) and final distributors of disposable plastic packaging

What needs to be done?

To begin with, the VerpackG contains requirements that must be observed when developing, manufacturing and distributing packaging. In addition, the VerpackG restricts the marketing of packaging that contains certain substances, such as lead.

Furthermore, the VerpackG obliges manufacturers of so-called system-participating packaging to register with a dual system prior to placing the packaging on the market, which then takes back and disposes of this packaging.

Finally, final distributors of disposable plastic food packaging and disposable beverage cups will have to offer packaged food also in reusable packaging from 01 January 2023 onwards

What happens in case of non-compliance?

The VerpackG contains numerous criteria for regulatory offences. Depending on the nature of the violation, the relevant federal state authorities may impose fines of up to 200,000 euros, 100,000 euros or 10,000 euros.

Since 2014, certain public interest companies have been required to submit a non-financial declaration ("CSR reporting obligation"). The German legislature transformed this Directive into national law in 2017 with the CSR Directive Implementation Act. Since the 2017 financial year, approximately 11,600 companies based in the EU have therefore been required to submit this declaration, an estimated 550 companies of which are in Germany.

In June 2022, the EU institutions agreed on a new directive on corporate sustainability reporting. The new Corporate Sustainability Reporting Directive, abbreviated to: CSRD, will significantly expand the existing CSR reporting obligation

What is it about?

The existing reporting requirements for non-financial reporting are being fundamentally expanded and upgraded by the CSRD. In addition to the extended content of reporting requirements to include ESG issues, in future the non-financial reporting will become part of the management report as sustainability reporting and is subject to a limited content audit by the auditor

Who does it affect?

The CSRD significantly expands the group of companies that is required to render a sustainability report. Whereas only a few large listed companies were previously required to submit non-financial reports, many more companies will be obliged to do so in the future:

• all large corporations and commercial partnerships equivalent thereto via Sec. 264a of the German Commercial Code (Handelsgesetzbuch, HGB), irrespective of their capital market orientation;
• all other capital market-oriented companies, with the exception of micro-companies;
• subsidiaries of companies from third countries, if the subsidiaries are large companies or listed on a European stock exchange and the parent company generates net sales of more than 150 million euros in the Union, as well as
• branches of companies from third countries if they generate net sales in the Union of more than EUR 40 million and the parent company generates net sales in the Union of more than EUR 150 million.

What needs to be done?

In the future, companies within the scope of the CSRD will have to disclose an extensive range of sustainability-related information. The scope of the reporting obligations is thus being significantly expanded again compared to those existing at present. The information to be reported includes, among other things, a brief description of the company's business model and strategy, as well as sustainability risks and opportunities. In addition, companies must define clear ESG targets.

The reporting requirements are being concretised by uniform and binding EU-standards for sustainability reporting, the preparation of which has been transferred to the European Financial Reporting Advisory Group (EFRAG). The EFRAG’s final drafts for the European Sustainability Reporting Standards (ESRS) were submitted to the Commission on 24 November 2022, and are expected to be adopted by the Commission by June 2023 (general principles) and June 2024 (supplementary information)

What happens in case of non-compliance?

The measures in case of violations of the sustainability reporting obligations are directed against the responsible members of the body authorised to represent the company or of the supervisory board. Violations of the reporting requirements are subject to severe fines. Misrepresentations may also constitute a criminal offence by the management bodies, punishable by imprisonment of up to three years or a fine. In addition, the name of the person responsible for the violation may be published.

What is it about?

The Taxonomy Regulation provides for a uniform classification system, enabling transparent and comparable information on sustainable economic activities in investment assets, portfolios and business areas. The goal is to define the scope of "environmentally sustainable business" for most industries and to redirect private financial flows to more sustainable activities. In connection with the EU taxonomy, companies and the financial sector also bear comprehensive reporting obligations.

Who does it affect?

The reporting requirements provided for in the Taxonomy Regulation are aimed at institutional investors, financial institutions, asset managers and large companies listed on the stock exchange. Today, companies that have to submit a non-financial statement according to the EU CSR Directive are already affected by the EU Taxonomy Regulation. With the entry into force of the CSDR, the group of companies covered by the EU taxonomy reporting requirements is also being expanded.

What needs to be done?

In the future, companies subject to the CSR reporting obligation will have to disclose information on the conformity of their business activities with the EU taxonomy. To this end, the regulation requires the reporting of the proportion of "green" revenue, capital expenditures (CapEx), and operating expenditures (OpEx) as defined by the taxonomy for each individual taxonomy-eligible economic activity and for each environmental objective.

The EU Commission has been authorised to specify the content and presentation of the information to be disclosed by means of delegated acts. For the environmental goals "climate protection" and "adaptation to climate change", the EU Commission has already adopted a first delegated act which has had to be applied since 01 January 2022. For the remaining four environmental objectives ("the sustainable use and protection of water and marine resources", "the transition to a circular economy", "pollution prevention and reduction", "the protection and restoration of biodiversity and ecosystems"), the delegated act is expected in 2023.

What happens in case of non-compliance?

For violations of the transparency obligations of the Taxonomy Regulation, the member states must stipulate national provisions for supervisory and civil law consequences for responsible companies.

What is it about?

The EU Disclosure Regulation is intended to reduce the information asymmetry between financial market participants and investors in terms of sustainability aspects. To this end, it stipulated transparency obligations for financial products, the scope of which depends on the product design of the financial product in question. However, no product classification for financial products is created through the Disclosure Regulation.

Who does it affect?

The Regulation covers financial market participants and financial advisors. The only exceptions are small insurance brokers and investment advisors who employ fewer than three people.

What needs to be done?

Financial market participants and financial advisors are subject to obligations under the Disclosure Regulation to disclose pre-contractual and ongoing information about their financial products with regard to sustainability aspects. They are divided into company-related and product-related disclosure requirements.

At the corporate level, all financial market participants and financial advisors covered by the Regulation must report on their strategies for managing sustainability risks in their investment decision processes or their investment advisory or insurance advisory activities.

Financial market participants must also disclose product-related information, the scope of which is determined by the product design. There are three categories of financial products:

• For all financial products, investors must be provided with information on the type and manner in which sustainability risks are considered in their investment decisions.
• For financial products that also advertise environmental or social features, the disclosure of how such features are achieved is required.
• If the financial product is intended to target sustainable investments, detailed information must be provided on how the intended sustainability goal is to be achieved. The information must already be disclosed pre-contract and kept up-to-date when advertising the products on websites or in regular reports.

What happens in case of non-compliance?

Violations of the transparency obligations under the Disclosure Regulation may, in particular, trigger civil liability consequences for the responsible companies.