Overview of the LkSG and CS3D
Both the LkSG and CS3D's objectives are to enhance both sustainability and human rights throughout the value creation chain. Both outline the due diligence requirements that businesses must adhere to.The LkSG came into force on January 1, 2023 and requires companies that meet a certain employee threshold in Germany to establish a risk management system to prevent or minimize environmental and human rights risks.
CS3D aims to foster responsible and sustainable corporate behaviour by considering the activities of companies, their subsidiaries and global value chain.
It focuses on actual and potential adverse impacts on human rights and the environment of a company's own operations, their subsidiaries operations or through the chain of activities of their business partners.
Differences between the LkSG and CS3D
Sustainability is at the heart of both pieces of legislation. However, the LkSG focuses primarily on the aspect of human rights, while the current draft of CS3D places additional focus on environmental sustainability and combatting climate change.
Additionally, the LkSG only affects German businesses and companies that have their head office, principal place of business, or a branch office in Germany. The CS3D, on the other hand, applies to the entire European Union and in some cases beyond.
The CS3D, as it currently stands, contains stricter requirements compared to the LkSG across several areas.
These include, but are not limited to:
The draft CS3D has expanded the scope of companies that will be affected
The LkSG applies to all companies with more than 3,000 employees (or 1,000 employees starting in January 2024) irrespective of their turnover.
For the draft CS3D, applicability criteria mainly relate to average employee size and turnover (not just employee numbers) over two consecutive years.
The CS3D applies to companies established in the EU with over 500 employees and a net worldwide turnover over €150 million. It also applies to those companies established within the EU with over 250 employees, and a net worldwide turnover of between over €40 million and €150 million whereby at least €20 million is generated in certain economic sectors listed in an Annex to the Directive. And there is current proposals under consideration this week to double or triple these thresholds
It also has extra-territorial applicability, catching companies established outside the EU with over €150 million of turnover in the EU. CS3D applies to those with a net turnover in the EU of over €40 million to €150 million, if €20 million falls within one of the classified economic sectors stated above.
The draft CS3D has extended the due diligence obligations to the entire value chain ('chain of activities')
The LkSG is initially aimed at the "direct supplier". Indirect suppliers are only included if there is "substantiated knowledge" that the indirect supplier is violating the obligations of the LkSG.
The draft CS3D goes beyond the reach of the German LkSG on the value chain and uses the term 'chain of activities' in the latest version.
On the one hand, the activity chain includes activities of a company's upstream business partners in connection with the manufacture of goods or the provision of services by the company, including the planning, extraction, procurement, manufacture, transportation, storage and delivery of raw materials, products or parts of products as well as the development of the product or service. Indirect suppliers are therefore also covered by the regulation.
In addition the activity chain includes the activities of a company's downstream business partners in connection with the distribution, transportation, storage and disposal of the product, if the business partners carry out these activities directly or indirectly for the company or on behalf of the company. This is also intended to cover the product marketing chain accordingly.
In summary, CS3D's due diligence obligations relate to the company's own business activities, subsidiaries, direct suppliers, indirect suppliers, the use an disposal of the product which is beyond the scope of the LkSG.
The draft CS3D introduces a new civil liability offense for the violation of due diligence obligations
While the German LkSG has not introduced any new civil liability for breaches of due diligence obligations (the general rules apply), the draft CS3D expressly provides for civil liability for breaches of due diligence obligations to prevent potential or end actual adverse effects. Liability is not limited to the company's own breaches, but is also conceivable in the case of breaches by subsidiaries and suppliers.
The prerequisite for liability is that non-compliance with the specified due diligence obligations has resulted in adverse environmental and human rights impacts that should have been identified, avoided, mitigated, stopped or reduced in their extent if the due diligence obligations had been observed, and that damage has been caused as a result.
The draft CS3D extends the list of protected goods.
The areas of human rights and environment to be respected and protected are set out in detail in the annexes to the draft CS3D. These areas go beyond the provisions of the LkSG in some places. This means the range of potential adverse impacts to be managed through corporate compliance and risk management systems will be broader under the CS3D compared to the LkSG.
In summary
The draft CS3D will incur stricter regulations compared to the LkSG if and when it is approved. The Directive will impact EU and non EU companies, based on employee and turnover thresholds, as discussed above.
The longer list of human rights and environmental matters in the CS3D will require a greater breadth and depth of corporate compliance and risk management frameworks. At the same time, the CS3D will require deeper engagement with and understanding of the full value chain, as it includes broader requirements to identify and address risks posed by indirect business relationships.
To learn more about the EU Corporate Sustainability Due Diligence Directive, German LkSG and more sustainability regulation, contact our experts below.
