Brussels course correction: EU drastically cuts supply chain law

The EU Council has given in to demands for a "simplification revolution" and, after Parliament, has finally approved the "Omnibus I" package. This affects, for example, the EU Supply Chain Act: what started as a flagship project for greater global responsibility is now being significantly scaled back. The new resolutions are intended to provide tangible relief, especially for small and medium-sized enterprises (SMEs): the EU member states have massively increased the thresholds for reporting and due diligence obligations.

The core components of European sustainability regulation, the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CS3D), are given a new face with the reform finally confirmed on Tuesday. The correction is particularly evident in the Supply Chain Act (CS3D). Here, the rules will in future only apply from a threshold of 5,000 employees and net sales of 1.5 billion euros. According to the EU Parliament's rapporteur, Jörgen Warborn (EVP), this means that around 85 percent of the companies originally covered will fall out of the scope of application. Estimates suggest that only around 1,500 corporations will still be affected.

The logic behind this: According to the Council of Ministers, only the major players have the necessary leverage to exert profound influence on global value chains and bear the enormous costs of monitoring processes. Brussels is thus responding to criticism that small suppliers would be indirectly crushed by the so-called "trickle-down effect" if large corporations meticulously queried every piece of information down to the smallest link in the chain.

With the directive, affected companies are generally obliged to mitigate their negative impacts on human rights and the environment, such as child labor, slavery, labor exploitation, pollution, deforestation, excessive water consumption, or damage to ecosystems. Previously, abuses in supply chains have repeatedly come to light at companies like Apple, Samsung & Co.

Pragmatism instead of a jungle of paragraphs

In the rules for sustainability reporting (CSRD), the EU legislative bodies have also narrowed the scope of application. In the future, only companies with more than 1,000 employees and annual sales of over 450 million euros will have to submit the complex reports. For companies from third countries, stricter turnover thresholds also apply, which increases the bureaucratic filter for the European market.

Furthermore, the transitional regulation is particularly relevant for many businesses: Companies in the first wave, which would actually have been subject to reporting obligations for 2024, are excluded for 2025 and 2026, provided they fall below the new thresholds.

The amendment also stipulates that companies may base their efforts on "reasonably available information." Companies also receive more flexibility in identifying risks. If several problem areas are identified, they may prioritize and focus on direct business partners first. A crucial bureaucratic hurdle has also been completely removed: the obligation to create a dedicated transformation plan for climate protection mitigation within the framework of the CS3D.

The scope of liability and sanctions has also been reduced. The harmonized EU liability regime originally envisaged is off the table. Responsibility for correct implementation remains at the national level, with penalties for violations capped at a maximum of three percent of worldwide net turnover. The EU Commission is to publish guidelines to avoid a patchwork of sanctions.

Time gained for the economy

For the economy, this decision primarily means a gain in time. The deadline for transposing the CS3D into national law has been postponed by another year to July 26, 2028. Companies will not have to apply the new measures bindingly until July 2029. Marilena Raouna, the responsible Cypriot minister, emphasizes that the EU is thus fulfilling its promise to reduce unnecessary and disproportionate burdens to make the Union more autonomous and competitive.

The package follows the recommendations of the reports by Enrico Letta and Mario Draghi, who warned in 2024 about over-regulation of the European economy. The publication of the legal text in the EU Official Journal is expected in the coming days. This marks the end of a tug-of-war, which was recently also fueled by demands from Germany. Chancellor Friedrich Merz (CDU) called for the EU Supply Chain Act to be completely abolished. The federal government already effectively abolished the National Supply Chain Act six months ago.

(vbr)