Corporate Due Diligence in International Distribution Relationships

3 July 2023 - Michael Fries

On 1 January 2023, the German Act on Corporate Due Diligence Obligations in Supply Chains came into force. This law only applies to companies whose registered office or principal place of business is located in Germany and is therefore not relevant from the perspective of Spanish companies. However, a European directive is already underway that will also bind Spanish companies in their international distribution relationships with German and other foreign contractual partners.

Michael Fries Abogado & Rechtsanwalt +34 91 319 96 86

On 1 June 2023, the European Parliament approved the amendments to the European Commission’s proposal for the Corporate Sustainability Due Diligence Directive.

This directive aims to promote sustainable and responsible behaviour of companies operating in the European single market, in line with limiting global warming to 1.5 °C as defined in the Paris Agreement.

Furthermore, the directive seeks to establish a framework for companies operating in the single market to promote respect for human rights and the environment. In this way, tackling unethical corporate behaviour, such as the exploitation of workers or child labour, and encouraging companies to be as climate neutral as possible have come into focus.

The directive foresees obligations for companies to adopt measures to identify adverse effects on the environment in order to prevent, reduce, end or remedy them. In certain cases, this could oblige companies to terminate a business relationship.

According to the proposed directive, monitoring and ensuring sustainable operations in the terms of the directive will be the responsibility of the company management.

To ensure transparency, the supervisory authority will publish a list of the companies to whom the directive will apply and link their respective due diligence statements.

The directive’s criteria for the scope are based, in general, on the number of employees and the net turnover of companies, which can be calculated using different methods. As such, the directive applies to EU companies with more than 500 employees and a worldwide net turnover of more than EUR 150 million, as well as EU companies with more than 250 employees and a worldwide net turnover of more than EUR 40 million, if they are operating in so called high impact sectors. Non-EU companies fall within the scope of the directive if they reach the employee thresholds defined for EU companies and fulfil the net turnover thresholds for the portion generated in the EU.

In the event of non-compliance with the measures, the directive lays out detailed criteria for sanctions based on the investments made, the severity of the adverse effect, its duration and the company’s effort made to remedy it. Pecuniary sanctions of at least 5% of worldwide net turnover can be imposed.