EU Commission Proposes Significant Amendments to Supply Chain Law

The European Commission has announced its intention to renegotiate the EU Supply Chain Law, suggesting a substantial reduction in the number of companies subject to transparency obligations. According to the Commission, around 80% of businesses could be exempted from these requirements.

The proposal, released on Wednesday, includes detailed recommendations for amending four existing directives: the Auditing Directive, the Accounting Directive, the Corporate Sustainability Reporting Directive (CSRD), and the Supply Chain Directive (CSDDD). The implementation of the latter was initially scheduled to commence in 2027 in three phases, depending on company size. However, the Commission is now seeking to postpone the second and third phases by two years.

The Supply Chain Directive, which was approved the previous year, aims to harness the economic power of the European Economic Area (EEA) to promote human rights and environmental protection. It stipulates that companies benefiting from practices like child or forced labor outside the EU must be held accountable through transparency requirements. Larger enterprises are also expected to align their business models with the Paris Agreement on climate change, and the directive's scope extends to foreign companies generating significant revenue within the EEA. Currently, small and micro enterprises, defined as having a minimal number of employees and meeting specific financial thresholds, are excluded from these obligations.

The Commission proposes raising these thresholds significantly, allowing companies with up to 1,000 employees and either EUR25 million in total assets or EUR50 million in annual revenue to be exempt. This change would mean that approximately 80% of the currently included subjects would be freed from the law's requirements, leaving around 6,000 EU firms and 900 foreign entities still covered. Additionally, the Commission opposes specific reporting requirements for certain sectors that are prone to human rights violations or environmental damage.

For the remaining large companies still subject to the directive, the Commission aims to simplify compliance. They will no longer be required to gather information from small and medium-sized enterprises (SMEs) not covered by the transparency requirements to illustrate their supply chains. In other words, large companies will only need to ensure that their suppliers, who are also large organizations, are adhering to the human rights and environmental standards set forth in the directive.

Another proposed simplification relates to reporting formats. Some topics may be excluded from reporting requirements altogether, and companies could be required to provide only numerical data rather than detailed explanations. The Commission is also considering eliminating mandatory disclosure standards in favor of non-binding guidelines applicable only to specific topics, thus completely removing an anticipated enhancement of transparency for the future.

Germany has already enacted its own Supply Chain Law, which sets a precedent. However, the EU's version aims to impose stricter obligations, particularly concerning corporate accountability for breaches of due diligence.