Supply chain due diligence: the European regulatory landscape

Responsible supply chain management is rapidly becoming a binding regulatory obligation. A company’s supply chain significantly extends its sphere of influence beyond the boundaries of the organization itself, exposing it to external factors that may fall outside the control of internal policies.

In this context, supply chain due diligence plays a central role in enterprise risk management. The risks assessed range from legislative and governance issues to ethical and environmental concerns.

As expectations grow for companies to carry out proper due diligence on their suppliers, this issue is increasingly becoming a legislative matter, particularly in Europe, potentially indicating the direction that U.S. legislation may follow in the future.

The EU Corporate Sustainability Due Diligence Directive

In March 2021, the European Parliament voted to proceed with a proposal for new legislation introducing wide-ranging mandatory due diligence obligations. Subsequently, in February 2022, the European Commission adopted the proposal for a directive on corporate sustainability due diligence.

The proposed directive would apply to the following categories:

• Large EU companies
• Non-EU companies active within the EU
• Other companies operating in high-impact sectors

The proposed directive would require companies falling within its scope to:

• identify, prevent, cease, or mitigate the adverse impacts of their activities on human rights and the environment;
• integrate due diligence into corporate policies, with specific duties for directors;
• ensure access to justice for victims, who may initiate legal actions for damages that could have been avoided through appropriate due diligence measures.

Following approval by the European Parliament and Council, Member States will have two years to transpose the directive into national law.

The Corporate Sustainability Due Diligence Directive (CSDDD) entered into force on July 25, 2024, requiring EU member states to transpose the directive into national law by July 26, 2026.

The German Supply Chain Due Diligence Act (LkSG)

In June 2021, the German parliament passed its own Supply Chain Due Diligence Act. The new law was prompted by a government-commissioned study that found only 13–17% of companies were voluntarily complying with due diligence requirements.

The law entered into force on 1 January 2023 with a phased application:

• 2023: companies with more than 3,000 employees
• 2024: extension to companies with more than 1,000 employees

Companies subject to the law must:

• implement processes to identify and prevent or mitigate environmental and human rights risks in their supply chains;
• publish an annual report outlining the measures taken;
• develop and implement an environmental and human rights risk management plan for the supply chain;
• assign internal organizational responsibilities for compliance and due diligence activities;
• create a policy statement on the company’s human rights strategy;
• establish grievance mechanisms for workers;
• conduct regular and ongoing risk analyses.

Companies found in violation of the law are subject to:

• fines of up to €800,000 or up to 2% of their average annual global turnover
• exclusion from public contract awards in Germany for three years.

Comparison with other jurisdictions

United States

While supply chain due diligence has not yet become a regulatory obligation in the United States to the same extent as in Europe, there have been significant developments. In 2022, the U.S. government began enforcing the Uyghur Forced Labor Prevention Act, which bans the importation into the U.S. of goods mined, produced, or manufactured in the Xinjiang Uyghur Autonomous Region of the People’s Republic of China, due to the high prevalence of forced labor in that region.

This suggests that supply chain due diligence is also gaining momentum in the U.S. as a regulatory, risk management, and sustainable sourcing priority.

The importance of early preparation

As regulators increasingly focus on supply chain due diligence, companies should prepare for potential future legislation, even if not yet formally obligated.

Early preparation allows organizations to:

• develop structured processes before they become legally required
• identify and mitigate risks before they materialize
• gain a competitive advantage through sustainable practices
• avoid sanctions and reputational damage.

Companies should consider the following steps to prepare effectively:

• review internal policies to assess the current supplier selection process;
• outline a supplier risk matrix to evaluate how different types of risk may affect the business;
• create a formal due diligence checklist for screening potential suppliers.

How van Berings supports companies in regulatory alignment

At van Berings, with our solid expertise in corporate law, regulatory compliance, and risk management, we support companies in aligning with the new supply chain due diligence regulations.

Our multidisciplinary approach allows us to offer integrated support that combines legal, compliance, and risk management expertise, helping businesses turn regulatory obligations into opportunities for growth.