Germany Scraps National Supply Chain Law in Favor of EU Directive

Germany's new coalition government has signed up to repeal its Supply Chain Act (LkSG), a U-turn on sustainability due diligence. The conservative CDU and CSU parties, and the centre-left SPD, which form the coalition, said that the LkSG will be repealed effective immediately. The abolition is included in the coalition agreement and is coupled with a suggestion to replace the law with the European Union's upcoming Corporate Sustainability Due Diligence Directive (CSDDD).

The LkSG, introduced in 2021 and effective from 2023, required large Germany-based companies to conduct annual human rights and environmental risk analyses in their operations and supply chains. It first targeted companies with more than 3,000 employees before it widened in 2024 to companies with more than 1,000 employees. The law called for action not only from immediate suppliers but also indirect suppliers where human rights violations were reportedly occurring. Non-compliance would attract fines of up to 2% of yearly revenue for companies.

But the new coalition has decided to abolish these requirements. Having a policy program to reduce administrative hassles, the coalition abolished the reporting obligation under the LkSG as of today. There will be no further sanctions issued under the LkSG, except for grave human rights abuses, until the CSDDD comes into force.

The EU's CSDDD, approved in May 2024, is currently to come into full effect as from July 2028, with recent changes brought in by the European Commission's Omnibus proposals delaying the same by a term of one year and significantly limiting the burden created by regulatory requirements on business concerns. Among the most important changes is a shift in due diligence responsibility, limiting full obligations to direct business partners unless companies are able to have knowledge of risks further down the supply chain. Monitoring requirements have also been relaxed, with reviews now being required every five years instead of annually. The proposals also cap the amount of information about compliance that can be asked of small firms in the supply chain.

The CSDDD will give a platform to companies to discover, assess, mitigate, and rectify risks affecting both the environment and people. They consist of issues like forced labor, child labor, deforestation, pollution, and ecosystem destruction along the whole value chain. It will also be used on downstream activities in specific areas like distribution and product recycling.

While national legislation put more immediate and specific requirements, moving to the EU-level structure aligns with attempts on a broader level to harmonize sustainability standards among member states. The Omnibus proposals are seen as an attempt to streamline regulation, especially for small and medium-sized enterprises, through setting more flexible and miniaturized requirements.

The coalition's support of these EU-level reforms is part of an overall strategy to simplify sustainability reporting requirements and avoid duplicative or redundant regulatory regimes. Businesses now enjoy a longer time horizon and less burdensome compliance obligations, giving them more time to adjust to the new regulatory environment.

This policy shift is a watershed moment in Germany's corporate sustainability strategy. By stepping back from the EU's belated and less strict directive, the country is departing from a national law that had been seen as a leader in regulation of corporate responsibility. As the EU directive goes on, companies will need to prepare for the next phase of sustainability governance with a new set of expectations and deadlines.

Source/Credits: Mark Segal, ESG Today, April 10, 2025
Original Report Title: Germany's New Coalition Government Scraps Sustainability Due Diligence Law