Expansion of the scope of the LkSG and approval of new EU Due Diligence Directive mark the first half of 2024

The new reality of international trade is being shaped by unilateral regulations from some markets with extraterritorial effects that require greater transparency regarding compliance with social and environmental governance criteria throughout the supply chain, through the mandatory adoption of due diligence procedures by companies with respect to environmental and social risks.

Among these regulations is the European Union Deforestation Regulation (EUDR), which requires that by December 30, 2024, coffee exported to the EU must provide information on the geo-location of its origin, as well as proof that the coffee was not produced in a deforested area after December 31, 2020, and that production processes comply with national legislation, including human and labor rights.

However, in addition to the EUDR, other regulatory efforts focused on social issues have been underway since the beginning of 2024 in key destination regions for Brazilian coffee.

The first case is the German Supply Chain Due Diligence Act (LkSG). For companies based in Germany with at least 3,000 employees, the law took effect on January 1, 2023. As of January 1, 2024, the scope of the LkSG has been extended to business entities (corporations, joint stock companies, partnerships, foundations, and associations) with more than 1,000 employees that have a principal place of business, administrative headquarters, statutory seat, or branch office in Germany.

The LkSG requires companies to exercise due diligence with respect to social risks throughout their supply chains, and sets forth the following obligations: (i) establish a risk management system; (ii) define in-house responsibility for compliance; (iii) perform risk analysis at least once a year and issue a due diligence policy statement; (iv) establish preventive measures in the company’s operational business area; (v) adopt remedial action and a complaints procedure that is accessible to the external public; (vi) document and publicly report on compliance with their due diligence obligations annually.

The human rights risks that companies must manage throughout their supply chains, including direct and indirect suppliers located in countries where raw materials are produced, are Prohibition of child labor, slavery and forced labor; Failure to comply with occupational health and safety obligations; Denial of the right to form trade unions or employee representative bodies; Unequal treatment in employment; Denial of decent wages (at least the minimum wage established by applicable law); Causing harmful changes to the soil; Pollution of water, air or noise, or excessive water consumption; Illegal dumping and grabbing of land, forests and water; Torture; Injuries and violations of freedom of association by security forces hired to protect company projects.

Environmental risks include the manufacture of mercury products and the use of mercury and its compounds, the manufacture and use of persistent organic pollutants (POPs), and the export of hazardous waste.

Companies are subject to administrative sanctions for violations of the LkSG, including debarment from participation in public contracts and tenders for up to three years and fines of up to 2% of the average annual worldwide turnover for large companies with a turnover of more than EUR 400 million.

Also with a focus on protecting human rights and the environment, the European Union adopted the Corporate Sustainability Due Diligence (CS3D) Directive in April. Under the new directive, companies based in the EU with more than 1,000 employees and a turnover of more than EUR 450 million, as well as companies from third countries with significant operations in the bloc, will be required to implement due diligence policies to identify and address the adverse impacts on human rights and the environment that they may cause: (i) through their own operations; (ii) through their subsidiaries; or (iii) through business associations in their chain of operations.

CS3D also requires companies to implement a transition plan to mitigate the effects of climate change, including time-bound targets related to the company’s climate goals for 2030 and in five-year increments to 2050, based on conclusive scientific evidence, and, where appropriate, absolute targets for greenhouse gas (GHG) emission reductions for Scope 1, Scope 2 and Scope 3.

Unlike the LkSG, which only imposes administrative sanctions on companies that fail to meet their due diligence obligations, the CS3D provides for civil liability. Companies that intentionally or negligently fail to meet their obligation to prevent potential adverse effects or to remedy actual adverse effects may be held liable if the violation causes harm to an individual or group of individuals. The statute of limitations for victims to file complaints is at least five years.

As CS3D is a Directive, Member States will have two years to transpose its provisions into national law. This will require a new discussion of the LkSG in Germany in order to incorporate the new elements provided for in the Directive. The new rules are expected to be phased in from 2027.

The growing trend towards the consolidation of ESG criteria in laws and regulations affecting foreign trade demonstrates the relevance of the projects and actions developed by the Brazilian coffee export segment to effectively communicate the advanced sustainability of national coffee production to the foreign market.

The export segment’s commitment to environmental, social and governance issues, as embodied in Cecafé’s Code of Ethics and Conduct, stands out. Through the Code of Ethics and Conduct, member exporters extend the precepts of ethics and commitment to legal requirements in force in Brazil to their supply chain, including those related to occupational health and safety and respect for human rights.

By working to continuously improve the social and environmental governance of the coffee chain, with traceability and transparency, the export segment contributes to consolidating Brazil’s position as the world’s leading supplier of sustainable coffee.

 

Marcos Matos
CECAFÉ CEO
Silvia Pizzol
CECAFÉ Sustainability Manager