On 23 February 2022, the European Commission published its long-awaited proposal for a “Directive on Corporate Sustainability Due Diligence” (the “Directive”). Its aim is to “foster sustainable and responsible corporate behaviour throughout global value chains”[1]. If adopted, the Directive will require certain companies to conduct due diligence on their own operations, as well as those of their subsidiaries and commercial partners. Because of the extensive scope of the obligations proposed, the draft text is seen as a milestone[2] in policymakers’ attempts to regulate businesses’ impact on human rights and the environment.
Specifically, companies will need to:
- Maintain corporate policies on due diligence;
- Conduct due diligence;
- Take steps to prevent adverse impacts on human rights and the environment;
- Establish a complaints procedure; and
- Report on due diligence
The idea is that this due diligence will help to identify and prevent adverse human rights and environmental impacts, with various Member State supervisory authorities being able to investigate and impose sanctions on those businesses which fail to comply.
Background to the proposal
Regulators and companies are becoming increasingly interested in environmental, social and governance (“ESG”) issues, including in the products sphere (see our recent blog posts here and here).
Against this backdrop, the European Commission began consulting on a “sustainable corporate governance initiative” in October 2020[3]. There were also calls from both the EU Member States and the European Parliament for EU legislation on mandatory cross-sector corporate due diligence along global value chains[4].
Separately, various countries across Europe have introduced or are considering their own national legislation on due diligence in the areas of sustainability and human rights. If adopted, the new EU proposal will adopt a harmonised approach, which is likely to be easier for businesses to manage, given the global nature of most large companies’ operations across Europe.
Who would the new rules apply to?
The new rules would apply to both EU and non-EU companies of a certain size, including product manufacturers. In particular, the Directive would apply to the following companies:
- EU companies with more than 500 employees and global revenue of more than EUR 150 million[5];
- EU companies with more than 250 employees and global revenue of more than EUR 40 million, and which generate more than half of their revenue in certain “high-impact” sectors, namely textiles, agriculture and resource extraction;
- Non-EU companies with EU revenue of more than EUR 150 million[6]; and
- Non-EU companies with EU revenue of between EUR 40 and 150 million, and which generate more than half of their revenue in one or more of the high-impact sectors[7].
What are the key requirements being proposed?
The key obligations on companies are as follows:
- Maintaining corporate policies on due diligence (Article 5): Any company in scope must have in place a “due diligence policy” setting out its approach and processes with respect to identifying any harmful human rights or environmental practices (known as “adverse impacts”) in its value chain, as well as a code of conduct it will follow when conducting such due diligence.
- Conducting due diligence and monitoring (Articles 6 and 10): Companies must continuously monitor actual or potential adverse impacts arising from its own operations, those of its subsidiaries or the operations of any companies with whom it has an established business relationship.
- Preventing adverse impacts (Articles 7 and 8): Companies must take steps to prevent or mitigate any potential adverse environmental or human rights impacts and end or minimise the extent of any actual adverse impacts. This could involve seeking contractual assurances from a business partner.
- Establishing complaints procedures (Article 9): Companies must establish and maintain effective procedures by which any third parties can submit complaints to the company regarding adverse supply-chain impacts.
- Reporting on due diligence (Article 11): Companies must publish an annual statement on their website (to the extent they are not already required to do so via their annual reports) on the due diligence matters covered by the proposed directive.
What are the “adverse impacts” companies would need to identify and prevent?
Rather than specifying the adverse impacts by way of new definitions or criteria, the Commission has taken the approach of referring to various instruments of international law.
For example, one adverse human rights impact listed in the Annex is any “violation of the prohibition of arbitrary or unlawful interference with a person’s privacy, family, home or correspondence and attacks on their reputation, in accordance with Article 17 of the Universal Declaration of Human Rights”[8].
In practice, this means companies will need to train the executives in charge of their supply chains to understand and verify compliance with the various human rights and environmental treaties and instruments listed in the Annex to the Directive.
Consequences of non-compliance
Under the proposals, national regulators will be empowered to investigate companies suspected of non-compliance, issue orders requiring a company in breach to take remedial action and impose fines[9]. Member States will also be required to establish civil liability regimes (if they do not already exist) whereby companies could be liable for damages if their failure to comply results in harm to individuals[10].
Provisions affecting company directors
Directors of companies in scope of the Directive would be responsible for putting in place and overseeing the due diligence obligations set out above, in particular with respect to corporate policies on due diligence[11].
Directors of EU companies in scope would also need to take into account the consequences their decisions might have on “sustainability matters”, including with respect to human rights and the environment[12].
Next steps
The proposed Directive has now passed to the European Parliament and European Council for their review. They could adopt the proposal in full or (more likely) suggest amendments before adopting. However, there are reportedly large areas of disagreement among the institutions and indications that a final text might not be agreed during the current Parliament and Commission presidencies, which will both change in 2024. Once adopted, EU Member States would have two years to transpose the Directive into their national law[13].
We will be closely following this development and how it might impact our clients’ businesses. For questions about this article or the topic of ESG in products generally, feel free to contact a member of the Cooley team listed here.
[2] https://www.accountancyeurope.eu/good-governance-sustainability/eu-corporate-sustainability-due-diligence-directive-a-global-milestone-that-will-need-further-clarity/
[5] Article 2(1)(a)
[6] Article 2(2)(a)
[7] Article 2(2)(b)
[8] Annex, Part I, paragraph 5
[9] Articles 18 and 19
[10] Article 22
[11] Article 26
[12] Article 25
