The long-awaited publication of the European Commission’s February 23rd 2022 was published by the European Commission. Proposal for a Corporate Sustainability Due Diligence Directive (“Directive”). The aim of the Directive is to better exploit the single market to prevent and mitigate adverse human rights and environmental impacts in corporate and financial actors’ value chains.
The Directive would require subject “companies” (broadly defined to include corporate and financial actors) to implement a sustainability due diligence strategy to address adverse human rights and environmental impacts (“adverse impacts”) across their global value chains. Adverse impacts include violations of a broad range of environmental and human rights, among others, rights to life, health, adequate housing, and a healthy environment; labour and indigenous peoples’ rights; and modern slavery and human trafficking norms.
It would also require certain subject “companies” to have a plan to ensure that their business strategies are compatible with limiting global warming to 1.5 °C in line with the Paris Agreement.
Sustainability due diligence strategy requirements
“Companies” subject to the Directive (including US and other international “companies” doing business in the EU) would need to comply with prescriptive requirements to demonstrate that they take a robust approach to managing environmental and human rights risks across their value chains (upstream and downstream activities relating to the production of goods or the provision of services).
The required sustainability due diligence strategy would need to encompass a robust due diligence policy framework and management system to ensure that “companies”:
- Take appropriate steps to identify adverse consequences arising out of their own operations, subsidiary operations, and certain business relations with contractors, subcontractors, and other legal entities within the value chain. Such measures should reflect, among other things, the corporate and financial actors’ sector and bargaining power;
- Prevent, mitigate and minimize adverse impacts through corrective or prevention action plans; contractual frameworks that are cascaded throughout the value chain (compliance which is independently verified); investment management and production processes; targeted assistance to SMEs to help them comply with codes and action plans; collaboration with other businesses within bounds of competition law
- Do not enter into new or extended contracts. If possible, suspend or terminate business relationships.
- A complaints mechanism should be made available to affected stakeholders, trade unions, civil society organisations, and other interested parties. It would be necessary to follow up on information requests and arrange meetings between complainants, company representatives, and the complainant.
- Periodic assessment and monitoring of systems should be done at least once every 12 month.
- include disclosures in annual reports (for EU “companies”) or otherwise on public-facing websites.
“Companies” that meet a €150 million threshold, regardless of where they are based, will need to adopt a plan to ensure that their business model and strategy is compatible with a 1.5°C transition pathway. The plan must include emissions reductions targets in areas where climate change is a primary risk.
Who would the Directive apply?
The Directive applies to “companies,” which is broadly defined to include, but is not limited to: EU-incorporated companies and partnerships; non-EU-incorporated companies and partnerships; banks; investment firms; AIFMs; insurance companies; pension funds; UCITS management companies; AIFs; UCITS; and Central Clearing Parties.
The Directive is applicable worldwide and covers all industries.
| EU | Net worldwide turnover of more than €150 million in the last financial year for which annual financial statements were prepared | 500+ |
| EU (where at minimum 50% of the net worldwide turnover is generated within one or more high impact sectors such as minerals, extractives and agriculture, textiles and clothing, excluding areas where financial actors invest). | Net worldwide turnover of more than €40 million (but not more than €150 million) in the last financial year for which annual financial statements were prepared | 250+ |
| Non-EU | Net turnover of more than €150 million generated in the EU in the financial year preceding the last financial year | None |
| Non-EU (where at most 50% of the net worldwide turnover is generated within one or more high impact sectors) | Net turnover of more than €40 million in the EU (but not more than €150 million) in the financial year preceding the last financial year | None |
How would the Directive be implemented?
The Directive proposes regulation supervision at both the European and national levels. The European Commission would create a European Network of Supervisory Authorities. It will bring together representatives of national regulators to ensure a coordinated approach in supervision and enforcement. The regulators would be empowered to request information and conduct investigations and inspections. They could also impose civil penalties and/or fines based on turnover and adopt interim measures to avoid serious dangers.
Civil liability provisions are also included to make it easier for third-party claimants to pursue litigation against “companies” in European Member States where non-compliance with the requirements results in loss or damage.
Next steps
The Council and the European Parliament will now vote on the proposal. Given the differences between the report adopted in 2021 by the European Parliament and the initial draft proposal, it is difficult to predict how much debate the proposal will receive. After the Directive is adopted, Member States have two years to implement it in their national laws and to communicate the relevant texts to Commission.
Global companies and financial players may want to determine if their organizations are covered by the Directive. They may need to conduct a gap analysis to determine if they fall within the Directive’s scope.