Europe: European Commission adopts a proposal of Directive on Corporate Sustainability Due Diligence

In brief

On 23 February 2022, the European Commission gave the green light to the proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937 (“Proposal“).

The Proposal aims to promote sustainable business behavior with regard to supply chains, in particular activities affecting human rights and the environment. To this end, the Proposal introduces a legal obligation to conduct due diligence in the field of human rights and the environment.

Companies must assess the potential and actual harmful effects of their own activities, their subsidiaries’ activities and the activities of their established commercial partners throughout the value chain. Established commercial relationships are those supposed to be enduring, and not ancillary to the relevant value chain.

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The new due diligence rules will apply to two groups of companies: 

• EU companies: 

1. All EU companies with personnel exceeding on average 500 employees and with a worldwide net turnover exceeding EUR 150 million in the last financial year for which financial statements were drawn up
    
2. Other companies that do not meet the two thresholds of group a), but have on average 250 employees and a worldwide net turnover of EUR 40 million in the last financial year, provided that they generate at least 50% of the turnover in designated high-impact sectors.

For companies in this group b), due diligence obligations will apply two years after the end of the two-year national implementation period set forth in the Proposal. 

• Third country companies with activities in the EU. Turnover generated in the EU must meet the criteria for groups a) or b) above, including in the latter case the condition of 50% of the turnover originating in designated high-impact sectors.

The due diligence obligation is defined as an obligation of means, to adopt adequate measures in order to prevent or remove/minimize harmful effects. In order to comply with the due diligence duty of companies, Member States must ensure that companies fulfill the following obligations: 

• Integrate due diligence into all corporate policies and establish and annually update a due diligence policy.

The due diligence policy must include a code of conduct laying down the rules and principles that employees and subsidiaries must abide by. 

• Determine actual or potential harmful effects on human rights and the environment across its operations, subsidiaries and business relationships. 
  1. Notwithstanding the above, companies with turnover between EUR 40 million and EUR 150 million will only detect harmful effects relevant to the designated high-impact sectors. 
  2. To detect harmful effects, companies may rely on independent reports, information obtained from claims and consultations with stakeholders. 
• Prevent and minimize potential adverse impacts through actions that may include the development and implementation of a prevention action plan. Where applicable, Member States will require companies to do the following: 
  1. Obtain from direct commercial partners some contractual assurances endorsing compliance with the company’s code of conduct and, if applicable, with the preventive action plan. In turn, direct commercial partners must obtain contractual assurances from their partners insofar as the latter are within the company’s value chain. Those contractual assurances must be enforced with adequate measures; in this regard, companies might rely on sector-related adequate initiatives or an independent assessment by third parties. 
  2. When the preventive measures are not sufficient to prevent or mitigate potential harmful effects, to refrain from having new relationships or from expanding existing ones with the partner in relation to whom or to whose value chain the effects arose. Relations will be suspended if there is a reasonable prospect that preventive measures will be effective, or terminated if the potential harmful effects are serious. Member States will facilitate termination of commercial relationships for this reason. 
• Remove or at least minimize any actual adverse impacts through a variety of actions including paying damages to affected persons, developing and implementing a corrective action plan with improvement measures and obtaining contractual assurances. Where applicable, Member States will require companies to do the following: 
  1. Obtain from direct commercial partners some contractual assurances endorsing compliance with the company’s code of conduct and, if applicable, with the corrective action plan. In turn, direct commercial partners must obtain contractual assurances from their partners insofar as the latter are within the company’s value chain. Those contractual assurances will be enforced with adequate measures. 
  2. When the corrective measures are not sufficient to remove or minimize actual harmful effects, to refrain from having new relationships or from expanding existing ones with the partner in relation to whom or to whose value chain the effects arose. Relations will be suspended if there is a reasonable prospect that corrective measures will be effective, or terminated if the actual harmful effects are serious. Member States will facilitate termination of commercial relationships for this reason. 
• Establish complaints mechanisms for affected people, trade unions, workers’ representatives and civil society organizations when they have legitimate concerns about actual or potential impacts on human rights or the environment. Member States should ensure that companies follow up on complaints raised. 
• Monitor their operations and the effectiveness of their preventive/corrective measures, those of their subsidiaries and their established commercial relationships, and publish an annual statement in line with the Corporate Sustainability Reporting Directive by 30 April each year. 

The Proposal foresees that in order to attain compliance with the due diligence obligations, companies will have the possibility to pool resources and information within corporate groups and with other companies. 

Other collateral obligations for companies and their management are the following: 

• Companies with over 500 employees and with over EUR 150 million worldwide net turnover must have a climate change plan in place to ensure that their business strategy is compatible with limiting global warming to 1.5°C pursuant to the Paris Agreement. If climate change is a main risk for the company’s activities or a main effect thereof, the company must include emission reduction targets.

Directors’ variable remuneration will in some cases be made contingent upon compliance with the above. 

• Directors must establish and monitor the implementation of due diligence including the due diligence policy, and integrate prevention of real and potential harmful effects on human rights or the environment into business strategy. Furthermore, in fulfilling their duty to act in the interest of the company, directors will have to take into account the human rights and environmental consequences of their decisions. 

Member States will designate an authority to monitor these new rules and impose sanctions, as well as to request information and conduct investigations into possible corporate noncompliance. Moreover, Member States will provide for penalties for noncompliance in the form of corrective measures to be taken by the noncompliant undertaking or financial penalties based on turnover. In the event of damage resulting from a company’s failure to carry out adequate due diligence, the company will incur civil liability. 

As a final note, Member States will have two years as of the entry into force of the directive to transpose it into national law.