Our key takeaway: Lara Wolters, the Rapporteur on the EU Parliament’s Committee of Legal Affairs, has released proposed amendments to the EU Corporate Sustainability Due Diligence Directive. Now we’re talking UNGPs soft law and hard law inter-connections! The proposed directive makes clear that the responsibility to respect applies to all companies, regardless of their size, sector, operational context, ownership and structure - and thus the proposed directive would capture a much larger number of companies than the European Commission’s draft. In short, the proposed text reduces the employee and turnover thresholds for companies and increases the number of high-risk sectors for SMEs. The text now specifically includes the beauty of the UNGPs’ three differentiated modes of involvement (cause, contribute, direct linkage), which in turn trigger a distinct set of actions. In particular, the text calls out the importance of building leverage with responsible parties to tackle the human rights/environmental impact. The concept of the remedy eco-system is reflected in the text by referencing the expectation in direct linkage situations that companies consider using leverage with responsible parties to enable the remediation of the damage. The Article 15 climate transition plan is more robust - and explicitly includes both its adoption as well as its implementation. Meaningful stakeholder engagement is a cornerstone of a number of the actions expected of companies, and last but not least, the established business relationships concept is gone: due diligence expectations cover the value chain, with prioritisation of impacts based on salience (their severity and likelihood). In short, the UNGPs look good on the legal page! Our view obviously is that the closer the alignment with the human rights standard companies are already using to shape their due diligence, the better - both for companies, as well as for the people and planet that the directive is intended for.
On 8 November, Lara Wolters - Rapporteur on the EU Parliament’s Committee of Legal Affairs - has released proposed amendments to the EU Corporate Sustainability Due Diligence Directive. These amendments feed into ongoing discussions at the European Parliament level, which in turn will feed into the discussions amongst the European Parliament, Council and Commission:
- A broader scope: The proposed text would include a larger number of companies within its remit. The text proposes extending the scope of the Directive to cover companies with 250 or more employees (rather than 500 in the European Commission’s proposal) and an annual worldwide turnover of more than EUR 40 million (rather than 150 million). When it comes to the SMEs covered, the text proposes reducing the employee threshold, the turnover threshold as well as the percentage of this turnover that needs to be generated in a high-risk sector. The list of high-risk sectors has been expanded to include, for instance, energy, construction, financial services and information technologies. Publicly listed companies are also included in the scope (with certain employee/ turnover conditions). When it comes to the scope of the due diligence obligation, the text removes the concept of ‘established business relationships’ which had previously narrowed the scope of due diligence. The due diligence now would apply to companies’ “own operations, products and services and those of their subsidiaries, and the value chain operations carried out by entities with whom the company has a business relationship.” Value chain explicitly includes upstream and downstream. Value chain is defined as “all upstream and downstream activities, operations, including marketing and advertising related to, and entities involved in, the production and supply of goods or the provision of services by a company, including the development of the product or the service and the use and disposal of the product.” Within the impacts identified in the value chain, companies can prioritise “on the basis of the severity and likelihood of impacts and in a manner informed by meaningful engagement with affected stakeholders.” The text adds a definition for ‘meaningful engagement’ which is defined as “an ongoing process of interaction and dialogue between a company and affected stakeholders that enables the company to listen to, understand and respond to their interests and concerns in good faith, including through collaborative.” Companies would be expected to “consult affected stakeholders by carrying out good faith, effective, meaningful and informed engagement with them throughout the due diligence process.”
- Cause, contribute, direct linkage framework: The cause, contribute, direct linkage framework of the UNGPs is now contained in the text. When it comes to actions to take, “where a company has caused or may have caused an impact, appropriate measures should be understood as measures which aim to prevent or mitigate an impact, and remediate any damage caused by an impact.” In these cause and contribute scenarios, “appropriate measures should be understood as measures which aim to prevent or mitigate the contribution to the impact, using or increasing the company’s leverage with other responsible parties to prevent or mitigate the impact, and contributing to remediating any damage caused by an impact, to the extent of the contribution.” When it comes to direct linkage: “appropriate measures should be understood as measures which aim at using or increasing the company’s leverage with responsible parties to seek to prevent or mitigate the impact, and considering using its leverage with responsible parties to enable the remediation of any damage caused by an impact.” The text also carries the differentiated responsibilities through to remedy: “Member States shall ensure that where a company has, or may have, caused or contributed to an adverse impact, that company shall take appropriate measures to remedy that adverse impact and the possible harm it has caused to people. … Where a company is directly linked to an adverse impact, Member States shall encourage its voluntary participation in any remedial measures, where appropriate, and encourage companies to consider using their leverage with responsible parties to enable the remediation of any damage caused by an impact.”
- The Article 15 climate transition plan and adverse environmental impacts: The text extends the definition of an adverse environmental impact, to include adverse impacts in a number of environmental categories. These include air and atmosphere; water and access to water; soil; biodiversity and animal welfare; climate and climate change mitigation and adaptation, including greenhouse gas emissions; and the transition to a circular economy. The article 15 climate transition plan has been expanded to explicitly reference effective implementation of the plan (in addition to its adoption). The contents of the transition plan has also been expanded. Companies would be expected to “adopt and effectively implement a plan to ensure that the business model and strategy of the company are aligned with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C in line with the Paris Agreement, the objective of achieving climate neutrality by 2050 and the 2030 climate target … and pursuant to the latest recommendations of the IPCC and the European Scientific Advisory Board on Climate Change. That plan shall be developed in consultation with stakeholders, and the plan and its implementation shall be approved by the company’s shareholders, where applicable.” The text goes on to list what should be included in this transition plan - including scope 3 emissions, reference to no or limited overshoot when it comes to alignment with 1.5 °C, and consideration of the risks and impacts of climate action. When setting variable remuneration for directors, the directive would expect that “a significant portion of that remuneration … be linked to the achievement of sustainability targets, in particular greenhouse gas emission reduction targets.”