The EU's proposal for a Corporate Sustainability Due Diligence Directive

‍Our key takeaway: And we’re off to the races. The European Commission has released its eagerly awaited proposal for a directive on Corporate Sustainability Due Diligence. The European Parliament and the European Council (and all of us reading this I’m sure!) will now start debating the directive before it is approved. Member States will then have two years to transpose the directive into national law. Expect a significant amount of discussion, debate and reflection over the next few months on what it would take for a law to effectively support companies in managing their impacts on people and the planet, in a way that aligns with international standards and expectations. A few key buzzwords you’ll hear again and again: stakeholder engagement, remedy, value chain, established business relationship, SMEs, liability and responsibility, civil and administrative enforcement, director duties – and the list goes on. We have our own views on the proposal, which we’re feeding into ongoing discussions, and will amplify others’ views as well where they are aligned with the objective of seeking to improve outcomes for people and enhance environmental protection in company supply chains.  

The European Commission has released its proposal for a directive on Corporate Sustainability Due Diligence. A few key points:

• The transition to a sustainable economy: The objective of the directive is to “better [exploit] the potential of the single market to contribute to the transition to a sustainable economy and contribut[e] to sustainable development through the prevention and mitigation of potential or actual human rights and environmental adverse impacts in companies’ value chains.” The Explanatory Memorandum clarifies that the directive is needed because this objective “cannot be sufficiently achieved by the Member States acting individually or in an uncoordinated manner.” The European Commission points to a need to ensure that company due diligence is effective, that companies in the single market benefit from legal certainty and a level playing field; and that there is no fragmentation of the internal market – which is particularly important given the number of countries that are already passing laws on this topic. The European Commission also points to demand from stakeholders – investors and consumers – as well as companies for such rules.
• Due diligence obligation: The directive would impose a due diligence obligation on certain companies with regard to their human rights and environmental impacts. The Recitals provide that “[c]ompanies should take appropriate steps to set up and carry out due diligence measures, with respect to their own operations, their subsidiaries, as well as their established direct and indirect business relationships throughout their value chains.” The directive would request that “companies conduct human rights and environmental due diligence … by carrying out the following actions: (a) integrating due diligence into their policies …; (b) identifying actual or potential adverse impacts …; (c) preventing and mitigating potential adverse impacts, and bringing actual adverse impacts to an end and minimising their extent …; (d) establishing and maintaining a complaints procedure …; (e) monitoring the effectiveness of their due diligence policy and measures …; (f) publicly communicating on due diligence ….” When it comes to directors’ duty of care, the proposed text provides that “Member States shall ensure that, when fulfilling their duty to act in the best interest of the company, directors of companies … take into account the consequences of their decisions for sustainability matters, including, where applicable, human rights, climate change and environmental consequences, including in the short, medium and long term.” Companies are also asked to “adopt a plan to ensure that the business model and strategy of the company are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C in line with the Paris Agreement.” Member States will designate supervisory authorities to supervise compliance with the due diligence obligations, and the directive provides for investigations, sanctions and civil liability.
• Very large and large companies: The directive applies to very large EU companies (i.e., EU companies with more than 500 employees on average and a worldwide net turnover exceeding €150 million); this comprises about 9,400 companies. The directive also applies to large EU companies (i.e. EU companies with more than 250 employees on average and more than €40 million worldwide net turnover) – provided that they operate in one or more high-impact sectors (textile, agriculture, mineral resources); this comprises about 3,400 companies. Non-EU companies are also covered (with very large companies needing to generate a net turnover of at least €150 million in the EU—about 2,600 companies; and large companies needing to generate a net turnover of over €40 million in the EU and operating in one or more high-impact sectors—about 1,400 companies). Large companies have longer to comply than very large companies (two years from the end of the transposition period). The European Commission justifies its regulation of non-EU companies by noting that “[t]urnover is a proxy for the effects that the activities of those companies could have on the internal market.” The European Commission also observes that “[a]lthough SMEs are not included in the scope of this Directive, they could be impacted by its provisions as contractors or subcontractors to the companies which are in the scope.”