On 23 February, the Commission has published its proposed directive to encourage sustainable and responsible corporate behaviour and to apply human rights and environmental considerations in companies’ activities and corporate governance. Those interested can feedback their views to the Commission until 23 May 2022. UK businesses are likely to be affected by the proposal and so may want to make sure that their views on the proposal are taken into account.
UK companies may be affected in at least three cases. First if they have generated between EUR 40 million and EUR 150 million in the Union in certain specified sectors or have generated more than EUR 150 million in the Union. Secondly, if they have established business relationships with EU businesses that will be caught by the Directive. Thirdly, if their subsidiaries in the Union will be affected by the proposed directive.
“Companies” in the first category (which has an extended meaning including partnerships and limited partnerships) will be supervised in the member state where they have a branch. If they do not have a branch or have branches in different member states the authority where the company has generated most net turnover will be the supervisor. If this changes, the company can ask to change its authority. There is nothing to say how a decision is to be made as to whether to accept a request. It is also not clear which laws will apply to a UK company that operates in different member states. Will it be only the laws of the member state where the supervisory authority is located? This would seem the sensible approach but this is not clear. Otherwise a company operating in more than one member state could be subject to different, and possibly conflicting, requirements from the various member states where it operates.
Companies subject to the proposed directive will have to identify adverse human rights and environmental impacts arising from established business relationships. They must ask business partners to comply with their code of conduct and prevention action plan. UK companies that do business with affected EU companies may therefore receive many requests to comply with codes of conduct and prevention action plans, all of which may differ. Although the Commission wants to reduce the burden for SMEs, there is nothing to allow a business to follow an international standard or accepted industry standard and for that to be sufficient, rather than having to meet many different requests. This does not seem sensible.
Thirdly, UK companies with EU subsidiaries affected by the directive (whether directly or because they have established business relationships with affected companies), will need to consider the proposed directive. Although the directive does not impose obligations on such parent companies which do not have established business relationships with EU companies, in practice it may not be attractive to have different approaches running in the same group.
Commentators have already raised various detailed points about how the proposals will work in practice. Companies need to make sure the Commission understands the potential difficulties of translating what the directive proposes into workable practices.
Vanessa Knapp OBE is a retired partner of Freshfields Bruckhaus Deringer LLP and a Visiting Professor at Queen Mary University of London