On 23 February, the Commission published its proposal for a directive on Corporate Sustainability Due Diligence (see also here). The aim of the proposed law is to encourage sustainable and responsible corporate behaviour and to apply human rights and environmental considerations in companies’ activities and corporate governance.
Objective and scope
The proposed directive will set out rules on companies’ obligations regarding actual and potential adverse effects on human rights and environment with respect to these companies’ activities. These include not only the operations of the company, but also those of their subsidiaries and value chain operations carried out by entities with which the company has an established business. The proposal is designed to complement the existing body of human rights and environmental protection legislation in the EU and its member states.
The directive will cover the companies which are formed according to the member state legislation and that meet one of the conditions listed below:
- the company had more than 500 employees on average and had a net worldwide turnover of more than EUR 150 million in the last financial year for which annual financial statements have been prepared; or
- the company had more than 250 employees on average and had a net worldwide turnover of more than EUR 40 million in the last financial year for which annual financial statements have been prepared, provided that at least 50% of this net turnover was generated in one or more of the following sectors:
- clothing, textiles and footwear;
- agriculture, forestry and fisheries (including food production and trade in agricultural products, food and beverages); and
- extraction of mineral resources, manufacture of metal products and other non-metallic mineral products and fabricated metal products (except machinery and equipment).
The directive will also apply to foreign companies which meet one of the conditions:
- generated a net turnover of more than EUR 150 million in the Union in the financial year preceding the last financial year;
- generated a net turnover of more than EUR 40 million but not more than EUR 150 million in the Union in the financial year preceding the last financial year, provided that at least 50% of its net worldwide turnover was generated in the sectors mentioned above.
The proposal obliges member states to ensure that companies carry out environmental and human rights due diligence by:
- integrating due diligence into their policies;
- identifying actual or potential adverse impacts;
- preventing and mitigating potential adverse impacts, and bringing actual adverse impacts to an end and minimising their extent;
- establishing and maintaining a complaints procedure;
- monitoring the effectiveness of their due diligence policy and measures;
- publicly communicating on due diligence.
To prevent adverse impacts or, if that is not possible, to mitigate them, companies should take various actions which cover developing and implementing a prevention action plan, seeking contractual assurances (to ensure compliance) from business partners, making necessary investments, or collaboration with other entities (in accordance with competition law) to bring an adverse impact to an end. In case these measures are not sufficient, the company may want to conclude a contract with a partner with whom it has an indirect relationship in order to achieve compliance with the code of conduct or a prevention action plan.
If it is not possible to bring adverse impacts to an end, the proposal includes a series of measures that companies should take, such as neutralising the impact or minimising its extent, developing and implementing a corrective action plan, seeking contractual assurances from business partners or working together with other entities.
If these measures fail, companies must refrain from extending or entering into new relationships with partners or in value chains where the impact occurred and must also temporarily suspend commercial relationships with the partner in question or terminate the business relationship with respect to the activities concerned (if the impact is severe).
The proposal obliges the member states to make sure that certain persons and organisations can submit complaints to companies ‘where they have legitimate concerns regarding actual or potential adverse human rights impacts and adverse environmental impacts.’ These include:
- persons who are affected or have reasonable grounds to believe that they might be affected by an adverse impact;
- trade unions and other workers’ representatives representing individuals working in the value chain concerned;
- civil society organisations active in the areas related to the value chain concerned.
The companies must also set up a procedure for dealing with complaints. The complainants will also be entitled to request an appropriate follow-up of their complaint and to meet with the company’s representatives to discuss the adverse impact which is the subject of the complaint.
Monitoring and assessment
Companies will be obliged to carry out a periodic assessment of their own operations or measures, those of their subsidiaries, related to the value chains of the company and those of their established business relationships.
Guidance and support
The Commission will have to draft model contractual clauses to assist companies in their compliance efforts. In addition, the Commission, in cooperation with member states, stakeholders and various EU bodies, may issue guidelines to assist the companies and member states in their due diligence efforts.
Obligation to combat climate change
Importantly, Article 15 obliges companies 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.’ The plan must identify the extent to which climate change is a risk for or an impact of the company’s operations. If climate change is a risk for or an impact of the company’s operations, the plan must be accompanied by the emission reduction objectives.
Article 17 obliges member states to designate one or more supervisory authorities to ensure compliance with the laws enacted on the basis of the directive. The competent supervisory authority will be the one of the member state where the company has its registered office or a branch (the latter in case of non-EU companies). These authorities will have to be notified to the Commission which will publish the list of all supervisory authorities.
Importantly, member states will need to guarantee sufficient independence and impartiality of these authorities, as well as respect for obligations of professional secrecy.
Among the powers of the supervisory authorities, Article 18 lists the power to start an investigation on its own or on the basis of substantiated concerns communicated to it where it decides it has sufficient information on a breach of the obligations in national law enacted on the basis of this directive. The authorities will be able to carry out inspections, according to the law of a country in which it will be taking place, and with prior warning, unless the warning ‘hinders the effectiveness of the inspection.’
If the authority finds that the company failed to comply with national laws enacted on the basis of the directive, it must grant the company sufficient time to take remedial action. It also must have powers to order to stop the infringement or its repetition, order remedial action, impose pecuniary sanctions and adopt interim measures to avoid severe harm. Member states are also to set out necessary rules on sanctions and their enforcement.
The proposal obliges member states to make sure that any natural or legal person can submit substantiated concerns to the supervisory authority and that the latter assesses it and, if necessary, takes action. The persons submitting the concerns must have access to a court or an independent body to review the procedural and substantive legality of the decisions, acts or failure to act by the supervisory authority.
The proposal also establishes a European Network of Supervisory Authorities and sets out basic rules on such issues as cooperation, sharing of information, assistance to other supervisory authorities and calling on other institutions or experts if required by the investigation.
The proposal obliges member states to make sure that the companies are liable for damages if they failed to comply with the obligations under the directive and as a result an adverse impact occurred and led to damage. This does not apply in situations where the activities were undertaken by an indirect business partner and the company has undertaken relevant remedial actions (as per the directive).
The proposal will now be discussed in the Parliament and in the Council (among member states). Once adopted, it will take two years to transpose the provisions of the directive into national laws of all member states.