The European Commission’s proposal for a Directive on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937 (COM(2022) 71 final) has been published on 23 February 2022. This long-awaited Directive will require companies to perform due diligence to identify, prevent, mitigate and account for external harm resulting from adverse human rights and environmental impacts in the company’s own operations and in the value chain.
According to the Commission’s proposal, an EU level legislation on corporate due diligence will advance respect for human rights and environmental protection and create a level playing field for companies within the EU. The Directive is an outcome of the preparations relating to the EU initiative on Sustainable Corporate Governance after plenty of debate and several delays.
The Directive would lay down rules on obligations for companies regarding actual and potential human rights and environmental adverse impacts, with respect to their own operations, the operations of their subsidiaries, and the value chain operations carried out by entities with whom the company has an established business relationship, and on liability for violations of these obligations. Enforcement would be trusted to national supervisory authorities.
National administrative authorities appointed by Member States would be responsible for supervising the new rules and could impose fines in case of non-compliance. In addition, victims would have the opportunity to take legal action for damages that could have been avoided with appropriate due diligence measures.
The Directive would also set up certain duties of care for directors.
According to the proposal, the Directive will apply to:
- EU companies:
- Group 1: all EU limited liability companies of substantial size and economic power (with 500+ employees and EUR 150 million+ in net turnover worldwide)
- Group 2: Other limited liability companies operating in defined high impact sectors, which do not meet both Group 1 thresholds, but have more than 250 employees and a net turnover of EUR 40 million worldwide and more. For these companies, rules will start to apply 2 years later than for group 1
- Non-EU companies active in the EU with turnover threshold aligned with Group 1 and 2, generated in the EU
Member States would be responsible for determining the obligations of companies to set up due diligence processes to identify, prevent and end their adverse impacts on human rights and the environment. Member States would be required to ensure, for example, that companies integrate due diligence into all their corporate policies and have in place a due diligence policy.
Directors’ duty of care
Member States would need to ensure that, when fulfilling their duty to act in the best interest of the company, directors of companies take into account 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. Member States would further need to ensure that their laws, regulations and administrative provisions providing for a breach of directors’ duties apply also to the duty of care provisions of the Directive.
The proposal for a Directive on Corporate Sustainability Due Diligence will be presented to the European Parliament and the Council for approval. Once adopted, Member States will have two years to transpose the Directive into national law and communicate the relevant texts to the Commission.
We will keep you posted on the legislation process. In the meantime, the European Commission’s proposal for the Directive can be found here: https://ec.europa.eu/info/publications/proposal-directive-corporate-sustainable-due-diligence-and-annex_en
We are happy to discuss any questions you may have regarding the proposed Directive as well as its expected implications.