EU: Proposal for a Directive on Corporate Sustainability Due Diligence

The European Commission published its long-awaited proposal for a Directive on Corporate Sustainability Due Diligence. The proposal imposes new obligations on large companies to ensure that their own activities and those of their supply chains comply with human rights and environmental sustainability criteria.

Published on 23 February 2022, the proposal for a New Directive on “Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937” is aiming to foster sustainable and responsible corporate behaviour throughout global value chains. It provides for new due diligence obligations, tightening the existing requirements under the German Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz).

Who is affected?

The new due diligence rules distinguish between EU and non-EU companies.

EU companies are divided into Group 1 and 2 according to different thresholds. Companies of Group 1 are all EU companies of substantial size and economic power (more than 500 employees and €150 million in net turnover worldwide). Group 2 includes other companies which operate in defined high-impact sectors, such as textiles, agriculture, forestry, fisheries, manufacture of food products, trade in beverages, extraction of natural resources, and manufacture and trade of metal and non-metallic mineral products. Group 2 companies do not meet both Group 1 thresholds, but have more than 250 employees and a net turnover of at least €40 million worldwide, provided that at least 50% of this net turnover comes from engaging in one or more of the high-impact sectors.

The rules will also apply to non-EU companies which are active in the EU with turnover threshold aligned with Group 1 and 2, generated in the EU.

In general, the proposal does not only apply to the company’s own operations, but also to its subsidiaries and its value chains as direct and indirect established business relationships. While small and medium enterprises (SMEs) are not directly in the scope of this proposal, they are likely to be caught indirectly through requirements placed on them by their in-scope business partners.

What obligations does the proposal contain?

In-scope companies will be required to identify and, where necessary, prevent, terminate or mitigate adverse impacts of their activities on human rights, such as child labour and exploitation of workers, and on the environment, for example pollution and biodiversity loss. They must establish appropriate complaints procedures, assess the implementation of their due diligence measures and report on the due diligence matters covered by the proposed Directive, including public communications. The proposal aims to more effective protection of human rights included in international conventions and of key environmental conventions.

Companies will therefore need to take appropriate measures. The proposal introduces directors' duties to set up and oversee the implementation of due diligence and to integrate it into the corporate strategy. In addition, when fulfilling their duty to act in the best interest of the company, directors must take into account the consequences of their decisions for sustainability matters, including human rights, climate change and environmental consequences. In general, Member States shall ensure that national provisions on breach of directors' duties also apply to these provisions, e.g. by adding personal liability of directors for non-compliance with sustainability.

Furthermore, Group 1 companies need to adopt a plan to ensure that their business strategy is compatible with limiting global warming to 1.5 °C in line with the Paris Agreement.

What are the consequences of infringements?

The proposed Directive lays out a combination of administrative sanctions, turnover-based sanctions and civil liability.

The Proposal provides for turnover-based fines, with the amount of the sanction and the competent national authority still to be designated by the Member States. National authorities will have the power to request information and carry out investigations related to compliance with the obligations set out in the draft Directive. Further, they will supervise the new rules and may impose effective, proportionate and dissuasive sanctions, including fines and compliance orders in case of non-compliance.

Member States shall ensure that companies are liable for damages, e.g. if they failed to comply with the proposal’s obligations. Moreover, they have to ensure that their laws, regulations and administrative provisions (about infringements of directors’ duties) apply also to the provisions of the proposal. Victims may take legal action for damages. Any person may inform supervisory authorities about concerns that a company is not complying with its due diligence obligations.

When do the rules come into force?

The proposal will first be submitted to the European Parliament and the Council for approval. When the Directive comes into force, Member States will have two years to transpose the Directive into national law. From this point on, companies must comply with the regulations. There is an exception for companies in Group 2, as the regulations only apply to them after a further two years.