An Insight into the EC's Proposal for a Directive on Corporate Sustainability Due Diligence

Recently, the European Commission published a proposal for a Directive on Corporate Sustainability Due Diligence in February 2022. This publication proposes an EU standard for human rights & environmental due diligence. The main aim of this Directive is to bring international standards into the European law to prevent the negative consequences of global business activities. 

It would require the companies to identify adverse environmental and human rights impacts and prevent and cease them across their organizations and the other entities with whom the company maintains an established business relationship. 

The Directive, standing today, is stated to be further discussed and approved by the European Parliament and the Council but still gives an insight into the prospective EU legislation based on the OECD Guidelines for multinational companies and the UN Guiding Principles. The Directive is also meant to complement other EU initiatives like the Employers Sanctions Directive, Taxonomy Regulation, and the proposed Sustainable Products Initiative, and the Regulation on Deforestation-free Supply Chain.

Who Does the Directive Apply?

EU Companies with any of the following attributes:

1. Over 500 employees and a net turnover (global) of over EUR 150 million;
2. Over 250 employees and a net turnover (global) of over EUR 40 million. However, at least half of this net turnover (50%) is to be generated in a ‘high-risk sector’ like forestry, textiles, food, and agriculture among others. 

Non-EU Companies with any of the following attributes:

1. A net turnover of over EUR 150 million in the European Union;
2. A net turnover of somewhere between EUR 40 million and EUR 150 million. However, at least half of the net turnover is to be generated in a ‘high-risk sector.’

Based on the recent statistics, almost 4,000 non-EU companies and 13,000 EU companies will fall under this criteria. An interesting point to note is that even when small and medium-sized companies are excluded from the Directive directly, as part of the value chain, they will still have to bear the consequences. 

An established business relationship, as per the Directive, is a direct or indirect lasting relationship with another party (like contractors) that doesn’t represent a mere ancillary part of the value chain. It means that the proposed Directive is vital for all types and sizes of companies and should be understood by them. 

Things Companies have to do in Terms of Specific Due Diligence Obligations

1. Including due diligence obligations into company policies and keeping them updated;
2. Identifying potential or actual adverse human rights & environmental impacts (like the EU regulations on toxic chemicals, ozone depletion, biodiversity, and hazardous waste) from their operations and that of their subsidiaries and business relationships in the value chain;
3. Preventing the said adverse impacts and ensuring they are brought to an end;
4. Establishing and maintaining compliance procedures where third parties can submit their complaints related to the adverse impacts;
5. Monitoring the effectiveness of the due diligence at least every year;
6. Annually communicating the measures taken for due diligence by the company.

At this point, you should also note that the duties to prevent and cease the adverse impacts will mean preparing action plans and investing in legal work. Companies, for example, would have to get auditable contractual assurances from the partners they do business with to prevent or correct the adverse impacts. 

The Duty of Care of the Directors of the Companies

1. Taking note of the consequences of the decisions taken for sustainability (such as human rights, environmental consequences and climate change);
2. Ensuring and overseeing the implementation of the required due diligence actions in the company and reporting to the board of directors about the same;
3. Adapting the corporate strategy to be maintained for the identified adverse impacts;
4. Adapting a plan within the scope for relevant companies to ensure the business model & strategy are compatible with the transition while limiting global warming to 1.5℃, per the Paris Agreement. 

In line with this, the Member States will also have to ensure that their laws that provide for breach of directors’ duties apply to the duty of care provisions mentioned in the Directive.

The Environmental Impacts Referred to the Directive

Environmental impacts refer to the EU regulations on toxic chemicals, ozone depletion, biodiversity, carbon emissions, and hazardous waste, amongst others. While not much is clearly stated in the current publication in detail, the draft Directive as of now asks the Member States to ensure that they adopt a business model and strategy that is compatible with the transition to a sustainable economy. The plan must assess if climate change can be a risk factor in the company’s operations and if yes, define objectives to reduce emissions as well. It should, under the Paris Agreement, ensure that global warming is limited to 1.5℃ and outline the steps the company can take to achieve the goal. We will keep you updated as this topic develops, subscribe to our newsletter today.

The Sanctions Enforced by the Directive

The Directive will allow the Member States to enforce sanctions on non-compliance with the obligations mentioned. The sanctions will be ‘effective, dissuasive, and proportionate’ and might also include financial penalties per the company’s net turnover. The National administrative authorities who are appointed by the Member States will be responsible for supervising these new rules. 

There will also be a new civil liability regime introduced by the Directive. Here, the companies will be liable for damages if the non-compliance to due diligence obligations had led to the damage. It gives the option for potential victims to take legal action, thereby fostering an increase in environment-related litigation and human rights.

Once all the changes have been made by the authorities and the Directive has been adopted, the Member States will have two years to transpose the same into national law. The EU and non-EU companies with over EUR 150 million net turnovers will have two years after the Directive enters into force, and the EU and non-EU companies with over EUR 40 million net turnovers will have four years for the same. 

Timber Exchange, a SAAS-based global trade automation platform, aims to become a high-trust network for importers, exporters and freight companies in the forestry industry. Every company on the platform goes through a thorough vetting process that ensures only those with compliant documentation are on board. Apart from this, Timber Exchange has 100+ advanced supply chain tools, a regularly updated market data hub, and trade-finance & trade-compliance services that make the entire supply chain process from the inquiry to the delivery of timber as smooth and hassle-free as possible.