Corporate

Proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence

Published on 20th Apr 2022

On 23 February 2022, the proposal for a Directive, which aims to encourage a responsible and sustainable environmental and human rights-related corporate behaviour across global supply chains, was submitted.  

The proposal aims to integrate due diligence processes into the policies of certain companies through procedures that would enable such companies to identify, prevent, mitigate and bring to an end potential and actual adverse impacts regarding human rights and environmental matters 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.

Scope of application

The proposal for a Directive shall apply to companies in the European Union that fulfil some of the following conditions: 

  • companies with more than 500 employees on average and a net worldwide turnover of more than EUR 150 million; 
  • companies that do not reach the thresholds set above but have more than 250 employees on average and a net worldwide turnover of more than EUR 40 million, provided that at least 50% of this net turnover was generated in one or more of the sectors identified as high-impact sectors by the proposal for a Directive (among others, textile, agricultural, mining, metallurgy, hydrocarbons (production and commercialization)). 

The proposal for a Directive would also apply to third-country companies that fulfil any of the following conditions: 

  • companies with a net turnover of more than EUR 150 million in the European Union in the financial year preceding the last financial year; 
  • companies with a net turnover of more than EUR 40 million but not more than EUR 150 million in the European Union in the financial year preceding the last financial year, provided that at least 50% of this net worldwide turnover was generated in one or more of the sectors identified as high-impact sectors.

Due diligence and its integration into company policies 

Under the proposal for a Directive, companies shall conduct human rights and environmental due diligence by: 

  • integrating due diligence processes into their policies (including, among others, the establishment of a code of conduct and the description of procedures); 
  • identifying actual and potential adverse impacts; 
  • preventing and mitigating potential adverse impacts, 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; and 
  • publicly communicating on due diligence. 

Due diligence policy, which shall be updated annually, shall contain all the following elements: 

  • a description of the company's approach to due diligence, including in the long-term;
  • a code of conduct describing rules and principles to be followed by company's employees and subsidiaries; and 
  • description of the processes to implement due diligence policies, including any measures taken to verify compliance with the code of conduct and to extend its application to established business relationships. 

Combating climate change

The proposal for a Directive sets out that certain companies will adopt a plan to ensure that their business model and strategy 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. In particular, such plan will determine the extent to which climate change poses a risk to or has an adverse impact on the company's operations and, if appropriate, will include objectives to reduce emissions. Companies will duly consider compliance with the above obligations when setting variable remuneration should this be linked to the directors' contribution to the company's business strategy and its long-term interests and sustainability. 

Sanctions and civil liability 

Member States shall establish a sanctions regime that will be applied in the event of non-compliance with any national provisions adopted pursuant to this proposal for a Directive. Financial penalties will be based on the company's turnover.

The proposal for a Directive sets out that companies are liable for damages in case they fail to comply with their obligations if any adverse impact, which should have been identified, prevented, mitigated, brought to an end, or its extent minimized through the application of the appropriate measures, is produced as a consequence of non-compliance and causes damages. 

In both cases, the company's efforts to apply corrective measures, investments, collaboration or other specific support to face adverse impacts will be duly considered. 

Directors' duty of care

Likewise, the following will apply to company directors within the European Union who would be affected by this proposal:

  • when fulfilling their duty to act in the company's best interests, they will consider the implications of their decisions in terms of sustainability, including, when appropriate, the short-, mid-, and long-term consequences on human rights, climate change and the environment. National legislations will include the regulation of non-compliance with this obligation within their legal provisions that regulate breach of directors' duties; and 
  • they will all be responsible for putting in place and overseeing due diligence actions and for taking the necessary measures to adapt the company's strategy so that it considers any actual and potential adverse impacts and any measures taken. 

Procedure

The European Commission has submitted the proposal for a Directive and will begin the legislative procedure for its approval, where amendments will be considered. 
 

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* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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