February 24, 2022
EU Adopts Proposal for Corporate Sustainability Due Diligence
5 Min Read
On February 23, the European Commission adopted a proposal for a Directive on corporate sustainability due diligence. The directive aims to make large companies (500+ employees) operating in or with suppliers from the European Union (EU) more accountable for environmental and human rights harm caused by their activities. These companies will have to make commitments in line with the Paris Agreement, which is likely to lead to additional net-zero pledges. Implementing this legislation would help Europe strengthen its global leadership in sustainability by addressing concerns around corporate exploitation of workers, land-grabbing, deforestation, and pollution. It would also make it easier for victims of abuses to seek redress for violations of labor rights or environmental damage by requiring companies to establish effective grievance mechanisms through which claims can be addressed.
Get ready for the coming changes with the Ultimate Guide to ESG Sustainability
What is the EU Directive on corporate sustainability due diligence?
The proposal sets out new rules which require corporations to disclose their efforts in managing sustainability risks and opportunities. This includes a requirement to have an effective sustainability risk management system in place, a principle which is already reflected in many companies’ codes of conduct. If adopted as proposed, the directive will be the first legislation in a major economy requiring companies to step up their “due diligence” in identifying and addressing environmental and human rights impacts in their own operations, their subsidiaries, and their supply chains. It is part of a series of signals that the Commission may be moving toward a more stringent mandatory EU system of due diligence for supply chains.
What will the EU corporate due diligence Directive mean for my organization?
To comply with the Directive, companies will need to:
- Integrate due diligence into policies.
- Identify actual or potential adverse human rights and environmental impacts.
- Prevent or mitigate potential impacts.
- Bring an end to or minimize actual impacts.
- Establish and maintain a complaint procedure.
- Monitor the effectiveness of the due diligence policy and measures.
- Publicly communicate on due diligence.
The Directive also establishes accountability at the corporate and director (executive) level as follows:
- Corporate: Companies must account for and mitigate negative environmental and human rights impacts in their own operations, their subsidiaries, and their supply chains. Large companies will also need to have a plan to ensure that their business is compatible with the Paris Agreement to limit global warming to 5 °C. This includes linking variable pay for executives to emission reduction targets.
- Director: Directors must set up and manage the implementation of due diligence processes and integrate due diligence into the corporate strategy. When acting in the best interest of the company, directors must also account for the environmental and human rights consequences of their decisions.
Which companies will the EU corporate due diligence apply to?
The proposed rules will apply to both EU and non-EU companies. Small and medium-sized enterprises (SMEs) are not currently affected, although the proposal provides supporting measures for SMEs that could be indirectly affected.
EU companies (expected to affect approximately 12,800 organizations):
- Group 1: Large EU limited liability companies with more than 500 employees and €150 million in net turnover worldwide.
- Group 2: Other limited liability companies with more than 250 employees and €40 million in net turnover worldwide that operate in high impact sectors such as textiles, agriculture, or the extraction of minerals. For these companies, the rules will start to apply two years later than for Group 1.
Non-EU companies (expected to affect approximately 4,000 organizations):
- Companies active in the EU market with EU-generated turnover thresholds aligned with Group 1 and 2.
Source: European Commission
How will the EU Directive for corporate sustainability due diligence be enforced?
Member States will be responsible for appointing authorities to supervise these new rules and impose fines for non-compliance, though no details have been shared on what those fines are or the process for imposing them. Victims will also be able to take legal action for damages that could have been avoided with due diligence measures.
When will the EU corporate due diligence be enacted into law?
The proposal will go 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.
While this is still two years away at the earliest, important points to keep in mind include:
- Large companies will have to make a net-zero pledge.
- There will be reporting requirements, although no details are mentioned yet.
- It will be enforced through EU member states.
- It will establish a stronger requirement for supply chain due diligence which also apply to large companies doing business in the EU.
To learn how to keep your organization ahead of the curve on emerging regulations, download the ebook “Ultimate Guide to ESG Sustainability”
You may also find this ESG Program Checklist to be helpful as you work to align your program with the EU Directive for Corporate Sustainability Due Diligence.