Corporate Sustainability Due Diligence EU Directive

The European Commission accepted the proposal for a Directive on Corporate Sustainability Due Diligence on February 23rd, 2022. In the draft the EU Parliament mentions how voluntary due diligence efforts have not achieved significant progress. With reference to some isolated initiatives, such as the French Loi de Vigilance (2017) or the latest German Lieferkettengesetz (2021), EU institutions are now aiming for a more exhaustive framework.

Thanks to similar initiatives, such as the EU Whistleblowing Directive, most European organisations are already striving for more ethical and transparent business practices. However, a real confrontation of violations of human rights and the environment will require a lot more than locally-focused, isolated efforts. Europe must act as a whole. More importantly, Europe must look beyond her own boundaries.

“This proposal is a real game-changer in the way companies operate their business activities throughout their global supply chain. With these rules, we want to stand up for human rights and lead the green transition. We can no longer turn a blind eye on what happens down our value chains. We need a shift in our economic model. The momentum in the market has been building in support of this initiative, with consumers pushing for more sustainable products. I am confident that many business leaders will support this cause.”

Didier Reynders, Commissioner for Justice

Elaborating on the European Green Deal, the European Commission wants to establish respect for human rights and the environment on a global scale. What has come to be known as the EU Supply Chain Act aims to cultivate a responsible and sustainable corporate behaviour in all global value chains. The EU aims to ensure that both its private and public sectors act in full respect of its international commitments towards human rights, sustainable development and international trade rules.

Corporate Sustainability Due Diligence EU Directive: The key topics

Organisations are being called to pragmatically evaluate their impact on human rights and the environment. They will soon be required to identify and, where necessary, prevent, end or mitigate any damaging consequences of their activities throughout their entire supply chain.

Who is concerned?

EU companies

Group 1: all EU limited liability companies of substantial size and economic power
- 500+ employees
- a net turnover of EUR 150 million+ worldwide
Group 2: Other limited liability companies operating in defined high, which do not meet both Group 1 thresholds, but have
- 250+ employees
- a net turnover of EUR 40 million+ worldwide

Non-EU companies

Any international companies active in the EU with turnover threshold aligned with Group 1 and 2, generated in the EU.

Small and medium enterprises (SMEs)

While SMEs are not directly in the scope of this proposal, they could still be indirectly affected as part of another organisation’s supply chain.

Overview of the requirements

The Corporate Sustainability Due Diligence EU Directive will apply to an organisation’s own operations, as well as to those of their subsidiaries and their value chains. Therefore, organisations should examine both their direct and indirect business relationships.

Organisations will have to:

integrate the due diligence requirements to their policies;
identify actual or potential adverse human rights and environmental impacts;
prevent or mitigate potential impacts;
bring to an end or minimise actual impacts;
establish and maintain a complaints procedure;
monitor the effectiveness of the due diligence policy and measures;
and publicly communicate on due diligence.

Some highlights

A significant addition of the proposal is the introduction of climate and environmental protection into the due diligence catalogue. While initiatives, such as the German Supply Chain Act, only indirectly tackle environmental protection, the European equivalent explicitly includes negative impacts on the environment in its scope of protection. For instance, organisations that fall within Group 1 will have to ensure that their business strategy is compatible with the Paris Agreement – to limit global warming to 1.5°C.

The proposal also calls for the direct involvement of organisational directors with specific duties to fulfill. These include setting up and overseeing the implementation of due diligence, as well as integrating it into the corporate strategy. Alongside their organisation’s best interest, directors will now have to consider human rights, climate change and the environmental consequences of their decisions. In addition, in cases of variable remuneration, there will be incentives for corporate plans that help combat climate change.

The Act does not neglect providing support to all organisations that might be affected, directly or indirectly. The proposal includes accompanying measures to provide guidance (e.g. model contract clauses). These might be complemented with more measures in the future.

Enforcement

Each Member State will have to appoint national administrative authorities responsible for supervising the rules. These authorities might be able to impose fines in case of non-compliance. Furthermore, potential victims will have the opportunity to take legal action for damages that could have been avoided with appropriate due diligence measures.

Timeline

The proposal 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. For Group 2, the rules will start to apply 2 years later than for Group 1. Even though the process will take some time, the European Commission recommends that organisations start aligning their values, purpose and objectives with the expected provisions now.

Source: European Commission

bomen

Whistleblowing in your supply chain

Supply chain technologies are here to stay. So far European organisations were not required to set up a complaint mechanism for third-parties. However, the supply chain initiatives seem to be moving in a different direction. The Lieferkettengesetz is already calling German organisations to make complaint mechanisms available to suppliers. And the EU Supply Chain Act is most likely to follow its footsteps.

Thanks to the Whistleblowing Directive, a lot of European organisations are currently setting up their whistleblowing solutions. Having helped a lot of organisations deal with the topic, we encourage you to see the upcoming EU Supply Chain Act as an opportunity: an opportunity to examine your policies and processes, and to assess whether your current tool truly solves the problem. Is your whistleblowing mechanism suitable for the upcoming changes, or will you have to start the selection and implementation process all over again soon?