Compulsory corporate sustainability due diligence under the European Commission’s new proposal

On 23 February 2022 the European Commission adopted a proposal for a Directive on corporate sustainability due diligence (Directive). The purpose of the proposal is to foster sustainable and responsible corporate behaviour and to secure human rights and environmental considerations in companies’ operations and corporate governance.

The Directive establishes a duty of corporate human rights and environmental due diligence. Companies shall integrate due diligence into all their corporate policies and have in place an annually update of the due diligence policy, moreover, establish a due diligence procedure, create a code of conduct and a description of the measures. The identification of the actual and potential adverse impacts is important, therefore, companies shall take appropriate measures to identify actual and potential adverse human rights and environmental impacts arising from their own operations or those of their subsidiaries and, where related to their value chains, from their established business relationships. The obligations are also covered to prevent and mitigate the potential adverse impacts, and bring actual adverse impacts to an end and minimising their extent such as create prevention action plan or seek contractual assurances from the business partners. Further obligation is establishing and maintaining a complaints procedure, which means that companies should ensure to submit complaints for persons who are affected or have reasonable grounds to believe that they might be affected by an adverse impact, for trade unions and other workers’ representatives, and also for civil society organisations. Finally, companies shall monitor the effectiveness of their due diligence policy and measures, and publicly communicate on due diligence.

Other core elements of the Directive are that companies shall adopt a plan to ensure that the business model and strategy of the company are compatible with the limiting of global warming to 1.5 °C in connection with the Paris Agreement. The plan shall identify to which climate change is a risk for, or an impact of, the company’s operations. Furthermore, directors of companies are responsible for the consequences of their decisions for sustainability matters. The Directive requires Member States to hold the companies concerned liable under civil law if they breach certain obligations and thereby cause damage to third parties.

The new rules apply to companies in the EU that have more than 500 employees and a net turnover of EUR 150 million worldwide, or more than 250 employees and a net turnover of EUR 40 million worldwide, provided that minimum 50% of the turnover origins from specific sectors such as textiles, agriculture or extraction of minerals. The Directive shall also apply to companies which are formed in a third country, and generated a net turnover of more than EUR 150 million in the Union or generated a net turnover of more than EUR 40 million but not more than EUR 150 million in the Union, provided that at least 50% of its net worldwide turnover was generated in the specific sectors as detailed above.