EU Corporate Sustainability Due Diligence Directive Proposal

EU Corporate Sustainability Due Diligence Directive Proposal

Overview


What does it mean?

EU Corporate Sustainability Due Diligence Directive is setting a framework for businesses operating in the EU to protect human rights and the environment in their own operations and through their value chains. Several similar due diligence regulations have been adopted in some member states (like the French Duty of Care Law, or the German LkSG). The purpose of this Directive is to avoid fragmentation within the single market by setting common standards and requirements on supply chain due diligence. See the full proposal from the European Commission.

Who is concerned?

The EU Corporate Sustainability Due Diligence Directive applies to two groups of companies: 

Group 1 : 

  • Companies based in the EU with over 500 employees and a net worldwide turnover of more than €150M. 

  • Third-country companies with a turnover in the EU of more than €150M. 

Group 2 : 

  • Companies based in the EU active in high-impact sectors*, with more than 250 employees and a net worldwide turnover that exceeds €40M (but not entering the Group 1 category). 

  • Third-country companies active in high-impact sectors, with a turnover in the EU between €40M and €150M. 

  • The due diligence requirements for those Group 2 companies will be simplified as they would focus on severe adverse impacts that are relevant for their sector. 

* Meaning that at least 50% of their turnover has to be generated in one or more of the following sectors: textile, agriculture, forest, fishery, food & beverage and extraction of mineral resources.

What are the critical dates to remember?

This Directive proposal was published on 23 February 2022, the power to adopt this act is conferred to the Commission. 

  • Member States shall publish their transposition of the Directive in their Law within 2 years after its entry into force (regardless if they already have due diligence regulations).  

  • It will become mandatory for Group 1 companies 2 years after the entry into force. 

It will become mandatory for Group 2 companies 4 years after the entry into force.

Requirements

Member States shall ensure that companies conduct human rights and environmental due diligence by carrying out the following actions:

  1. Integrating due diligence in the company’s policies and strategy: Including an annually updated description of the company’s approach to due diligence, its internal code of conduct and the processes in place. 

  2. Identifying impacts: Group 1 companies shall take appropriate measures to identify potential and actual adverse human rights and environmental impacts within their operations, those of their subsidiaries and those of their established business partners along their value chain. For Group 2 companies, this requirement is limited to severe adverse impacts relevant to their sector of activity. Companies must be entitled to access independent relevant information to better identify risks. 

  3. Preventing potential adverse impacts: Companies shall take appropriate measures to prevent, and if not possible, mitigate potential adverse human rights and environmental impacts that have been identified. Their action plans shall contain clearly defined timelines and indicators for improvement measuring. In this effort, large and medium enterprises shall provide support to their SME partners instead of transferring the burden on them. Whenever the prevention efforts fail, companies shall be required to either suspend or terminate business relations with the problematic supplier (except in the case of financial services). 

  4. Bringing actual adverse impacts to an end: Either by neutralizing the impact by the payment of damages to the affected persons/communities, or by setting corrective action plans. Companies must seek contractual assurances to ensure compliance with the code of conduct. In case of failure, companies may seek to conclude or suspend the relationship with the partner in question. 

  5. Setting up a complaints procedure: Companies must provide the possibility for persons and organizations to submit complaints when they have concerns regarding potential adverse impacts. Complainants shall be entitled to request follow-up from the company. 

  6. Monitoring: Companies shall conduct yearly assessments of their due diligence measures and progress, but also of those of their subsidiaries and established business partners. This monitoring shall allow companies to evaluate the effectiveness of the activities here on top. 

  7. Communicating: Companies must annually disclose on their website a report on the matters covered by this Directive.


Accompanying measures and guidelines: In order to provide support to the Member States, the Commission along with other international bodies may issue global or sector/impact specific guidelines. Member States themselves shall provide support for SMEs. 

Combating Climate Change: Member States must ensure that Group 1 companies have a plan to make their strategy and business model compatible with the Paris Agreement’s 1.5°C global warming threshold. If the operations of a company have a major impact on climate change, they shall include emission reduction objectives in their plan. 

Civil liability: Member States shall ensure that companies are liable for damages if they failed to comply with points 3 or 4 of the requirements. The assessment of the company’s liability shall take into account the company’s efforts to comply with any remedial action required from Supervisory Authorities (see paragraph below), and to address the adverse impacts. 

Director’s duty of care: Member States shall ensure that directors of EU-based companies concerned by this Directive take into account the consequences of their decisions on sustainability matters, human rights, in the short and medium term, while fulfilling their duty to act in the best interest of the company. Directors of EU companies are responsible for putting in place and overseeing the due diligence actions with consideration for input from stakeholders.

Consequences

Sanctions: 

  • Sanctions will be defined by Member States. They shall take necessary measures to ensure that those sanctions are implemented. 

  • Sanctions shall be effective, proportionate and dissuasive (not negligible for the companies). They shall take into account if a company has taken remedial measures. Economic sanctions shall be calculated on the company’s turnover basis.  


Supervisory Authorities: 

  • Each Member State must designate independent and impartial Supervisory Authorities (SAs) to supervise compliance with the obligations laid down in the national transpositions of the Directive. 

  • These SAs have power to request information and carry out investigations. If they identify a failure to comply, SAs shall grant companies a period of time to take remedial measures. 

  • Member States shall ensure that natural and legal persons are entitled to submit their concerns regarding breaches of this Directive to a SA. These persons shall be protected according to the EU Directive 2019/1937. 

  • SAs shall mutually assist each other and share relevant information through the European Network of Supervisory Authorities.

Risk Mitigation

To ensure compliance with the Directive, firms should start to design and implement an effective compliance system and get an understanding of their entire value chain in order to discover any human rights or environmental violations.

Sounds complicated? Not with the right platform! TrusTrace provides actionable transparency of your entire supply chain and makes it easier to manage compliance, supply chain risk and communicate product origin easily and credibly. Contact us for more information on how we can help your company.

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