On 23 February 2022, the European Commission published a proposal for a Directive on Corporate Sustainability Due Diligence (the “Directive”).
The Directive will set out a horizontal framework to foster the contribution of businesses operating in the single market to the respect of human rights and the environment in their own operations and through their value chains, by identifying, preventing, mitigating and accounting for their adverse human rights, and environmental impacts, and having adequate governance, management systems and measures in place to this end.
In particular, the Directive will:
- Improve corporate governance practices to better integrate risk management and mitigation processes of human rights and environmental risks and impacts,
- Avoid fragmentation of due diligence requirements in the single market,
- Increase corporate accountability for adverse impacts, and ensure coherence for companies regarding obligations under existing and proposed EU initiatives on responsible business conduct;
- Improve access to remedies for those affected by adverse human rights and environmental impacts of corporate behaviour;
- Complement other measures in force or proposed, which directly address some specific sustainability challenges or apply in some specific sectors, mostly within the European Union.
In this regard it is important that the Directive is consistent with existing policy in this area.
It will further complement the current Non Financial Reporting Directive (the NFRD). The NFRD has been transposed into Luxembourg law by the law of 26 July 2016 and is applicable since 1 January 2017. It requires large undertakings (exceeding on their balance sheet dates the criterion of the average number of 500 employees during the financial year), which are public interest entities to disclose information on environmental, social and employees matter, respect for human rights and anti-corruption and bribery matters.
The proposed amendments will be adding a substantive corporate duty for some companies to perform due diligence to identify, prevent, mitigate and account for external harm resulting from adverse human rights and environmental impacts in the company’s own operations, its subsidiaries and value chain.
The Directive will also support the Sustainable Finance Disclosure Regulation (SFDR) that has recently entered into force and applies to financial market participants, where for instance financial market participants are required to publish, among others, a statement on their due diligence policies with respect to principal adverse impacts of their investment decisions on sustainability factors on a comply or explain basis.
In addition, this Directive will complement the Taxonomy Regulation. It imposes public reporting requirements and by requiring companies to identify their adverse risks in all their operations and value chains, the Directive aims to help in providing more detailed information to investors.
The Directive shall apply to:
- A company that had more than 500 employees on average and had a net worldwide turnover of more than EUR 150 million in the last financial year.
- A company that did not reach the threshold under point a) but had more than 250 employees on average and had a net worldwide turnover of more than EUR 40 million in the last financial year provided that at least 50% of this net turnover was generated in one or more of the following sectors :
- the manufacture of textiles, leather and related products (including footwear), and the wholesale trade of textiles, clothing and footwear;
- agriculture, forestry, fisheries;
- the manufacture of food products and the wholesale trade of agricultural raw materials, live animals, wood, food and beverages;
- the extraction of mineral resources regardless of where they are extracted, the manufacture of basic metal products, other non-metallic mineral products and fabricated metal products, and the wholesale trade of mineral resources, basic and intermediate mineral products.
It will also apply to companies set up in third countries under the following conditions:
- Net turnover of more than EUR 150 million in the EU in the financial year preceding the last financial year;
- Net turnover of more than EUR 40 million but not more than EUR 150 million in the EU 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 listed under b) above.
Obligations of companies within the scope
It will cover obligations regarding:
- Due–diligence obligations
- Identifying actual and potential adverse impacts
- Preventing potential adverse impacts
- Complaints procedure
- Combatting climate change
- Civil Liability
Each Member State shall designate one or more supervisory authorities to supervise compliance with the obligations as laid down in the Directive.
The competent supervisory authority must be that of the EU Member State in which the company has its registered office (for companies incorporated in the EU), in which the company has a branch (for non-EU in-scope companies) or in which the company generated most of its net turnover in the EU in the financial year preceding the last financial year.
The Directive contains a range of public and private sanctions which must be effective, proportionate and dissuasive.
The European Parliament and the Council will now review and amend the text in order to reach political agreements amongst the EU institutions.
The Directive should in principle be adopted in 2023 but will then need to be transposed into national law.