EU Proposes New Due Diligence Obligations for Companies and their Directors
On 23 February 2022, the EU Commission adopted a proposal for a directive on corporate sustainability due diligence which introduces new mandatory due diligence obligations for large EU companies and non-EU companies with significant operations in the EU, together with new duties for directors of in-scope EU companies.
- applies to both EU and non-EU companies , that satisfy certain criteria;
- imposes due diligence obligations on companies to identify, bring to an end, prevent, mitigate, and account for actual or potential adverse impacts on human rights and the environment in the company’s own operations, its subsidiaries and value chains;
- requires that larger EU and non-EU companies have a plan to ensure that their business strategy is compatible with limiting global warming to 1.5°C in line with the Paris Agreement. Directors are incentivised to contribute to sustainability and climate change mitigation goals; and
- introduces duties of care for directors of in-scope EU companies in addition to obligations to oversee effective due diligence measures.
Companies in Scope
- with more than 500 employees on average and a net worldwide turnover of more than EUR 150 million in the last financial year for which financial statements have been prepared; or
- with more than 250 employees on average and a net worldwide turnover of more than EUR 40 million in the last financial year for which financial statements have been prepared, provided at least 50% of the net turnover was generated in one or more specified high impact sectors.
- with a net turnover of EUR 150 million in the EU in the financial year preceding the last financial year; or
- with a 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 its net worldwide turnover was generated in one or more specified high impact sectors.
|“High Impact Sectors”|
In-scope companies will be required to conduct due diligence for human rights and environmental adverse impacts in the company’s own operations, its subsidiaries and value chains.
Integrate Due Diligence into Corporate Policies
Companies will be required to integrate due diligence into all their corporate policies and have in place a due diligence policy containing a description of the approach to due diligence, a code of conduct for employees and subsidiaries and a description of the processes put in place to implement due diligence. Companies will be required to update their due diligence policy annually.
Appropriate Measures for the Identification of Adverse Impacts
Companies will need to take appropriate measures to identify actual or potential adverse human rights and environmental impacts arising from their own operations, their subsidiaries and their value chains from established business relationships.
Adverse human rights and environmental impacts are the violation of one of the rights, prohibitions or obligations identified in the Annex to the proposed directive (including in relation to working conditions, child labour and greenhouse gas emissions). Companies in–scope due to their operation in high impact sectors will be required to identify adverse severe impacts relevant only to the respective sector(s).
|“Established Business Relationship”|
|A business relationship, whether direct or indirect, which is, or which is expected to be lasting, in view of its intensity or duration and which does not represent a negligible or merely ancillary part of the value chain.|
Prevent, Mitigate and End Adverse Impacts
Companies will be required to take appropriate measures to prevent potential adverse impacts identified, or to adequately mitigate those impacts, where prevention is not possible. It is anticipated that a company will be able to end actual adverse impacts in their own operations and in subsidiaries. Measures that a company may be required to take as regards established business relationships, in order to minimise adverse impacts, include:
- development and implementation of a preventative or corrective action plan;
- seeking contractual assurances from a direct business partner that it will ensure compliance with the code of conduct or the prevention action plan, including by seeking corresponding contractual assurances from its partners to the extent that their activities are part of the company’s value chain;
- the payment of damages to affected persons and of financial compensation to affected communities proportionate to the scale of the adverse impact and the company’s role;
- making necessary investments into management or production processes and infrastructures; and
- providing targeted and proportionate support for SMEs with which the company has an established business relationship.
Establish a Complaints Procedure
Companies will be required to provide for the ability to submit complaints to the company where the complainant has legitimate concerns with respect to the company, its subsidiaries or value chains. Complainants may include persons affected or with reasonable grounds to believe they might be affected by an adverse impact, trade unions and worker representatives working in the value chain and civil society organisations active in the area concerned.
Monitor the Effectiveness of the Due Diligence Policy
Companies will be obliged to carry out periodic assessments on the implementation and effectiveness of their due diligence policies and measures for the identification, prevention and correction of adverse impacts. Assessments must be carried out at least every 12 months or whenever there are reasonable grounds to believe that there are significant new risks of the occurrence of adverse impacts. The due diligence policy must be updated in accordance with the outcome of any assessment.
In-scope companies which are not subject to reporting requirements under the EU Non-Financial Reporting Directive will be required to publish an annual statement on their website by 30 April each year, covering compliance with the obligations during the previous calendar year. The Commission will set out the content and criteria for this statement in separate delegated acts.
Combatting Climate Change
In addition to the due diligence framework, very large EU and non-EU companies (which satisfy the EUR 150 million turnover threshold (and employee criteria for EU companies)) will be required to adopt a plan to ensure that their business strategy is compatible with limiting global warming to 1.5°C in line with the Paris Agreement.
This plan should identify the extent to which climate change is a risk for, or an impact of, the company’s operations. Where climate change is identified as a principal risk, the company should include emission reduction objectives in its plan.
Such companies must also take into account these obligations when setting directors’ variable remuneration, if variable remuneration is linked to the contribution of a director to the company’s business strategy and long-term interests and sustainability.
Directors of in-scope EU companies, when fulfilling their duty to act in the best interest of the company, must take into account the consequences of their decisions for sustainability matters, including human rights, climate change and environmental consequences, including in the short, medium and long term.
Member States will be required to ensure that their laws, regulations and administrative provisions providing for a breach of directors’ duties apply to this obligation.
Directors are responsible for putting in place and overseeing the implementation of the due diligence processes and integrating due diligence into the corporate strategy.
Compliance and Enforcement
Member States must designate one or more supervisory authorities to ensure effective compliance with and enforcement of the obligations (as transposed into national law).
Non-EU companies will be required to designate an authorised representative in the EU to be addressed as a point of contact by the relevant supervisory authority for the receipt of communications regarding compliance and enforcement.
The proposal provides for a combination of sanctions and civil liability:
Member states will provide for dissuasive, proportionate and effective sanctions for infringement in the local transposing legislation. Decisions of the supervisory authorities containing sanctions related to breaches will be published. Companies applying for public support will be required to certify that no sanctions have been imposed on them for a failure to comply with the obligations.
- Civil Liability
Companies also face civil liability for damages arising from adverse impacts that could have been identified, prevented, mitigated, brought to an end or its extent minimised through appropriate measures. A company will not be liable for damages caused by an adverse impact arising from the activities of an indirect business partner where cascading contractual assurances were obtained from the direct business partner, unless it was unreasonable to expect that action taken would be adequate to prevent, mitigate, bring to an end or minimise the adverse impact.
Any natural or legal person that has reasons to believe, on the basis of objective circumstances, that a company does not appropriately comply with the obligations imposed by the directive, will be entitled to submit substantiated concerns to the supervisory authority.
The proposed directive provides that the Commission may issue guidance, including for specific sectors or specific adverse impacts. In addition in order to assist companies in compliance with their due diligence obligations through their value chain, the Commission may issue guidance in the form of non-binding model contractual clauses.
Legal Status and Timeframe
The Directive on Corporate Sustainability Due Diligence is currently a proposal and does not yet have legislative effect. The proposal will be considered by the European Parliament and Council as part of the EU legislative process.
Once adopted, Member States, including Ireland, will have two years to transpose the Directive into national law. For companies which are in-scope due to their operations in high impact sectors, the obligations will commence two years later.