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The European Commission adopts proposal for a Corporate Sustainability Due Diligence Directive

Posted on 14 April 2022

In February 2022, the European Commission (EC) adopted a proposal for a Corporate Sustainability Due Diligence Directive (the Proposed Directive) which aims to ingrain human rights and environmental considerations into business policy and encourage sustainable and responsible corporate behaviour. The Proposed Directive aims to do this by imposing a sustainability due diligence duty on large EU companies as well as non-EU companies with substantial EU activity, which requires such companies to address any negative human rights and environmental impacts within their operations, their subsidiaries and value chains (i.e. direct or indirect business relationships) both inside and outside Europe.

The companies affected by the Proposed Directive include large EU limited liability companies consisting of over 500 employees and over €150m turnover worldwide, which are called "Group 1" companies, and EU companies with over 250 employees and over €50 million turnover worldwide which operate within defined high-risk sectors (such as textiles, agriculture and forestry, extraction of minerals) called "Group 2" companies. For Group 2 companies, the rules apply two years later than that for Group 1 and at least 50% of the companies' net turnover must be generated from one of the defined high-risk sectors. The proposal also covers non-EU companies within its ambit that are active within the EU and generate turnovers in the EU exceeding the net turnover threshold for either Group 1, or Group 2 in high impact sectors. While small and medium-sized enterprises (SMEs) are not affected directly by the Proposed Directive, it is foreseeable that they might be exposed indirectly to its effects through measures taken by such large companies with whom they transact.

The Proposed Directive introduces a corporate due diligence duty on corporates, the key components of which are to identify, prevent, mitigate, remedy and account for any adverse human rights and environmental impacts in the company's own operations, its subsidiaries and its value chains. From a practical perspective, this would mean more effective protection of human rights and avoiding negative environmental impact through stricter compliance with international conventions in both areas.

Certain large companies would also need to ensure that they have in place climate transition plans, which ensure that their business strategy is aligned with the transition to a sustainable economy and limiting global warming to 1.5°C, in line with the Paris Agreement.

The Proposed Directive also imposes duties on directors of the companies within scope, which include duties to set up and monitor the due diligence processes and ensure they are integrated into corporate governance and strategy. Additionally, when complying with their duty to act in the best interest of the company, directors must bear in mind and consider the human rights, climate and environmental consequences of their decisions, in the present and in the long term.

Member states will need to designate a supervisory authority to monitor and impose effective, proportionate and dissuasive sanctions, including fines and compliance orders. At the European level, the EC will set up a European Network of Supervisory Authorities that will bring together representatives of all the national bodies to ensure a harmonised EU-wide approach. Member States must also ensure that victims of breaches are appropriately compensated and are able to bring civil liability claims for damages before domestic courts.

The proposal will now go to the European Parliament and Council for their approval, and once adopted, it will need to be implemented in all 27 Member States, which will have a period of two years to implement the Directive into national law.

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