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March 3, 2022
2022-0353

European Commission proposes new Directive on corporate sustainability due diligence aimed at establishing legal accountability for global value chains

Executive summary

On 23 February 2022, the European Commission (the Commission) proposed rules that will require certain companies to identify and, where necessary, prevent, end or mitigate adverse impacts of their activities on human rights and on the environment in their global value chains. The new rules are intended to advance environmental and human rights objectives in Europe and beyond. While some European Union (EU) Member States have adopted their respective national rules and some companies are undertaking voluntary initiatives, the Commission and the European Parliament have articulated a need for a common regulatory framework in that respect.

Detailed discussion

Proposal for EU Directive on corporate sustainability due diligence

The following groups of companies are impacted:

  • Group 1: All EU limited liability companies of substantial size and economic power (with 500 or more employees and exceeding €150m in net turnover worldwide)
  • Group 2: Other limited liability companies operating in high impact sectors, which do not meet both Group 1 thresholds, but have more than 250 employees and a net turnover of at least €40m worldwide. In the case of these companies, rules will start to apply two years later than for those in Group 1
  • Non-EU companies active in the EU with a turnover threshold aligned with Group 1 and 2, generated in the EU

The new obligations will apply to the company's own operations, those of their subsidiaries and entities in their value chain (not limited to the first-tier business partners).

High impact sectors include:

Manufacturers and wholesale trade of textiles, leather and footwear, agriculture, forestry, fisheries, manufacturers of food products, mineral resources extraction, manufacturers of basic metal products as well as the wholesale trade of mineral resources, basic and intermediate mineral products (including metals and metal ores, construction materials, fuels, chemicals and other intermediate products).

Companies in scope will be required to:

  • Integrate due diligence into their internal policies
  • Identify actual or potential adverse human rights and environmental impacts
  • Prevent or mitigate potential impacts
  • Bring to an end or minimize actual impacts
  • Establish and maintain a complaints procedure
  • Monitor the effectiveness of the due diligence policy and measures
  • Publicly communicate on due diligence

National administrative authorities appointed by EU Member States will be empowered to impose fines in cases of non-compliance. In addition, the affected entities or individuals will have the right to take legal action for damages that could have been avoided with appropriate due diligence measures.

In addition, Group 1 companies (and the non-EU companies that meet the respective turnover requirement) will need to 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. In case climate is or should have been identified as a principal risk for or a principal impact of the company’s operations, the company should include emissions reduction objectives in its plan.

The proposal also introduces directors' duties to set up and oversee the implementation of due diligence and to integrate it into the corporate strategy. When fulfilling their duty to act in the best interest of the company, directors will have to take into account the human rights, climate change and environmental consequences of their decisions.

Next steps

The proposal will be presented to the European Parliament and the Council of the EU for approval. Once adopted, Member States will have two years to transpose the Directive into national law and communicate the relevant texts to the Commission. In the course of the legislative process, the draft proposal might undergo modifications including extension of the scope of companies subject to the new rules. Businesses should start taking necessary steps toward building awareness and traceability systems to track sustainability indicators within their global value chains.

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For additional information with respect to this Alert, please contact the following:

EY Doradztwo Podatkowe Krupa sp.k., Warsaw

 

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