Introduction
On 23 February 2022, the European Commission published their proposal for a Directive on Corporate Sustainability Due Diligence. This proposal is in line with the European Green Deal which aims to achieve a climate neutral and green economy and includes many human rights and environmental objectives. An increasing number of EU companies were already using value chain due diligence[1] as a tool to identify risks in their value chain. However, companies found this difficult due to the lack of legal clarity regarding corporate due diligence obligations. Consequently, the benefits of due diligence are not widespread among European companies and across economic sectors. This is one of the main reasons the Commission decided to publish the proposal determining binding rules for EU Member States.
Scope
The Directive will apply to EU companies which meet one of the following thresholds:
- EU companies with more than 500 employees on average and a net worldwide turnover of more than EUR 150 million in the last financial year;
- EU companies with more than 250 employees on average and a net worldwide turnover of more than EUR 40 million in the last financial year, provided that at least 50% of this net turnover is generated in a high-impact sector[2].
It will also apply to non-EU companies if they fulfil one of the following conditions:
- The company generated a net turnover of more than EUR 150 million in the EU in the last financial year;
- The company generated a net turnover of more than EUR 40 million, provided that at least 50% of this net turnover is generated in a high-impact sector.
Companies which do not meet the first threshold (be they EU or non-EU companies) will be provided a longer adaptation period. The due diligence obligation will apply two years after the end of the transposition period of the Directive, which will be two years after its entry into force.
Proposed measures
The proposed measures are in line with the six steps defined by the OECD Due Diligence Guidance for Responsible Business Conduct[3], which include due diligence measures for companies to identify and address adverse human rights and to carry out environmental impact assessments.
Adverse impact includes, in particular, human rights issues such as forced labour, child labour, inadequate workplace health and safety, exploitation of workers, and environmental issues such as greenhouse gas emissions, pollution, or biodiversity loss and ecosystem degradation.
To comply with the proposed measures, companies will have to integrate due diligence into their company policies. These policies must focus on identifying actual and potential adverse impact. Once identified, the companies must focus on prevention and bringing the adverse impact to an immediate end. The Directive provides some mandatory actions where relevant, such as drafting a prevention plan, seeking contractual assurances from business partners, etc.
Companies must also provide for a complaint procedure for individuals who (believe they) have been affected by an adverse impact, as well as for trade unions and workers’ representatives, and the relevant civil society organisations.
Companies will have to carry out periodical and ad hoc assessments (min. annually) of their own operations and those of their subsidiaries to monitor the effectiveness of the above-mentioned measures.
Lastly, the Directive aims to directly combat climate change by forcing companies to adopt a plan that ensures that their business model is in line with the planned transition towards a sustainable economy. Member States need to ensure that companies, where climate change is identified as a potential risk, include emission reduction objectives in their plans.
Enforcement
Each Member State will appoint one or more supervisory authorities to supervise compliance with the transposed national provisions. The supervisory authority can request information and carry out investigations in relation to compliance with the above obligations. They can also take remedial action such as imposing pecuniary sanctions as well as adopting interim measures to avoid (further) risk of harm. The pecuniary sanctions will be based on the company’s turnover.
Other than public enforcement, the Directive also provides the possibility for civil liability. The civil liability regime would allow people negatively affected by an EU company’s operations to take the company to court in an EU Member State if the company did not sufficiently act to prevent, minimise, end, and mitigate the adverse impact of its business activity. The introduction of a civil liability regime has been a key demand of NGOs campaigning for more corporate accountability.
Are you wondering whether the due diligence obligation might apply to your company? Do you have questions regarding the scope or the suggested measures of the proposed Directive? Feel free to contact PwC Legal. We are always happy to support you.
[1] In line with the OECD Due Diligence Guidance
[2] Some of these high-impact sectors include but are not limited to: (i) the manufacture of textiles, leather and clothing, (ii) the manufacture of food products and the wholesale food sector and (ii) the extraction of mineral resources. The financial sector is not seen as high-impact.
[3] (i) Integrating due diligence into policies and management systems, (ii) identifying adverse human rights and carrying out environmental impact assessments, (iii) preventing, putting an end to or minimising actual and potential adverse human rights, and environmental issues, (iv) assessing the effectiveness of measures, (v) communicating and (vi) providing remediation
