EU Directive on Corporate Sustainability Due Diligence
The new proposal [3] by the European Commission sets out a corporate due diligence duty to identify, prevent, bring to an end, mitigate and account for adverse human rights and environmental impacts in the company's own operations, its subsidiaries and their value chains – in the EU and globally.
The scope of the Directive includes EU companies that:
(a) had more than 500 employees on average and had a net worldwide turnover of more than EUR 150 million in the last financial year; or
(b) did not reach the thresholds 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 at least one of “high-risk” sectors (including but not limited to manufacture of/trade in textiles, leather and related products; agriculture, forestry, fisheries, the manufacture of food products; the extraction of/trade in mineral resources and others)
This Directive also applies to non-EU companies that (a) generated a net turnover of more than EUR 150 million in the EU in the financial year preceding the last financial year; or (b) generated 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 from activities in the “high-risk” sectors.
The new proposal will require the companies (private and listed – across both the financial and non-financial sectors) within the scope above to:
- Integrate due diligence into company policies
- Identify actual or potential adverse human rights and environmental impacts
- Prevent or mitigate potential adverse impacts
- Bring to an end or minimise actual adverse impacts
- Establish and maintain a complaints procedure
- Monitor the effectiveness of the due diligence policy and measures
- Publicly communicate on due diligence
The proposal builds on the UN's Guiding Principles on Business and Human Rights and OECD Guidelines for Multinational Enterprises and responsible business conduct, and on other internationally recognised human rights and labour standards.
In addition, and specifically in relation to climate, the Directive requires companies in scope, and which are materially exposed to climate change risks, to publish a transition plan – “to ensure that the business model and strategy of the company are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C in line with the Paris Agreement”. Such transition plans should be taken into account 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.
The new Directive is unlikely to enter into application before 2025.