Corporate sustainability due diligence: new rules for companies to respect human rights and environment in global value chains

On 23 February 2022, the European Commission has adopted a proposal for a Directive on corporate sustainability due diligence (the “Proposal”). The Proposal aims to foster sustainable and responsible corporate behavior throughout global value chains, i.e. in companies’ activities related to the production of goods or the provision of services, including the development of the products or services, and use and disposal of the products as well as the related companies’ activities of upstream and downstream established business relationships.

The Proposal establishes new rules on the obligation of companies to identify, prevent, remedy or mitigate adverse impacts on human rights and the environment of their activities, the activities of their subsidiaries and their value chains (for both directly and indirectly established business relationships).

Application of new rules:

The new rules will apply to companies established in the EU that meet one of the following conditions:

  • the company employs more than 500 employees and generated net revenues of more than EUR 150 million worldwide in the last financial year;
  • the company does not meet the threshold in the previous point, but employs more than 250 employees and, in the previous financial year, had net worldwide revenues of more than EUR 40 million, with at least 50% of its net revenues derived from operations in specific sectors (including, but not limited to, textiles, agriculture, minerals, food and beverages, iron and steel, etc.).

The rules will also apply to certain companies established outside the EU but operating and doing business in the EU.

New obligations of companies:

In order to meet their duty of due diligence, companies will need to, among other things, establish an internal policy describing the company’s approach to addressing the issue and identifying potential adverse impacts on human rights and the environment. Companies will be required to prevent and address such impacts, monitor the effectiveness of the policy and communicate due diligence to the public. They will also be required to establish a specific complaints procedure for violations. The Proposal also provides for the responsibility of the directors for establishing and monitoring corporate due diligence. Moreover, directors will also have to take into account the impact of their decisions on human rights, climate change and environmental change within their duty to act in the company’s interest.

Breaches of obligations:

Member States will have to appoint the competent authorities which will be responsible for monitoring possible breaches of the rules. Such supervisory authorities will be able to impose certain fines on the persons responsible in the event of non-compliance of due diligence. In addition, victims of infringements will have the possibility to bring civil actions before the competent national authorities.

The Proposal is currently with the European Parliament and the Council for the approval. Once adopted, Member States will have two years to transpose the Directive into national law.

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