On 23 February 2022, the European Commission published its long-awaited proposal for a directive on corporate sustainability due diligence (CSDD) which is in line with the human rights- and environment-related objectives set out in the European Green Deal and the UN Sustainable Development Goals (the Proposal). The Corporate Sustainability due diligence directive.
Sustainability Due Diligence
1. Scope of application
It is envisaged that the obligations set forth in the Proposal will apply to the following companies:
Group 1: companies with more than 500 employees on average and a worldwide net turnover in excess of EUR 150 million in the last financial year;
Group 2: companies with more than 250 employees on average and a worldwide net turnover in excess of EUR 40 million in the last financial year, provided that at least 50% of this net turnover was generated in one or more high-impact sectors1 ; and
non-EU incorporated companies with (i) EU-generated net turnover in excess of EUR 150 million in the financial year preceding the last financial year or (ii) EU-generated net turnover between EUR 40 million and EUR 150 million in the financial year preceding the last financial year, provided that at least 50% of its net worldwide turnover was generated in one or more high-impact sectors.
2. Due Diligence obligation
In order to conduct appropriate human rights and environmental due diligence, the in-scope companies must:
Integrate due diligence into their corporate policies
The in-scope companies are required to integrate due diligence into all their corporate policies and have in place an annually updated due diligence policy containing (a) a description of the company’s approach to due diligence, (b) a code of conduct describing the rules and principles to be followed by the company and (c) a description of the processes put in place to implement due diligence.
Identify potential and actual adverse human rights and environmental impacts from their operations
In-scope companies are required to identify actual or potential adverse human rights and environmental impacts from their operations. This identification should be based on quantitative and qualitative information. As part of the identification process, companies must carry out consultations with potentially affected stakeholders where relevant.
Prevent, mitigate and remediate such adverse impacts
Under the due diligence obligations set out by the CSDD, if an in-scope company identifies potential adverse human rights or environmental impacts, it should take appropriate measures to prevent and adequately mitigate them (such as, inter alia, develop and implement a prevention action plan, seek to obtain contractual assurances from direct business partners, etc.). Any identified actual adverse impacts must be brought to an end or minimised.
Establish and maintain a complaints procedure
In-scope companies must establish and maintain a complaints procedure which should provide the possibility for persons and organisations (such as trade unions, workers’ representatives and civil society organisations) to submit complaints directly to them in case of legitimate concerns regarding actual or potential human rights and environmental adverse impacts.
Monitor the effectiveness of their due diligence policies
Furthermore, the relevant companies should carry out periodic assessments of their own operations, those of their subsidiaries and, where related to the value chains of the company, those of their established business relationships, to monitor the effectiveness of the identification, prevention, minimisation, bringing to an end and mitigation of adverse human rights and environmental impacts. In order to ensure that such assessments are up-to-date, they should be carried out at least every 12 months and whenever new risks are reasonably identifiable.
Communicate publicly on their due diligence
Finally, in-scope companies will have to communicate annually on their due diligence (in principle through their annual report).
Additionally, in-scope companies of Group 1 (and the non-EU companies that meet the respective turnover requirement) must adopt a plan to ensure that the business model and strategy of the company is 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. This plan must, in particular, identify, on the basis of information reasonably available to the company, the extent to which climate change is a risk for, or an impact of, the company’s operations.
The Proposal envisages enforcement by Member State administrative authorities, with penalties for non-compliance, and specific duties for company directors to take into account sustainability matters (whereby breaches of these obligations would be considered a breach of fiduciary duties under national laws). In particular, when fulfilling their duty to act in the best interest of the company, directors of in-scope companies must take into account the consequences of their decisions for sustainability matters, including, where applicable, human rights, climate change and environmental consequences, in the short, medium and long term.
A civil liability regime would also be introduced to allow victims to sue in-scope companies for damages that could have been avoided through appropriate due diligence measures.
4. Next Steps
Subject to adoption by the European Parliament and the Council (which can last from 18 months to several years), the obligations of the CSDD will need to be transposed into national laws by the Member States within 2 years. For companies active in certain high-impact industries and sectors, the obligations under the CSDD will start to apply 2 years later.
A platform for stakeholders was set up for stakeholders to provide feedback on the Proposal and was opened until 23 May 2022.