Commission welcomes political agreement on rules enforcing human rights and environmental sustainability in global supply chains

This article is brought to you in association with the European Commission.

The European Commission welcomes the political agreement reached between the European Parliament and the Council on the Corporate Sustainability Due Diligence Directive. The proposal aims to foster sustainable and responsible corporate behaviour throughout global value chains. Large companies will be required to identify and, where necessary, prevent, end or mitigate adverse impacts of their activities on human rights, such as child labour and exploitation of workers, and on the environment, for example pollution and biodiversity loss. For businesses, these new rules will bring legal certainty, a level playing field and more sustainable competitiveness. For consumers and investors they will provide more transparency. The new EU rules will advance the green transition and protect human rights in Europe and beyond.

An EU law for a global just transition

The new diligence rules will apply to: (1) EU limited liability companies of substantial  size and economic power, i.e. with more than 500 employees and a net global turnover of more than €150 million, (2) EU limited liability companies that operate in specific high-impact sectors with more than 250 employees and a net global turnover of €40 million, and (3) non-EU companies meeting the above thresholds with turnover generated in the EU. Small and medium enterprises (SMEs) do not fall under the scope of the new Directive.

This Directive will apply to the company’s own operations, its subsidiaries and their value chains. In order to comply with the corporate risk-based due diligence duty, companies need to:

• integrate due diligence into their policies;
• take appropriate measures to:

• (i) identify, assess and, where needed, prioritise actual or potential adverse human rights and environmental impacts;
• (ii) prevent or mitigate potential adverse impacts; and
• (iii) bring to an end, minimise and remedy actual adverse impacts;

• establish and maintain a notification mechanism and complaints procedure;
• monitor the effectiveness of the due diligence policy and measures; and
• publicly communicate on due diligence.

With a view to limiting the burden from requests for information on smaller companies along the value chain, companies are required to prioritise requesting necessary information directly from business partners where the adverse impacts are most likely to occur.

Companies that do not comply with these rules will face sanctions from national administrative authorities. Victims will have the opportunity to seek legal redress for damages that they suffer as a result of the failure to conduct appropriate due diligence.

Furthermore, EU companies of substantial size and economic power (i.e. meeting threshold (1) above) will be required to adopt transition plans and make best efforts to ensure that their business strategy is compatible with limiting global warming to 1,5 °C.

The proposal also includes accompanying measures, which will support all companies directly concerned, but also SMEs that may be indirectly affected. Measures include the development of individually or jointly dedicated websites, platforms or portals and potential financial support for SMEs. In order to provide support to companies, the Commission may adopt specific guidance, including about model contract clauses. The Commission may also complement the support provided by Member States with new measures, including helping companies in third countries.

Next Steps

The political agreement reached by the European Parliament and the Council is now subject to formal approval by the co-legislators. Once published in the Official Journal, the Directive will enter into force 20 days after publication and Member States will have 2 years to transpose the provisions of the Directive into national law.

Background

European companies are global leaders in sustainability performance. Sustainability is anchored in EU values and companies show a commitment to respecting human rights and to reducing their impact on the planet. Despite this, companies’ progress in integrating sustainability, and in particular human rights and environmental due diligence, into corporate governance processes remains slow.

To address these challenges, in March 2021, the European Parliament called on the Commission to submit a legislative proposal on mandatory value chain due diligence. Similarly, on 3 December 2020, the Council in its conclusions called on the Commission to present a proposal for an EU legal framework on sustainable corporate governance, including cross-sector corporate due diligence along global value chains.

The Corporate Sustainability Due Diligence Directive responds to these calls, taking closely into account the responses gathered during an open public consultation on the sustainable corporate governance initiative launched by the Commission on 26 October 2020. In preparing the proposal, the Commission also considered the broad base of evidence collected through two commissioned studies on directors’ duties and sustainable corporate governance (July 2020) and on due diligence requirements in the supply chain (February 2020).