Proposal on corporate sustainability due diligence: Scope and impact on industry
On 23 February 2022, the European Commission adopted a proposal for a Directive on corporate sustainability due diligence, which aims at ensuring sustainable and responsible corporate behaviours throughout global value chains.
As a result, 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.
The new due diligence obligations will apply to:
All EU limited liability companies of substantial size and economic power with more than 500 employees and more than 150 million euros in net turnover worldwide.
Other limited liability companies operating in defined high impact sectors (including textiles, agriculture, the manufacture of food products, the extraction of mineral resources etc.) which do not meet the above thresholds, but have more than 250 employees and a net turnover of 40 million euros worldwide. For these companies, the obligations will apply with a delay of two years.
The proposal also applies to non-EU companies which have a direct link to the Union market, and meet the above-mentioned criteria, considering that the turnover is generated within Union market.
Importantly, Small and Medium Enterprises (SMEs) are excluded from the scope of this proposal.
However, since the Directive applies to the company's entire value chain, some obligations might, by extension, impact SMEs.
The corporate due diligence duty includes, among others, the following obligations:
· The integration of due diligence into the companies policies;
· the identification of actual or potential adverse human rights and environmental impacts;
· the prevention or mitigation of potential impacts;
· the monitoring of the due diligence policy and their effectiveness;
· public communication on due diligence.
In addition, the proposal will introduce directors' duties to set up and oversee the implementation of due diligence and to integrate it into the corporate strategy.
This proposal for a Directive will now be presented to the European Parliament and the Council for approval. After formal adoption, Member States will have two years to transpose the Directive at national level.
Alongside with this proposal, the European Commission published its Communication on Decent Work Worldwide in which it announced the preparation of a new legislative instrument to effectively ban products made by forced labour from entering the EU market. This legislation is expected to cover goods produced inside and outside the EU ‘combining a ban with a robust enforcement framework’.