On 23 February 2022, the European Commission published the-much awaited proposal for a Corporate Sustainability Due Diligence draft directive. Seen by many as a step in the right direction, it leaves a lot to be desired. Here’s the lowdown.
Ever since the European Commissioner for Justice announced – back in April 2020 – that the Commission is firmly committed to make corporate human rights and environmental due diligence mandatory (1), many NGOs, civil society organisations and other stakeholders have been impatiently waiting for this commitment to become reality, as evidenced by several campaigns and statements calling for faster materialisation in the meantime (2). Following recommendations from the EP Committee on Legal Affairs and public online consultations concluded by the Commission, the proposal for a Corporate Sustainability Due Diligence draft directive has now been published (not without delay) on 23 February 2022.
For all intents and purposes, the draft directive represents a welcome step towards the harmonisation of corporate sustainability due diligence requirements at EU level, but unfortunatelly fails to deliver on the potential.
Companies have an inherent responsibility not to let their operations negatively impact principles for sustainable development. The new rules will therefore require companies to:
- integrate due diligence into their policies;
- identify actual and potential adverse impacts on human (including labour) rights and the environment;
- prevent and mitigate potential adverse impacts and end actual ones;
- set up and maintain a complaints procedure;
- monitor the effectiveness of the policy and afferent measures;
- be transparent about their due diligence and communicate on this publicly.
Due diligence obligations under this proposal will extend through the entire value chain, covering subsidiaries and both direct and indirect “established” business relationships.
The rules will be limited in scope and will only apply to:
- all large EU limited liability companies with more than 500 employees and more than EUR 150 million in net worldwide turnover;
- two years later, all EU limited liability companies with more than 250 employees and more than EUR 40 million in net worldwide turnover (at least half of which must be generated in one or more high-risk sectors specifically defined in the proposal, including clothing, agriculture, forestry, fisheries, food product manufacturing and extractives);
- all non-EU companies that are active within the EU and have a turnover aligned with the first group that has been generated in the EU;
- all non-EU companies that are active within the EU and have a turnover aligned with the second group, generated in the EU and of which at least 50% generated in the above-mentioned high-risk sectors.
Finally, under the proposed Directive, individual states will be fully responsible for overseeing and accounting for the implementation of these new rules and will have the power to impose fines for non-compliance. Victims of negative operational impacts will be able to take legal action where there is evidence that such impacts could have been prevented with the right measures for due diligence (an excellent step in the right direction). The proposed Directive recognises human rights and environmental due diligence as a key part in companies’ corporate strategy and introduces a director’s duty to integrate continuous due diligence in strategic decisions.
It must first be said that EU’s ambitious initiative to legislate in this area must be lauded; it’s a ground-breaking take with considerable potential to add uniformity to a field that is increasingly more fragmented. However, there are noticeable gaps and issues in this newly-released draft directive that will hopefully get to be addressed once the European Parliament and Council engage with it.
Firstly, the draft Directive fully acknowledges the responsibility of a company’s value chain, but specifically limits this to so-called “established” business relationships. These are loosely defined as relationships that “are expected to be lasting in terms of intensity and duration”. Not only does the wording leave plenty of room for interpretation, but it also creates a dangerous loophole in the set of rules; it raises the risk of incentivising companies to switch their suppliers regularly in order to avoid giving them “established” status and thus avoid liability.
Secondly, and what is – by far – one of the biggest shortfalls of this proposed Directive, is its very limited scope. As it stands, the rules will apply to less than 0.2% of EU companies. It is a recognised fact that turnover and employee count are not necessarily indicative of the harm caused by a company to its workers, therefore this Proposal falls significantly short of international standards such as the UNGPs which dictate that all companies, regardless of their size, need to conduct regular social, environmental and economic due diligence to assess their negative operational impacts. With Didier Reynders, the European Commissioner for Justice, stating in his most recent press conference that “we now need a larger scale of companies to bring more effective improvement to the living conditions of people and the environment”, one cannot fail to wonder, will less than 1% of companies in the EU be enough to provide for this “effective improvement” to materialise?
Thirdly, the proposed Directive specified that companies covered by group 2 and 4 are only required to identify actual and potential severe adverse impacts relevant to the respective high-risk sector in which they operate. This is in direct contradiction with the UNGPs, which expressly provide that companies shall identify, mitigate and remediate actual and potential adverse impacts on all human (including labour) rights across all their operations (no matter the sector). What is more, the proposed Directive specifies that, in identifying actual and potential adverse impacts, companies will be required – where relevant – to consult with potentially affected groups, failing to mention human rights defenders, a critique brought about only a few hours after the proposal was published (3). The Directive also fails to take into account the important departure from the traditional box-ticking exercise and all-too-onerous social auditing system, and introduces “independent third-party verification” for the purpose of verifying compliance with the set of rules. This is especially problematic as it takes away from the inherent transparency brought about by proper implementation of the UN Guiding Principles and OECD Guidelines, which dictate that all companies (and their subsidiaries) are responsible for the carrying out and regular documentation of their own due diligence process covering their operations.
In conclusion, this newly-released proposal is very much welcome as a substantial effort towards harmonising an area in dire need. But it is an effort far from perfect, with the above-mentioned shortfalls being only a few of all. It is hoped that, in time and with feedback from NGOs, companies and other stakeholders, the European Parliament and Council will address these when engaging with the Commission’s Proposal.
For more reactions to the release of the European Commission’s Proposal for Corporate Sustainability Due Diligence, visit:
(1) Webinar hosted by Responsible Business Conduct Working Group (30 April 2020).
(2) ‘Over 100 NGOs demand human rights and environmental due diligence legislation’ (02 December 2019),‘Open Letter to EU: Risking effective sustainable corporate governance’ (20 December 2021), ‘Making EU legislation on mandatory human rights and environmental due diligence effective’ (08 February 2022).