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European Commission proposes sustainability due diligence law

Camilla Rydzek
25 February 2022

The European Commission has announced that it has adopted a proposal for a directive on corporate sustainability due diligence, creating a common set of rules for companies operating in the EU.

The EU highlighted the "key role" corporations play in building a sustainable economy and society, adding that the new directive will "advance the green transition and protect human rights in Europe and beyond."

In order to comply with the new due diligence duty, companies will have to:

  • Integrate due diligence into policies
  • Identify actual or potential adverse human rights impacts in its own operations, subsidiaries and value chain
  • Identify actual or potential adverse environmental impacts in its own operations, subsidiaries and value chain
  • Prevent or mitigate potential impacts
  • Bring to an end or minimise actual impacts
  • Establish and maintain a complaints procedure
  • Monitor the effectiveness of the due diligence policy and measures
  • Publicly communicate on due diligence

This means that companies will be responsible for their workers and their access to adequate food, clothing, and water and sanitation in the workplace. Companies of a certain size will further have to adopt a plan to ensure that their business strategy is compatible with limiting global warming to 1.5°C in line with the Paris Agreement.

Whilst small to medium sized enterprises (SMEs) will be excluded from the directive, it will effect three types of larger companies. The first group includes all EU limited liability companies of who employ more than 500 people and generate at least £125 million (€150 million) in net turnover worldwide.

The second group includes all other limited liability companies which operate in defined high impact sectors, have more than 250 employees and have a net turnover of at least £33 million (€40 million worldwide). For these companies, rules will start to apply 2 years later than for group 1.

The third group includes all non-EU companies who are actively generating turnover in the EU and align with the thresholds outlined above.

As the commission explains, the new rules are meant to prevent legal fragmentation of due diligence laws in different markets and ensure a clearer view of a company's operations and supply chain, while generating economic benefits.

The proposal will be presented to the European Parliament and the Council for approval. If it is adopted Member States will have two years to transpose the directive into national law and communicate the relevant texts to the Commission.

Member states will be supervising companies' compliance with the new rules and will have the possibility to impose fines, or issue orders requiring companies to comply with the due diligence obligation. It will also enable victims to get compensated for damage and hold companies to account in this way. Under the new proposal victims will have the possibility to bring a civil liability claim before the competent national courts.

As might be expected, the EU Commission confirms that the new proposal will incur costs for companies as they have to establish and operate due diligence processes and procedures.

Didier Reynders, Commissioner for Justice said: “This proposal is a real game-changer in the way companies operate their business activities throughout their global supply chain. With these rules, we want to stand up for human rights and lead the green transition. We can no longer turn a blind eye on what happens down our value chains. We need a shift in our economic model. The momentum in the market has been building in support of this initiative, with consumers pushing for more sustainable products. I am confident that many business leaders will support this cause.”

Thierry Breton, Commissioner for the Internal Market, added: ”While some European companies are already leaders in sustainable corporate practices, many still face challenges in understanding and improving their environmental footprint and human rights track record. Complex global value chains make it particularly difficult for companies to get reliable information on their suppliers' operations. The fragmentation of national rules further slows down progress in the take up of good practices. Our proposal will make sure that big market players take a leading role in mitigating the risks across their value chains while supporting small companies in adapting to changes.

The news comes one month after the Competition and Markets Authority (CMA) started a review of environmental claims in the UK fashion retail sector, as more businesses are making claims about the use of "recycled materials" and being more "sustainable".

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