In February 2022, the European Commission presented a proposal for a directive on Corporate Sustainability Due Diligence.
According to the Council of the European Union, the Due Diligence Directive “will strengthen environmental and human rights protection in the European Union and beyond”.
A new European directive on Corporate Sustainability Due Diligence is coming into force. Why should you get ready now? Who should be responsible for the project in the company?
In December 2022, the first trial based on the French corporate due diligence law opened, pitting Total Energies and its oil project in Uganda against six NGOs. In January of 2023, three NGOs filed a lawsuit against Danone for non-compliance with the same law. They consider that the company has not fulfilled its obligations by not deploying a deplastification strategy to combat the harmful effects of plastic use (https://get.surfrider.eu/deplastifierdanone). Pioneered in France in 2017, this law requires multinationals to publish due diligence plans to prevent the risks of human rights and environmental abuses throughout their value chain. These two high-profile lawsuits raise the question of how difficult it is for very large companies to carry out the exercise and therefore question the ability of smaller companies to comply successfully and reduce the risk of litigation.
A regulation largely inspired by the French text is being developed at the European level.
In February 2022, the European Commission presented a proposal for a directive on Corporate Sustainability Due Diligence . Along with the SFDR, the Taxonomy and the CSRD, this directive is a key step in the European Union’s action plan for sustainable finance . This regulatory development is also part of the European Union‘s efforts to transition to a greener, climate-neutral economy, as outlined in the Green Pact for Europe and the United Nations Sustainable Development Goals (“SDGs”). According to the Council of the European Union, the Due Diligence Directive “will strengthen environmental and human rights protection in the European Union and beyond .”
The text provides for improved remedies for those affected by the negative impacts of companies by allowing them to sue in European courts.
The rules of the directive will apply to the “chain of activity” of companies, which includes the company’s own activities, the activities of its upstream business partners and part of the activities of its downstream business partners.
A regulation that looks beyond national borders and forces to consider upstream the risks that the company’s activity, as a whole, poses to the environment and human rights.
The objective of this directive is to impose rules on companies in the European Union regarding how they manage the social and environmental impacts caused by their activities, including the activities of their subsidiaries and business partners outside Europe’s borders. The text also provides a framework for associated sanctions, civil liability in case of violation of these requirements and the obligation to adopt a plan to ensure the compatibility of their business model with the Paris Agreement on climate.
With the entry into force of this directive, the European authorities wish to ensure that the activities of companies comply with the standards of human rights and environmental protection as defined by the International Labour Organization and the SDGs. The text provides for improved remedies for those affected by the negative impacts of companies by allowing them to sue in European courts. This groundbreaking legislative initiative thus seeks to promote a sustainable global economy and the integration of sustainability into the corporate governance and risk management system.
The rules of the directive will apply to the “chain of activity” of companies, which includes the company’s own activities, the activities of its upstream business partners and part of the activities of its downstream business partners. The use phase of the company’s products or the provision of services is excluded from the scope.
The proposal for a directive also mentions the civil liability of company directors, who could be required to consider the consequences of their decisions on short, medium and long-term sustainability issues.
Prioritisation of risks, clarification of civil liability and – beware – creation of new responsibilities for directors.
The general guidance published by the Council of the European Union indicates how to prioritise adverse impacts in order to facilitate the implementation of due diligence obligations. Inherited from the SFRD regulation, the concept of adverse impacts corresponds to the negative impacts of the chain of activity of companies on the environment or human rights.
The Council’s text also clarifies the conditions of civil liability, a provision that guarantees full compensation for damages arising from a breach of due diligence attributable to a company. The proposal for a directive also mentions the civil liability of company directors, who could be required to consider the consequences of their decisions on short, medium and long-term sustainability issues.
The principal axes of the text correspond to the obligations of the French law, but its scope of application is broader. The new European directive will therefore have a significant impact on all companies.
Decision-makers: your company will likely be affected in the short to medium term.
Companies meeting the following criteria are directly concerned:
- European companies and foreign companies operating in the EU with:
> 500 employees and
> 150 million euros turnover
- Thresholds are lower for high-risk industries (textiles and leather, agriculture and forestry, fishing and mining):
> 250 employees
> 40 million euros turnover
- SMEs are not directly concerned by the regulation but will be affected in the medium term: companies subject to the directive will choose suppliers enabling them to comply with their due diligence obligations throughout their activity chain.
Upon application of the directive, these companies will be required to:
- Identify actual or potential negative impacts on human rights and the environment and take steps to prevent or mitigate them;
- Integrate the sustainability due diligence into their policies and management systems;
- Establish an alert procedure accessible to the entire activity chain;
- Provide transparent information on compliance with their obligations;
- For companies with annual revenues of more than €150 million, provide a transformation plan to contribute to the goals of the Paris Agreement;
- Provide the necessary information to the supervisory and administrative boards to ensure that they take due diligence into account.
The proposal will be negotiated between the three European institutions to reach an expected agreement in spring 2023. Member States will then have two years to transpose the directive into their national legislation.
A European agreement expected in spring 2023.
Following the review of the Commission’s proposal for a directive during 2022, the Council of the European Union adopted a general approach on the file in December 2022. With the European Parliament also having begun its legislative work, the proposal will be negotiated between the three European institutions to reach an expected agreement in spring 2023.
Member States will then have two years to transpose the directive into their national legislation. The precise timetable for implementation has yet to be defined. While the Commission’s proposal retained the thresholds of 500 employees and 150 million euros in turnover, the Council recommends a gradual approach with an initial application to very large companies with more than 1000 employees and a turnover of more than 300 million euros.
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Notes and References
 Law no. 2017-399 of March 27, 2017 relating to the duty of vigilance of parent companies and ordering companies, Official Journal
 Proposal for a Directive of the European Parliament and of the Council on corporate sustainability due diligence and amending Directive (EU) 2019/1937, European Commission
 Action plan: financing sustainable growth, European Commission
 Due diligence rules for large companies: the Council adopts its position, Council of the EU
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