On February 23, 2022, the European Commission published a proposal for a Directive on Corporate Sustainability Due Diligence. The directive would lay down rules for companies with regard to actual and potential adverse human rights and environmental impacts on their own and their subsidiaries’ operations and within their value chains, as well as establish rules on civil liability. Companies that have a certain size or net turnover, or that operate in certain high-impact sectors, such as textile, agriculture, and mineral resource extraction, would be obligated to integrate human rights and environmental due diligence into all corporate policies and address identified adverse impacts.
A European Union (EU) directive is binding only as to the result it sets out to achieve; the means are up to the member states. Member states must transpose directives into their national law. (Consolidated Version of the Treaty on the Functioning of the European Union (TFEU) art. 288, para. 3.) If the new directive were adopted, EU member states would have two years to adopt and publish national measures. (Directive on Corporate Sustainability Due Diligence art. 30.)
Scope of the Directive
The directive would apply to the following companies:
- EU companies with more than 500 employees and an annual net worldwide turnover of more than 150 million euros (about US$169 million).
- EU companies that have more than 250 employees and an annual net worldwide turnover of more than 40 million euros (about US$45 million) and that generate more than 50% of their net turnover in the textile, agricultural, or mineral resource extraction sector.
- Third-country companies (those outside of the EU) with an annual net turnover of more than 150 million euros in the EU.
- Third-country companies that have an annual net turnover of more than 40 million euros but not more than 150 million euros in the EU and that generate more than 50% of their net worldwide turnover in the textile, agricultural, or mineral resource extraction sector. (Art. 2.)
Definition of Adverse Impacts
The proposal defines “adverse environmental impacts” as adverse impacts on the environment resulting from the violation of certain prohibitions and obligations set out in the international environmental treaties listed in the annex, in particular the 1992 Convention on Biological Diversity, the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES), the Minamata Convention, the Stockholm Convention on Persistent Organic Pollutants (POPs Convention), Convention on the Prior Informed Consent Procedure for Certain Hazardous Chemicals and Pesticides in International Trade (Rotterdam Convention), the Vienna Convention for the Protection of the Ozone Layer and its Montreal Protocol, and the Basel Convention.
“Adverse human rights impacts” would mean adverse impacts on protected persons resulting from the violation of one of the rights or prohibitions listed in the annex. This would include, among others, violations of:
- The right to life and security.
- The prohibition of torture and cruel, inhuman, or degrading treatment.
- The right to liberty and security codified in the Universal Declaration on Human Rights.
- The prohibition of child labor.
- The prohibition of forced labor.
- The rights to freedom of association and assembly, and to organize and bargain collectively.
- The people’s right to dispose of a land’s natural resources and to not be deprived of means of subsistence in accordance with the International Covenant on Civil and Political Rights.
In addition, the directive would contain a catch-all clause at the end intending to cover prohibitions or rights not covered by the previous points but included in certain fundamental human rights agreements and International Labour Organization conventions listed in the annex.
Due Diligence Procedures
Companies within the scope of the act would be obligated to set up each of the following due diligence procedures:
- Integrating due diligence into all corporate policies.
- Having in place an annually updated due diligence policy.
- Taking appropriate measures to identify actual or potential adverse human rights and environmental impacts on their own operations, those of their subsidiaries, or their value chains.
- Taking appropriate measures to prevent or mitigate identified potential adverse impacts.
- Taking appropriate measures to end actual adverse impacts.
- Setting up a complaints procedure for affected persons, trade unions, and civil society organizations.
- Periodically assessing and evaluating the implementation of due diligence measures.
- Reporting on their due diligence procedures and publishing an annual statement on their website. (Arts. 4–11.)
In addition, EU companies with more than 500 employees and an annual net worldwide turnover of more than 150 million euros, as well as third-country companies with an annual net turnover of more than 150 million euros in the EU, must ensure that their business model and strategy are compatible with limiting global warming to 1.5°C in line with the Paris Agreement. (Art. 15.)
The European Commission would develop voluntary model contractual clauses and guidelines to aid companies in fulfilling their obligations. (Arts. 12, 13.) National supervisory authorities would supervise compliance with the obligations. (Art. 17.)
Liability and Sanctions
Companies that violate the obligations of the directive would be civilly liable if the adverse impact led to damages. The burden of proof would be determined by national law. (Art. 22, recital 58.) In addition, companies could be sanctioned depending on the severity of the violation, taking into account the company’s efforts to comply with any remedial actions; any investments made, such as in management or production processes and infrastructures, and any targeted support for SMEs; and other efforts to address adverse impacts on the value chain with third parties. Pecuniary sanctions would have to be based on the company’s turnover. It would be up to the member states’ discretion to decide which sanctions would be most “effective, proportionate and dissuasive.” (Art. 20.)
On July 22, 2021, a similar law — the Act on Corporate Due Diligence in Supply Chains (Supply Chain Due Diligence Act) — was published in the German Federal Law Gazette. The act obligates German companies of a certain size to set up due diligence procedures to respect human rights and the environment within their supply chains. It differs in a few aspects from the proposed EU directive, among them personal scope, liability issues, and enforcement.