European Commission proposal on corporate sustainability
CONTEXT OF THE EUROPEAN COMMISSION PROPOSAL
On February 23, 2022, the European Commission (the Commission) published a proposal for a Corporate Sustainability Due Diligence Directive (the Proposal). This proposal creates several new obligations for eligible companies in relation to their supply chain, with a view to identifying and, if necessary, preventing, stopping or mitigating the adverse effects of their activities on the rights human rights, such as child labor and worker exploitation, and on the environment, for example pollution and biodiversity loss.
The first objective of the proposal is to level the playing field for businesses in the European single market, as so far only a few EU countries (notably France and Germany) have adopted legislation regulating supply chain due diligence.
Another objective of the proposal is to promote sustainable and responsible business behavior in all global value chains. Companies should be required to identify and, if necessary, prevent, remedy or mitigate any adverse human rights impact of their activities (e.g. child labor and worker exploitation, health and safety work) and on the environment (such as greenhouse gas emissions, environmental pollution or loss of biodiversity, and destruction of ecosystems). These obligations will apply to companies operating in the European Union, whether their head office is located in the European Union or in third countries, on the basis of specific criteria in terms of workforce and turnover.
CURRENT SITUATION IN FRANCE AND GERMANY
In France, the law on the duty of vigilance was promulgated on March 27, 2017 and applies to companies and groups of companies located in France which employ for two consecutive years, i.e. (i) more than 5,000 employees in France, or (ii) more than 10,000 in France and abroad. The law on the duty of vigilance imposes on these companies the obligation to establish, publish, implement and follow a “vigilance plan” to identify and prevent the risks of serious violations of human rights. and fundamental freedoms, human health and safety and the environment. throughout their sphere of influence, including subsidiaries and subcontractors where there is “an established business relationship”.
In Germany, the German Supply Chain Due Diligence Act (GSCDDA) was enacted in the Federal Gazette on July 22, 2021 and will enter into force on January 1, 2023. It applies to all companies, regardless of regardless of their legal form, which have their head office, main establishment, administrative headquarters or registered office in Germany and employ at least 3,000 employees in Germany (1,000 from 1 January 2024), including employees seconded to foreign. Foreign companies that (i) have a branch in Germany and (ii) employ at least 3,000 employees in Germany (1,000 from 1 January 2024) are also included in the scope of the GSCDDA. The GSCDDA requires companies to comply with a number of human rights and environmental due diligence obligations set out in the GSCDDA, with the aim of preventing or minimizing human rights or risk environmental rights or to end the violation of human rights or environmental obligations.
SCOPE OF THE PROPOSAL
According to Commission estimates, approximately 13,000 EU businesses and 4,000 non-EU businesses will ultimately be covered by the proposal as presented by the Commission. It should be noted that the proposal sets thresholds for the number of employees lower than those of French and German legislation.
The new due diligence obligations contained in the Proposal will apply:
From its entry into force, to companies having (i) at least 500 employees and (ii) a net turnover of at least 150 million euros worldwide.
Two years after entry into force, to other companies that do not meet the above thresholds but (i) operate in defined high impact sectors (e.g. textile manufacturing, agriculture, food, forestry, extraction of mineral raw materials, etc.) and (ii) have at least 250 employees and a net turnover of at least EUR 40 million worldwide.
The due diligence obligations contained in the proposal will also apply to non-EU companies operating in the EU that meet the above criteria.
Small and medium-sized enterprises (SMEs) fall outside the scope of the proposal, although they may be indirectly affected by the new rules due to the effect of the actions of large companies on their value chains. To remedy this, the proposal contains measures to protect SMEs from the excessive demands of large companies.
THE NEW DUE DILIGENCE OBLIGATIONS INTRODUCED BY THE PROPOSAL
Obligations imposed on companies
Companies falling within the scope of the proposal will be required, with respect to their own activities, subsidiaries and value chains (i.e. direct and indirect established business relationships):
Integrate due diligence into policies;
Identify actual or potential negative impacts on human rights and the environment;
Prevent or mitigate potential impacts;
End or minimize actual impacts;
Establish and maintain a complaints procedure;
Monitor the effectiveness of the policy and due diligence measures; and
Communicate publicly about due diligence.
This means that companies must take appropriate measures to prevent, end or mitigate impacts on the rights and prohibitions included in international human rights agreements, for example, concerning workers’ access to food , adequate clothing, water and sanitary facilities in the workplace.
Companies are also required to take action to prevent, end or mitigate adverse environmental impacts that run counter to a number of multilateral environmental conventions.
In addition, the proposal requires companies to adopt a plan to ensure their business strategy is compatible with limiting global warming to 1.5°C under the Paris Agreement.
Obligations imposed on company directors
The proposal also introduces obligations for directors of EU companies falling within the scope. These functions include setting up and overseeing the implementation of due diligence processes and integrating due diligence into business strategy.
Additionally, when directors act in the best interests of the company, they must consider the human rights, climate and environmental implications of their decisions and the likely long-term consequences of any decision.
Finally, when setting any variable compensation linked to a director’s contribution to business strategy and the long-term interests and sustainability of the business, companies should give due consideration to compliance with plan obligations. of the company’s approach to climate change.
ENFORCEMENT AND PENALTIES
A body appointed by each Member State (known as the “supervisory authority”) must monitor companies’ compliance with the abovementioned obligations. If it detects a violation, it must first give the company a reasonable period of time to remedy it.
Companies must also set up a complaints mechanism so that those affected, as well as trade unions and other organizations on their behalf, have the opportunity to take legal action in the event of harm suffered.
The proposal largely leaves the design of sanctions to EU member states and contains only the following provisions:
EU Member States should be able to impose proportionate penalties. Financial penalties should be based on the company’s turnover, although here too EU member states must regulate the amount of the financial penalties themselves.
The proposal contains relatively detailed provisions concerning the obligation to compensate victims and the liability of companies. Thus, there must be an obligation to pay damages if companies fail to meet their due diligence obligations. Liability cases may also arise in the context of indirect business relationships.
The proposal also requires EU Member States to adapt their civil liability rules to cover cases where damage results from a company’s failure to comply with due diligence obligations, building on their existing regimes in matters of civil liability. In addition, EU Member States must ensure that their national corporate civil liability regimes have overriding mandatory application, so that civil liability cannot be denied solely on the ground that the law applicable to such complaints is not the law of any EU member state.
At EU level, the Commission intends to set up a European Network of Supervisors which will bring together representatives of national bodies to ensure a coordinated approach and allow the sharing of knowledge and experience.
The proposal will now be examined by the European Parliament and the Council of the European Union. There is not yet a precise timetable for its adoption.
Once the proposal is adopted as a directive (as amended by the European Parliament and the Council of the European Union), EU member states will have two years to transpose the new rules into national law.