The EU Commission adopts a Proposal for Directive on Corporate Sustainability due diligence

Companies comprised by the Directive

 The directive will initially apply to all EU limited liability companies with more than 500 and more than EUR 150 million in net turnover worldwide. 2 years later the directive will also apply to other limited liability companies operating in defined high impact sectors (such as textiles, agriculture, and extraction of minerals), which have more than 250 employees and a net turnover of more than EUR 40 million worldwide.

 In addition, the directive will apply to non-EU companies with the above turnovers generated in the EU.

 The companies initially comprised by the directive must further ensure that their business model and strategy are compatible with the transition to a sustainable economy and limiting global warming to 1.5 °C in line with the Paris Agreement.

 

Areas comprised by the Directive

 The directive applies to the companies’ operations, subsidiaries, and value chains.

Companies comprised by the directive must:

• integrate due diligence into policies,
• identify actual or potential adverse human rights and environmental impacts,
• 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, and
• publicly communicate on due diligence.

 

Duties of Directors

 The directive imposes a general obligation for directors to consider the consequences for the environment, climate, and human rights. 

Directors must set up and oversee the implementation of due diligence and integrate it into the companies' corporate strategy in question. 

In addition, when fulfilling their duty to act in the company's best interest, directors must take into account the human rights, climate change, and environmental consequences of their decisions. 

Variable remuneration of directors must provide an incentive to contribute to combating climate change by reference to the corporate plan.

 Sanctions

 Each member state must appoint a national administrative authority, which will be responsible for supervising the new rules. The authority must be permitted to impose fines in case of non-compliance. 

Further, victims of such non-compliance must be granted the right to take legal action for damages that could have been avoided with appropriate due diligence measures.

Our comments

By comprising the entire value chain and imposing civil liability, the directive proposal is likely to have far-reaching effects on the management of affected companies. However, the extent remains to be seen if the proposal is actually adopted.