European Commission Publishes Proposed Directive on Corporate Sustainability Due Diligence02/23/2022The European Commission has published a proposed Directive on Corporate Sustainability Due Diligence. The proposed Directive is designed to encourage the conduct of due diligence by major companies (including regulated financial institutions) on their value chains to identify risks linked to human rights or environmental impacts. This in turn is intended to support the objectives of the European Green Deal and assist in the transition to a climate-neutral and green economy.
The proposed Directive will apply to two groups of EU companies: (1) all EU limited liability companies of "substantial size and economic power" (i.e., 500+ employees and €150m net worldwide turnover) and (2) other limited liability companies that do not meet those thresholds but operate in high impact sectors (e.g., manufacturers of textiles, leather and food products, extractors of mineral resources and wholesalers of any of those products), with more than 250 employees and a net turnover of €40m worldwide or more. It will apply to companies in the second group two years later than to the first group. Regulated financial undertakings, including credit institutions, investment firms, central counterparties, central securities depositories, alternative investment fund managers and crypto-asset service providers, will constitute "companies" for these purposes regardless of their legal form and so will be captured by the rules. The proposed Directive will also apply to non-EU companies active in the EU with a turnover threshold aligned with Groups 1 and 2, generated in the EU.
The proposed Directive will require companies to review their own operations as well as their value chains in order to: integrate due diligence policies into their own operations; identify human rights and environmental impacts within their own companies and their value chains; work to prevent or bring an end to these impacts; establish complaints procedures in the case of concerns raised about impacts in either their own companies or their value chains; and publicly communicate on due diligence. Companies in Group 1 will also need to produce a plan to ensure that their business strategy is compatible with limited global warming to 1.5 degrees centigrade. Regulated financial undertakings offering credit, loans or other financial services will only need to identify adverse human rights and environmental impacts before providing the service.
National bodies, appointed by Member States, will be responsible for supervising the new rules and will be granted powers to fine companies for non-compliance. Companies will also have civil liability for damages where they fail to comply with their obligations and this causes an adverse impact that should otherwise have been dealt with had appropriate due diligence been conducted.
The proposed Directive would complement the EU's existing ESG-related legislation, including the Sustainable Finance Taxonomy Regulation and the Sustainable Finance Disclosure Regulation.
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