The European Commission on 23 February 2022 adopted a long-awaited proposal for a Directive on mandatory corporate sustainability due diligence for widely-defined specified “companies”. The proposals cover obligations throughout the value chain and also attach to non-EU companies which meet specific criteria.
Companies need to prepare now both across their own business operations and their value chain to comply with the proposed Directive. While 2024 is the earliest the Directive will come into effect, the lead time will be needed to put compliant measures in place, or to face civil liabilities and significant fines based on turnover.
How does the mandatory corporate sustainability due diligence directive work?
The proposed Directive establishes a corporate sustainability due diligence duty requiring specific companies to identify and, where necessary, prevent, end or mitigate the potential or actual adverse impacts of their activities on human rights and the environment. Companies will have to publicly communicate their findings in an annual report and there are express directors’ duties. A European Network of Supervisory Authorities will be created to ensure coordination and alignment between Member States, as per a report on cms-lawnow.com
The proposal recognises the important role that directors will play in this process, such that new directors’ duties are proposed to set up and oversee the implementation and integration of sustainable due diligence into the corporate strategy, and a remunerative incentivisation used to ensure climate change is incorporated within the scope of the corporate plan. A director’s duty to act in the best interest of a company will now include expressly taking into account the human rights, climate change and environmental consequences of their decisions in the near, medium and long term.
Although SMEs are not directly in scope of the proposal, the Commission proposes accompanying measures to support all companies that may be indirectly affected by the broad application of the draft Directive.
Member States are required to ensure that natural and legal persons are entitled to submit substantiated concerns to any supervisory authority when they have reasons to believe, on the basis of objective circumstances, that a company is failing to comply with the national provisions adopted pursuant to the Directive. They are also obliged to establish civil liability regimes where companies are liable for damages if they fail to comply with the due diligence rules and as a result of this failure an adverse impact that should have been identified, prevented, mitigated, brought to an end or its extent minimised through appropriate measures occurs and leads to damage.
Implications of the corporate sustainability due diligence directive
Once the final version of the Directive is transposed, procedures and training will be required to ensure that companies have the requisite systems in place to be able to comply with the obligations and provide such reports. This will involve dialogue throughout the value chain and changes to existing contractual arrangements. Those not directly in scope should also consider their position and potential new requests for information to assist in the due diligence process by others. Once legislation is implemented, non-compliance can result in fines or orders issued requiring the company to comply with the due diligence obligation. Victims could also obtain compensation for damage due to non-compliance with this legislation, says cms-lawnow.com
The way forward
The proposal will be presented to the European Parliament and the Council for debate. Once a text is agreed, approved, and then adopted, Member States will have two years to transpose it into national law. This initiative is part of a wider corporate sustainability package intended to advance the European Green Deal which also announced an agreed Council position on the Commission’s proposal for a Corporate Sustainability Reporting Directive.
The German Supply Chain Due Diligence Act
In January 2023 a new German law, known as the Supply Chain Due Diligence Act, becomes effective and applies to companies operating or trading in Germany. The law introduces a legal requirement for businesses to manage social and environmental issues in their supply chains, through more responsible business practices.
The Act requires businesses to undergo significant efforts in order to achieve compliance. In this eBook, we will provide a first outline of the Act’s material contents and an in-depth analysis of the applicability of the Act to various corporate structures.
This eBook is the collection of a series of articles in which we will take a closer look at key issues, especially addressing the question of what you can do to adequately prepare yourself at this early stage. We would be happy to provide you with individual advice, as well. Please do not hesitate to contact us. If you cannot find what you are looking for, please feel free to get in touch with the team! Let’s talk
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