Corporate Sustainability Goes Mainstream: EU to Approve Directive on Sustainability Due Diligence

On Tuesday, 25th April 2023, the European Union Parliament's Legal Affairs Committee voted in favour of EU rules to hold companies accountable for human rights and environmental breaches. It is expected that it approved in a final plenary vote on 1 June, 2023.

The EU adopted theproposal for a Directive on corporate sustainability due diligence on 23 February 2022, aimed at fostering sustainable and responsible corporate behaviour and anchoring human rights and environmental considerations in companies’ operations and corporate governance.

The new rules are expected to ensure that businesses address adverse impacts of their actions, including in their value chains inside and outside Europe.

The directive will apply to large EU limited liability companies, non-EU companies, and third country companies active in the EU with turnover thresholds aligned with Group 1 and 2 generated in the EU. Micro companies and SMEs are not concerned by the proposed rules.

Once adopted, Member States will have two years to transpose the Directive into national law and communicate the text of the provisions to the Commission.

Which companies do the new sustainability due dilgence rules apply?

The EU have categorised companies affected by the directive into Group 1 and Group, respectively.

EU companies - large EU limited liability companies:

Group 1: estimated number of companies within this group is approximately 9,400 companies.

Group 2: estimated number of companies within this group is approximately in high-impact sectors. Examples of high impact sectors include textiles, agriculture, extraction of minerals. For this group, the rules start to apply two years later than for group 1.

Non–EU companies - large limited liability companies

The estimated number of companies within this group is approximately 2,600 companies in Group 1 and approximately 1,400 in Group 2. Third country companies active in the EU with turnover threshold aligned with Group 1 and 2, generated in the EU.

Micro and SMEs

Micro companies and SMEs are not concerned by the proposed rules. However, the proposal provides supporting measures for SMEs, which could be indirectly affected.

What obligations arise for companies and their directors?

The directive establishes a corporate due diligence duty, including:

· identifying,

· bringing to an end,

· preventing,

· mitigating, and

· accounting,

for negative human rights and environmental impacts in the company’s own operations, their subsidiaries, and their value chains.

Certain large companies need to have a plan to ensure that their business strategy is compatible with limiting global warming to 1.5°C in line with the Paris Agreement.

So what new duties of directors of EU companies arise?

These duties include setting up and overseeing the implementation of the due diligence processes and integrating due diligence into the corporate strategy. In addition, when fulfilling their duty to act in the best interest of the company, directors must take into account the human rights, climate change and environmental consequences of their decisions.

Who will benefit from these new EU corporate sustainability due diligence rules?

It is intended that the following stakeholders will benefit. Of course, proof is in the pudding.

Any Enforcement measures?

The directive provides for administrative supervision and civil liability for enforcement.

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