On 23 February 2022, the European Commission published its proposal for a directive on corporate sustainability due diligence (the Proposal), aiming to apply cross-sectoral mandatory obligations on companies to implement robust processes to manage human rights, governance and environment risks within their own business and value chains.
Main aspects of the Proposal
The Proposal applies to Group 1 Large Companies, i.e. EU limited liability companies with more than 500 employees on average and more than EUR 150 million in net turnover worldwide in the last financial year for which annual accounts have been prepared, and Group 2 Mid-Size ‘High Impact’ Companies, i.e. other EU limited liability companies operating in defined ‘high impact’ sectors, which do not meet both Group 1 thresholds, but have more than 250 employees on average and a net turnover worldwide of more than EUR 40 million worldwide in the last financial year for which annual accounts have been prepared, provided that at least 50% of this net turnover was generated in one or more of the ‘high impact’ sectors.
Companies will be required to monitor, prevent and account for actual and potential adverse human rights and environmental impacts in their own operations, those of their subsidiaries and entities within their global value chains with whom they have an established business relationship. Adverse impacts include, human rights issues such as forced labour, child labour, inadequate workplace health and safety, exploitation of workers, and environmental impacts such as greenhouse gas emissions, pollution, or biodiversity loss and ecosystem degradation. The annex to the Proposal provides a broad list of international instruments defining the rights, obligations and prohibitions to be taken into account.
The Proposal intends to maximize its external impact by applying obligations not only to companies incorporated within the EU, but also to non-EU companies which are active in the EU regardless of where they are headquartered. The Commission has estimated that the Proposal will capture around 13,000 EU companies and 4,000 non-EU companies.
As the Proposal takes the form of a draft Directive, when adopted the requirements will need to be transposed into the laws of each Member States, including Cyprus. The current draft contemplates that Member States will have 2 years from the date the Directive enters into force to implement the requirements for the Group 1 large companies and an additional 2 years for Group 2 mid-size ‘high impact’ companies.
Obligations on companies
Due Diligence Obligations. Companies’ due diligence requirements are set out in Articles 4 to 11 of the Proposal and include obligations concerning corporate policies, identification of actual or potential adverse human rights and environmental impacts, prevention, mitigation and remediation, bringing actual adverse impacts to an end, complaints procedures, monitoring, publication of an annual statement, seeking contractual assurances from third parties to ensure that they will comply with the company’s code of conduct and prevention action plans and transition plans.
Further, the Proposal seeks to impose additional duties on directors of in scope EU companies which include taking responsibility for adopting a due diligence policy, setting up and overseeing the implementation of the due diligence processes, and adapting the corporate strategy to take into account any adverse impacts that are identified in the due diligence project. In addition, when fulfilling their duty to act in the best interest of the company, directors must consider human rights, climate change and environmental consequences of their decisions, in the short, medium and long term.
Lastly, the Proposal introduces a civil liability regime which would allow people negatively affected by an EU company’s operation to take the company to court in an EU member state if the company did not sufficiently act to prevent, minimise, end, and mitigate the adverse impacts of its business activity. National supervisory authorities will be responsible for supervising the new rules under the Proposal and may impose fines in case of non-compliance which will be calculated based on turnover or issue orders for corrective action. In this respect, a European Network of Supervisory Authorities will be established, to facilitate cooperation and alignment.
Next Steps
The Proposal will now pass to the European Parliament and Council for adoption according to the ordinary legislative procedure.
Whilst the Proposal is not expected to come into force for several years, given the wide scope and significant obligations set out in the Proposal in scope companies should be taking action now to evaluate and adapt their own due diligence processes and internal governance obligations against the standards set out in the Proposal.
By Eleni Neoptolemou
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