Directive on Corporate Sustainability Due Diligence

On 23 February, the European Commission published its proposal for a Directive on Corporate Sustainability Due Diligence. It sets out a corporate duty for the largest companies to perform due diligence that will identify, prevent, mitigate and account for external harm resulting from adverse human rights and environmental impacts from their activities.

Businesses could be liable for sanctions and civil liabilities for damages if they fail to comply with the Directive, which also imposes obligations on directors (so-called directors’ duty of care).

In practice, this proposal will require several measures from companies, such as:

• To integrate due diligence into policies
• To identify actual or potential adverse human rights and environmental impacts
• To prevent or mitigate potential impacts
• To bring to an end or minimise actual impacts
• To establish and maintain a complaints procedure
• To monitor the effectiveness of the due diligence policy and measures, and publicly communicate on due diligence.

The scope of the proposal has been reduced to include only EU companies with more than 500 employees and a net turnover of more than €150 million. Companies with more than 250 employees and a turnover of €40 million will only have to comply if at least half of their turnover stems from engaging in a high-risk sector (e.g. mining). SMEs are removed from the application, but the Directive might have an indirect impact.

Legal requirements and penalties: The proposal stipulates that companies will be obliged to undertake due diligence “with respect to their own operations, the operations of their subsidiaries, and the value chain operations carried out by entities with whom the company has an established business relationship.” Due diligence procedures should cover environmental, labour and human rights risks.

Civil liability: Companies will become liable for damages that they might cause. In other words, victims will have the possibility to bring a civil liability claim before the competent national courts. Such civil liability also concerns companies’ own operations, subsidiaries and established business relationships.

The European Commission hopes to have this Directive approved by the European Parliament and Council in 2023. After this, the Directive will need to be transposed into national law within two years, following which it will become officially applicable. Existing national frameworks will have to be amended according to the Directive.

This topic is followed by ERA’s Sustainability Committee. If you want to know more about the committee or if you wish to receive more information about the a Directive on Corporate Sustainability Due Diligence, please do not ‎hesitate to contact the ERA Secretariat at [email protected].