The new sustainability directive will lay down due diligence obligations for companies

European Union - 

ESG Alert

European Commission publishes proposal for a directive on corporate sustainability due diligence and a communication on decent work worldwide.

A few days after the Social Rights and 2030 Agenda Ministry started a prior consultation period for the draft bill on protection of human rights, on sustainability and on due diligence in transnational business activities, as discussed in our alert on February 22, the European Commission adopted a proposal for a directive and a communication on decent work, laying down the rules for ensuring companies respect human rights and the environment in supply chains and setting out the strategy to promote decent work worldwide.

The proposal for a directive on corporate sustainability due diligence describes concrete obligations for the companies that will fall within the directive’s scope, aimed at placing a duty on them to determine, and if necessary prevent and mitigate, the human rights and environmental adverse impacts of their own operations and the operations of their subsidiaries and their value chains.

The obligations in the proposal for a directive are directed at companies formed in a member state of the European Union and fulfilling any of the following requirements:

  1. They have more than 500 employees on average and a net worldwide turnover of more than €150 million.
  2. Although they are below the thresholds mentioned above, they have more than 250 employees on average and a net worldwide turnover of more than €40 million, and additionally, at least 50% of this net turnover was generated in one or more of the so-called high-impact sectors.

The directive also covers third-country companies having a net turnover higher than the thresholds mentioned above.

The mentioned companies will have to approve and integrate due diligence into their policies with very specific contents, clearly aimed at encouraging transparency in setting up and overseeing the process, which must be designed for:

  1. Identifying actual or potential adverse human rights and environmental impacts.
  2. Preventing potential human rights and environmental impacts.
  3. Adopting the necessary steps to bring adverse impacts to an end or minimize their extent.
  4. Ensuring that there is a complaints procedure in place for victims, trade unions and civil society organizations.
  5. Carrying out periodical assessments of the effectiveness of measures in place, and updating the due diligence policy as required by the outcome of those assessments.
  6. Publishing an annual statement on their websites specifying information on the description of due diligence, potential and actual adverse impacts; and actions taken on them.

The proposal for a directive states that member states will have to lay down rules on the sanctions applicable to infringements, from the standpoint that the sanctions must be effective dissuasive and proportionate.

It also mentions that member states will have to ensure that when fulfilling their duty to act in the best interest of the company, directors should take into account the consequences of their decisions on sustainability (including human rights, climate change and environmental consequences), in the short, medium and long term. In addition to directors being responsible for overseeing the due diligence policy and adapting the corporate strategy to take all these aspects into account.

As a complement to the proposal for a directive, the Commission has also presented a communication on decent work worldwide, with the goal of eliminating child labor and forced labor.

Among the multitude of existing and future tools and actions that it lists in the communication, the Commission announces that it is preparing a new legislative initiative which will prohibit the placing on the EU market of products made by forced labor, including forced child labor. The initiative will cover domestic and imported products. The new instrument will build on international standards and complement existing horizontal and sectoral European Union initiatives, in particular the due diligence and transparency obligations.

In its conclusion, the communication highlights the European Union’s leading role in ensuring that the green and digital transition of the economy goes hand in hand with socially just global transmission. It further reiterates that the European Union will engage with its international partners to achieve a human-centered sustainable, fair and inclusive recovery from the COVID-19 crisis.