March 16, 2022
At a time when all eyes of the world were on Ukraine, in late February the European Commission published its highly anticipated proposed directive on corporate social and environmental due diligence. The Proposal for a Directive on Corporate Sustainability Due Diligence (the “Proposed Directive”) follows a March 10, 2021 European Parliament resolution calling for adoption of such rules.
The Proposed Directive represents the first proposed imposition by the Commission of a general human rights and environmental due diligence obligation for companies across their global value chains. Of note, the Proposed Directive imposes far-reaching and potentially costly penalties for companies and company directors for non-compliance, as well as a civil liability regime to allow victims to sue companies in relation to harm which occurred due to the company’s failure to comply with its due diligence obligations.
The Proposed Directive applies to EU companies meeting either of the following thresholds:
Of note, non-EU companies with significant operations in the EU are also covered. More specifically, the Proposed Directive applies to third-country companies which generated, in the financial year preceding the last financial year, a net turnover in the EU of:
Companies incorporated outside the EU will need to designate an authorized representative in the EU to liaise with the competent authorities of Member States (Article 16).
The Proposed Directive guards against adverse impacts on:
Pursuant to the Proposed Directive, covered companies must:
provided the relationships are lasting in view of their intensity or duration and not a negligible or merely ancillary part of the company’s value chain (Article 3).
Additional obligations complement the due diligence requirements. They include, for EU and non-EU companies meeting the large-company thresholds specified above, proposed requirements:
More generally, for covered EU companies, the general duty of care of directors will be expanded to take into account the consequences of directors’ decisions on sustainability matters, including, where applicable, human rights, climate change and the environment, including in the short, medium and long term (Article 25).
The Proposed Directive will require Member States to lay down rules governing the civil liability of companies for damages arising from a failure to carry out adequate due diligence. It is further stipulated that civil liability will arise even where the law applicable to the relevant claim is the law of a non-EU State.
A company will not be held liable as regards damages occurring at the level of an indirect business relationship if the company:
However, these actions will not shield the company if it was unreasonable to expect that the action taken would be adequate to address the adverse impact.
A company’s liability will further be assessed taking into account the company’s:
Companies will be given a reasonable time to remedy non-compliance before sanctions are imposed. Sanctions may include:
Member States may choose to provide for additional types of sanctions, such as exclusion from public procurement. Decisions imposing sanctions must be published.
The adoption of the Proposed Directive coincided with other important developments in the EU ESG space. Also on February 23, 2022, the Commission published its Communication on Decent Work Worldwide, promoting decent work in global value chains and reaffirming the EU’s commitment to eliminate child labor and forced labor—including, at a later date, a proposal to ban products made by forced labor from entering the EU. This was followed, on February 28, 2022, by the EU Platform on Sustainable Finance publishing its Final Report for the development of a social taxonomy, spelling out what constitutes a “social” investment (in the same way as has been done in the case of environmental investments under the EU Taxonomy Regulation).
The Proposed Directive will next be examined by the European Parliament and by the Council. The speed of adoption will depend, among others, on the extent of discussions on amendments.
If adopted, the Proposed Directive gives Member States two years to transpose the Directive’s obligations on large companies into their national laws, and another two years in the case of the obligations relating to the smaller “high risk” companies.
Shearman & Sterling’s Environmental, Social & Governance (ESG) team provides advice and advocacy to companies across multiple ESG impact areas. We would be pleased to answer any questions or to provide any further analysis of the above.