European Commission adopts proposal for a Directive on corporate sustainability due diligence

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01 Mar 2022

The European Commission has adopted a proposal (and associated annex) for a Directive on corporate sustainability due diligence.

The proposal establishes a corporate sustainability due diligence duty to address negative human rights and environmental impacts by identifying, preventing, mitigating, monitoring and communicating on potential or actual adverse impacts, as well as bringing actual adverse impacts to an end where possible or taking action to neutralise or minimise impacts including through paying damages.

The proposed new rules apply to:

  • All EU limited liability companies with 500 or more employees and a net turnover over €150 million worldwide (‘group 1’).
  • Other EU limited liability companies operating in defined high impact sectors with over 250 employees and a net turnover over €40 million worldwide (‘group 2’).  The sectors are:
    • the manufacture of textiles, leather and related products (including footwear), and the wholesale trade of textiles, clothing and footwear;
    • agriculture, forestry, fisheries (including aquaculture), the manufacture of food products, and the wholesale trade of agricultural raw materials, live animals, wood, food, and beverages; and
    • the extraction of mineral resources regardless from where they are extracted (including crude petroleum, natural gas, coal, lignite, metals and metal ores, as well as all other, non-metallic minerals and quarry products), the manufacture of basic metal products, other non-metallic mineral products and fabricated metal products (except machinery and equipment), and the wholesale trade of mineral resources, basic and intermediate mineral products (including metals and metal ores, construction materials, fuels, chemicals and other intermediate products).
  • Non-EU companies active in the EU with turnover thresholds and activities aligned with groups 1 and 2, generated in the EU.

The proposal applies to the company's own operations, their subsidiaries and their value chains (direct and indirect established business relationships).  

The proposal requires companies to:

  • integrate due diligence into company policies;
  • identify actual or potential adverse human rights and environmental impacts;
  • prevent or mitigate potential impacts; and bring to an end or minimise actual adverse impacts;
  • establish and maintain a complaints procedure;
  • monitor the effectiveness of the due diligence policy and measures; and
  • publicly report on due diligence via an annual statement on company websites (for those companies not already subject to the reporting requirements of the Non-Financial Reporting Directive (NFRD) and the future Corporate Sustainability Reporting Directive (CSRD)). The Commission will also adopt delegated acts to determine additional rules on the content and criteria of such reporting.

In addition, the new proposal requires group 1 companies (both EU and non-EU) to adopt a plan to ensure that their business strategy is compatible with limiting global warming to 1.5 °C in line with the Paris Agreement and to take this into account when setting variable Director remuneration if this is linked to contribution to the company's business strategy and long-term interests and sustainability.

Timing and next steps:

  • The proposed directive needs to be adopted by both the Council and the European Parliament (EP) and then implemented in the 27 Member States. The EP is expected to begin its discussions soon
  • The new rules will then apply to group 1 (EU and non-EU) companies from the date of implementation of the directive (at least two years after the entry into force) and to group 2 (EU and non-EU) two years after the date of implementation of the directive

The press release, the proposal and the associated annex are available on the European Commission website.

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