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European Commission adopts proposal for directive on corporate sustainability

24/03/2022

On the 23rd of February the European Commission has adopted a proposal for a directive on corporate sustainability due diligence. In short, the proposal sets out a corporate due diligence duty for companies to identify, prevent, bring to an end, mitigate and account for adverse human rights and environmental impacts in global value chains. The new rules also introduce a duty for directors to set up and oversee the implementation of the due diligence processes and to integrate due diligence into the corporate strategy. The transformation to a sustainable economy is a key political priority of the EU and in addition to the European Parliament and Council, civil society as well as companies call for action. The proposed directive will contribute to the advancement of the green transition and protect human rights in Europe and beyond.

The due diligence duty 

Under the proposed directive, companies will be required to identify and, where necessary, prevent, end or mitigate adverse impacts of their activities on human rights, such as child labour and exploitation of workers, and on the environment, for example pollution and biodiversity loss. The new due diligence rules will apply to the following European companies that for the purpose of this proposal have been divided into two groups: 

  • Group 1: All EU limited liability companies of substantial size and economic power (with 500+ employees and EUR 150 million+ in net turnover worldwide).
     
  • Group 2: Other limited liability companies operating in defined high impact sectors, which do not meet both Group 1 thresholds, but have more than 250 employees and a net turnover of EUR 40 million+ worldwide. For these companies, rules will start to apply 2 years later than for group 1.

The new rules regarding the due diligence obligations can also apply to non-EU companies that conduct business in the EU. This is the case for non-EU companies with a turnover threshold aligned with Group 1 and 2, generated in the EU

If a company  falls within the scope of the proposed directive, the new rules will apply to the company's own operations, the operations of their subsidiaries and their value chains. In order to comply with the corporate due diligence duty, companies need to:

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

Member States will supervise that companies comply with their due diligence obligations and may impose fines to companies, or issue orders requiring the company to comply with its due diligence obligation. It is particularly important to enable victims to obtain compensation for damages. Therefore, the proposal will also give those affected by harm the opportunity to hold companies to account.

Directors task 

The proposal also introduces directors' duties to set up and oversee the implementation of due diligence and to integrate it into the corporate strategy. In addition, when directors act in the interest of the company, they must take into account the human rights, climate and environmental consequences of their decisions and the likely consequences of any decision in the long term. Companies have to duly take into account the fulfilment of the obligations regarding the corporate climate change plan when setting any variable remuneration linked to the contribution of a director to the company's business strategy and long-term interests and sustainability. The rules on directors' duties are enforced through existing Member States' laws.

Directors of Dutch companies have the task to promote the long term value creation and the durability of the companies they lead. The concept of value in this respect refers not only to profit or other financial targets, but also to general interests, such as reducing any negative external impact the company has on the environment it functions within. The new rules deriving from the proposed directive, in view of the existing normative framework in the Netherlands, will contribute to the further clarification of the task of directors and the interests they need to take into account, specifically regarding ESG (Environmental, Social and Governance) topics. 

Business implications and next steps

The benefits of these new rules according to the European Commission for companies are legal certainty and a level playing field where companies of similar size and their directors are subject to the same requirements for integrating sustainable corporate governance and corporate due diligence measures in their internal management systems. According to the European Commission harmonised conditions would also be beneficial for cross-border mobility of company operations and investments, since it would facilitate comparison of corporate sustainability requirements and make engagement easier and thus less costly. The latter is very relevant from the perspective of the M&A practice. Due diligence on ESG related matters with regard to a company that is to be acquired has already become more important in the last years. Companies that underperform on ESG compliance will become less attractive targets, which might cause them to have trouble of acquiring new shareholders and raising capital on the long term. 

The proposal will be presented to the European Parliament and the Council for approval. Once adopted, Member States will have two years to transpose the directive into national law and communicate the relevant texts to the European Commission. 

Authors

Portrait ofMaarten Feenstra
Maarten Feenstra
Advocaat
Amsterdam
Portrait ofRoman Tarlavski
Roman Tarlavski
Partner
Amsterdam