On Corporate Due Diligence
On May 24, the Council of the European Union adopted a crucial piece of legislation for businesses – the European Parliament and Council Directive on corporate sustainability due diligence. The directive imposes obligations primarily on large enterprises regarding their harmful impacts on human rights and the environment. These rules apply not only to the activities of the companies themselves but also to their subsidiaries and business partners along the supply chain.
The directive directly affects companies with more than 1,000 employees and a turnover exceeding 450 million euros, covering activities from the production of goods or provision of services to the marketing, transportation, or storage of products in subsequent stages. Companies impacted by these regulations must establish and implement a risk-based system to monitor, prevent, or remedy human rights or environmental damage as defined by the directive.
The directive requires companies to ensure compliance with human rights and environmental obligations throughout their supply chains. If a violation of these obligations is identified, companies must take appropriate measures to prevent, mitigate, terminate, or minimize the harmful impact arising from their own activities, those of their subsidiaries, and their business partners. Companies can be held accountable for the damage caused and must provide full compensation. Additionally, affected businesses must adopt and enforce a climate transition plan in line with the Paris Agreement.
The directive stipulates that companies should take appropriate measures to establish and implement due diligence obligations concerning their operations, their subsidiaries, and their direct and indirect business partners throughout the supply chain as per the provisions of the directive. The directive does not obligate companies to ensure that harmful impacts never occur under any circumstances or that they can always be terminated. For example, regarding business partners whose harmful impacts result from state intervention, a company might not be able to achieve such outcomes. Therefore, the primary prescribed obligations should be those to make all reasonable efforts to achieve the intended result. A company should take appropriate measures that can reasonably be expected to prevent or minimize harmful impacts in the specific context. Factors to consider include the unique characteristics of the company’s business operations and supply chain, the sector, or the geographic area where its business partners operate, the company's ability to influence its direct and indirect business partners, and whether the company could increase its influence.
The supply chain should encompass activities related to the production and supply of goods or the provision of services by the company, including the activities of direct and indirect business partners involved in designing, extracting, manufacturing, transporting, storing, or delivering the raw materials, products, or components needed for the company's operations, or providing services necessary for the company’s activities. The supply chain should also include the activities of direct and indirect business partners involved in the marketing, transporting, storing, and disposing of the product, including dismantling, recycling, composting, or landfill disposal, when such activities are carried out for or on behalf of the company. The disposal of the product by consumers should not be included. Similarly, the supply chain should not cover the marketing, transporting, storing, and disposing of products subject to national export control once the product has been approved for export.
The due diligence process should encompass six stages defined in the OECD Due Diligence Guidance for Responsible Business Conduct to identify and address harmful impacts on human rights or the environment. These stages are:
- Integration of due diligence into policies and management systems;
- Identifying and assessing actual or potential adverse impacts on human rights or the environment;
- Preventing, terminating, or minimizing actual or potential adverse impacts on human rights or the environment;
- Evaluating the effectiveness of measures taken;
- Communication;
- Remediation.
Company Liability
The directive sets out four conditions that must be met for a company to be held liable – damage caused to a natural or legal person, breach of an obligation, causal link between the damage and the breach of obligation, and culpable act (intent or negligence) – adding an element of culpability.
Next Steps
After the President of the European Parliament and the Council President sign the directive, it will be published in the Official Journal of the European Union and will enter into force on the twentieth day following its publication.
Member States have two years to implement regulations and administrative procedures to comply with this legislation.
The directive applies depending on the size of the companies:
- 3 years after the directive's entry into force for companies with more than 5,000 employees and a turnover of 1,500 million euros;
- 4 years after entry into force for companies with more than 3,000 employees and a turnover of 900 million euros;
- 5 years after the directive's entry into force for companies with more than 1,000 employees and a turnover of 450 million euros.
Based on materials from the Council of the European Union by Reet Teder Council negotiating mandate (includes the text of the directive)