An initiative by the European Commission could lead to high administrative burdens for small businesses

The European Commission has come up with a proposal for a directive that imposes a number of new obligations on companies in terms of sustainable corporate governance and compliance with human rights and environmental due diligence obligations. Although the Chamber supports the aim of the proposal for the directive, we see a number of problematic points in it.

The proposal for the directive imposes human rights and environmental due diligence obligation on companies, consisting of six measures:

1. Companies have to integrate due diligence into all business principles and companies have to develop due diligence policies that need to be updated annually.
2. Companies must identify real or potential adverse effects on human rights and the environment in their activities, in the activities of their subsidiaries and at the level of their established direct or indirect business relationships.
3. Companies must prevent or mitigate identified adverse effects on human rights and the environment, stop the real adverse effects and reduce its scope.
4. Companies must establish and maintain a complaints procedure.
5. Companies must monitor the effectiveness of their due diligence policies and measures.
6. Companies are required to provide public information on compliance with due diligence.

In the proposal for the directive there are also other requirements for companies. For example, managers of companies must ensure that the company complies with due diligence obligation and that they are integrated into the company's strategy. The proposal for the directive also obliges larger companies to adopt a plan to ensure that the company's business model and strategy are in line with the transition to a sustainable economy and limiting global warming to 1.5° C in line with the Paris Agreement.

Fundamental changes need to be made to the proposal for the directive
The Chamber considers it important and supports the aim of the proposal for the directive to integrate sustainability into the management principles of companies and to guide companies in making business decisions that take into account human rights as well as climate and environmental impacts.

At the same time, we see a number of problematic points in the proposal for the directive, which can make it very difficult, if not impossible, to implement the directive in practice and lead to an increase in both costs and burdens for both companies and supervisory authorities. In addition, there is a risk that the directive will significantly reduce the flexibility of companies to achieve the desired objectives.

Therefore, the first preference of the Chamber is not to proceed with the proposal for the directive. If such solution is not supported, the proposal for the directive must be critically reviewed, a number of fundamental amendments must be made to it, so that the wording of the directive is clear and unambiguously understandable, and the additional burden is as low as possible and proportionate to the benefits.

It is not always possible to meet additional requirements
In the Chamber's opinion, the biggest bottleneck in the proposal for the directive is that it imposes additional obligations and responsibilities on the company in relation to the fulfilment of the human rights and environmental due diligence of the company's business partner, and in some cases this liability may extend even to the business partner of the business partner or even further down the value chain.

In some cases, it is very difficult for a company to actually verify that its business partner or its business partner's business partner is complying with its human rights and environmental due diligence obligations. The company can ask the business partner for confirmation, but this does not guarantee that the business partner actually complies with this due diligence obligation. For example, if the company's business partner is located in Africa or Asia, it is very difficult for a company located in Estonia to actually check whether the business partner fulfils its due diligence obligations. In addition, it is also difficult for the supervisory authority located in Estonia to exercise control over it.

In the Chamber's opinion, the proposal for the directive must clearly state that the new requirements apply only to the company itself or only to the direct contractual partner of the company and not to the entire supply or value chain. This solution ensures that companies are not subject to unreasonable obligations and that their responsibilities are not unreasonably wide.

Small businesses will also be affected by the new requirements
The proposal for the directive calls for companies with more than 500 employees and a net turnover of more than EUR 150 million to comply with the new requirements. In some cases, new requirements will also be added to companies with more than 250 employees.

In the opinion of the Chamber, the proposal will also have a significant impact on small and medium-sized enterprises. This is because large companies are more likely to transfer the additional due diligence obligations of the proposal to companies operating in the same supply or value chain. This would add a significant administrative burden and cost increase for small and medium-sized enterprises.

To mitigate such negative effects, we proposed to limit the scope of the Directive to companies with more than 1000 employees.

The proposal for the directive is currently being negotiated at EU level, so the text of the directive may still change. Estonia must transpose the directive within two years of its entry into force. It is not yet known exactly when the directive will enter into force.