Towards a European duty of due diligence for companies – Corporate governance

The European Commission has adopted a proposal for a directive on corporate due diligence in terms of sustainable development. Companies will be required to identify and, where appropriate, prevent, stop or mitigate the negative impacts of their activities on human rights and the environment.

Background

The European Parliament and the Council of the European Union had asked the European Commission to submit a proposal for a European legal framework on sustainable corporate governance (the “Proposal for a Directive”), on the model of what exists in France1 and Germany.

The European Commission’s proposed directive responds to these calls, following the launch of an open public consultation on the Sustainable Corporate Governance initiative on 26 October 20202. When preparing the proposal for a directive, the European Commission also took into account the large database collected in the context of two studies commissioned on the duties of directors and sustainable corporate governance (July 2020)3 and on due diligence requirements in the supply chain (February 2020)4.

Goal

The proposal for a directive establishes rules concerning:

  • corporate obligations regarding actual and potential adverse human rights impacts and adverse environmental impacts, with respect to their own operations, the operations of their subsidiaries, and the operations of the value chain carried out by entities with which the company concerned has an established business relationship; and
  • liability for breach of these obligations.

As such, it applies to the activities of companies themselves, to those of their subsidiaries, but also to the value chains (direct and indirect established business relationships).

Companies subject to the new obligations

The proposed directive would apply:

  • large companies over 500 employeesand worldwide net sales in excess of 150 million euros;
  • companies over 250 employees and a fillet worldwide annual turnover exceeding 40 million euros, provided that at least 50% of this net turnover is achieved in one or more specific business sectors (textile and footwear industry, agriculture, fishing, manufacture of food products, extraction of mineral resources (oil, gas, coal), manufacture of metal products, etc.). For these companies, the new rules would start to apply two years after their entry into force;
  • companies incorporated and operating under the laws of a third country when they achieve an annual net turnover of more than
    150 million euros in the European Union, or beyond 40 million euros in the European Union when at least 50% of this turnover is achieved in one or more of the specific sectors of activity mentioned above.

Thus, around 13,000 European companies and 4,000 third-country companies operating in the European Union would be subject to the corporate due diligence obligation. The scope of the proposed directive would therefore be broader than that of French law, which only concerns large companies with more than 5,000 employees in France or 10,000 in France and abroad (i.e. approximately 250 companies covered ).

Small and medium-sized enterprises (SMEs) do not fall directly within the scope of the proposed directive. Nevertheless, the European Commission clarified that they “will, however, be exposed to some of the cost and burden of doing business with the targeted companies, as larger companies are expected to pass on requests to their suppliers“.

Obligation

In order to comply with companies’ due diligence obligation in terms of sustainable development, companies should (article 4 of the proposed directive):

  • Integrate due diligence into their policies and governance;

  • Identify actual or potential negative impacts on human rights and negative impacts on the environment;

  • Prevent and mitigate potential negative impacts, and put an end to actual negative impacts or minimize their extent;

  • Establish and maintain a complaints procedure;

  • Monitor the effectiveness of the policy and due diligence measures;

  • Communicate publicly about due diligence.

Each of these 6 obligations is then detailed in Articles 5 to 11 of the proposed directive.

Liability and Sanctions

In the event of non-compliance with the above obligations, non-compliant companies may be held civilly liable and required to compensate the persons concerned (article 22 of the proposed directive).

Member States would also have to ensure that companies comply with their due diligence obligations and would be entitled to impose fines in case of infringement (Article 20 of the proposed directive).

A supervisory authority should be set up in each Member State with the power to require a company to cease non-compliant behavior or even to sanction it (Article 17 of the proposed directive).

Climate change

Companies over 500 employees and worldwide net sales in excess of 150 million euros would be required to adopt a plan to ensure that their business model and strategy are compatible with limiting global warming to 1.5°C in accordance with the Paris Agreement (article 15 of the proposed directive) .

Compliance with this obligation must be taken into account when setting variable remuneration, if the variable remuneration is linked to a director’s contribution to the business strategy and to the long-term interests and sustainability of the company. .

Next steps

The proposed directive will be submitted to the European Parliament and the Council of the European Union for approval. Once the directive is adopted, Member States will have two years to transpose it into national law and communicate the relevant national legislation to the European Commission.

Footnotes

1. See the articles entitled Climate law and resilience: what impact on company law? and The Judicial Court of Paris has sole jurisdiction to hear lawsuits relating to the duty of vigilance published respectively on our Blog in December 2021 and February 2022

2. https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12548-Sustainable-corporate-governance_en

3. https://data.europa.eu/doi/10.2838/472901

4. https://data.europa.eu/doi/10.2838/39830

To read in French, please click here.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

Helen D. Jessen