EU: Companies trading globally must respect human rights & environment (Due Dilligence)
- Arne Mielken
- Apr 11, 2024
- 6 min read
In 2022, the European Union adopted a proposal called the Directive on Corporate Sustainability Due Diligence. This proposal aims to promote sustainable and responsible corporate behavior across the global value chains.
Protecting humans and the environment
Companies play a crucial role in constructing a sustainable economy and society. As per this directive, companies will have to identify and prevent, end, or mitigate any adverse impacts their activities may have on human rights, such as child labor and worker exploitation, and on the environment, including pollution and loss of biodiversity.
What is the new regulation all about?
The new EU regulations will provide businesses with legal certainty and a fair playing field, and for consumers and investors, they will increase transparency. The EU's new rules will promote the green transition and protect human rights both in Europe and globally.
National Member States are already ahead
Several Member States have already implemented national regulations regarding due diligence, and some companies have taken steps on their own accord. However, voluntary actions alone may not be enough to bring about significant improvements. This proposal suggests that a corporate sustainability due diligence obligation be established to tackle negative environmental and human rights consequences.ts consequences.
Who should be concerned?
The proposal outlines the criteria for the companies that will be affected by the new rules. There are two groups of companies that the proposal targets. The first group consists of all EU limited liability companies that have substantial size and economic power, with 500 or more employees and a net turnover of at least EUR 150 million worldwide. The second group includes other limited liability companies that operate in high-impact sectors but do not meet both Group 1 thresholds. These companies should have over 250 employees and a net turnover of EUR 40 million worldwide or more. For Group 2 companies, the rules will apply two years later than for Group 1 companies.
For Non-EU companies that generate a turnover threshold aligned with Group 1 and 2, and operate in the EU, the new rules will apply. Small and medium enterprises (SMEs) are not directly affected by this proposal.
Who in the company must act and how?
This proposal is applicable to the company itself, as well as its subsidiaries and their value chains, which include direct and indirect established business relationships. To comply with the corporate due diligence duty, companies must:
1. Integrate due diligence into their policies
2. Identify actual or potential adverse human rights and environmental impacts
3. Prevent or mitigate potential impacts
4. Minimize actual impacts or bring them to an end
5. Establish and maintain a complaints procedure
6. Monitor the effectiveness of the due diligence policy and measures
7. Publicly communicate their due diligence activities.
It is the responsibility of companies to protect human rights and the environment as specified in international agreements. This means providing workers with safe and hygienic work environments and preventing environmental damage that violates significant environmental treaties. Within this framework, companies must take appropriate measures based on the severity and probability of different impacts, measures available to the company in the specific context, and the importance of setting priorities.
What are the Directors' duties?
Directors of companies have a crucial role in ensuring that due diligence becomes an integral part of the company's overall functioning. The proposal introduces new duties for directors to establish and oversee the implementation of due diligence, and to integrate it into the corporate strategy. When fulfilling their duty to act in the company's best interest, directors must consider the human rights, climate change, and environmental consequences of their decisions. Directors with variable remuneration will be incentivized to contribute to combating climate change by referring to the corporate plan.
What is the role for SME's?
The proposal includes support measures for all companies, including SMEs, that may be indirectly affected. These measures include developing dedicated websites, platforms or portals and providing potential financial support to SMEs. The Commission may provide guidance on model contract clauses to support companies. Additionally, the Commission may introduce new measures to complement the support provided by Member States, including helping companies in third countries.
The aim of the proposal is to ensure that the Union, comprising both the private and public sectors, upholds its international commitments in terms of protecting human rights and the environment, fostering sustainable development, and complying with international trade rules on the international stage.
Who will oversee the rules?
National administrative authorities appointed by Member States will supervise these new rules and may impose fines for non-compliance. In addition, victims can take legal action for damages that could have been avoided with appropriate due diligence measures.
Group 1 companies must have a plan to ensure their business strategy is compatible with limiting global warming to 1.5°C in line with the Paris Agreement.
Next steps
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 Commission.
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