Corporate sustainability: Commission drafts due diligence Directive

Corporate sustainability: Commission drafts due diligence Directive

The European Commission (the ”Commission”) has adopted a proposal for a Directive on corporate sustainability due diligence (the “Proposed Directive”) which aims to encourage sustainable and responsible corporate behaviour throughout global value chains and improve access to remedies for those affected by adverse human rights and environmental impacts. It is clear that the Commission  wants companies to respect human rights and the environment in global value chains – and wants to make sure they are liable if they do not.

The Proposed Directive will “advance the green transition and protect human rights in Europe and beyond.”

Background

This Proposed Directive follows a public consultation period held between 26 October 2020 and 8 February 2021, and an EU Parliament draft directive on “Corporate Due Diligence and Corporate Accountability” published on 10 March 2021.

A number of EU Member States have already introduced national rules on due diligence and some companies have taken measures on their own initiative. The Commission noted, however, that voluntary action does not appear to have resulted in large scale improvement and that certain EU companies have been associated with adverse human rights and environmental impacts, including in their value chains. It therefore considered that there was still need for EU legislation which would not only advance respect for human rights and environmental protection, but would also create a level playing field for companies within the EU and avoid fragmentation resulting from EU Member States acting on their own.

Requirements

The Proposed Directive lays down rules on the due diligence which must be carried out by companies regarding actual and potential human rights and environmental adverse impacts, with respect to their own operations, the operations of their subsidiaries, and the value chain operations carried out by established business relationships. It also seeks to ensure companies are liable for violations of the due diligence obligation.

Under the Proposed Directive, large companies (including third-country companies with significant operations in the EU) would need to comply with the following:

  • First, companies are required to integrate due diligence into all corporate policies and must have a due diligence policy in place that is updated annually. This due diligence policy should include a description of: (i) the company’s approach to due diligence; (ii) a code of conduct to be followed by the company’s employees and subsidiaries; and (iii) the processes put in place to implement due diligence.
  • Second, companies are required to take appropriate measures to identify actual and potential adverse human rights and environmental impacts arising not only from their own operations, but also at the level of their established direct or indirect business relationships in their value chain.
  • Third, companies are to take appropriate measures to prevent potential adverse impacts, or to adequately mitigate those impacts, where prevention is not possible or requires gradual implementation.
  • Finally, companies must bring to an end actual adverse human rights and environmental impacts that have been or could have been identified. Where this is not possible, companies should ensure that they minimise the extent of the impact. Companies are required to take the following actions, where relevant: (i) neutralise the adverse impact or minimise its extent, including by the payment of damages to the affected persons and financial compensation to the affected communities; (ii) implement a corrective action plan with timelines and indicators if the adverse impact cannot immediately be brought to an end; (iii) seek contractual assurances from business relationships to ensure compliance; and (iv) make necessary investments.

Moreover, companies are required to provide for the possibility of submitting complaints to the company in case of legitimate concerns regarding potential or actual adverse impacts, including in the company’s value chain.

Obligations related to climate change

Under the Proposed Directive, certain companies are required to adopt a plan to ensure that the business model and strategy of the company are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5°C in line with the Paris Agreement. This plan should identify, on the basis of information reasonably available to the company, the extent to which climate change is a risk for, or an impact of, the company’s operations. If climate change is or should have been identified as a principal risk for, or a principal impact of, the company’s operations, the company should include emission reduction objectives in its plan.

These climate-related obligations should be taken into account when the company sets variable renumeration, if variable remuneration is linked to the contribution of a director to the company’s business strategy and long-term interests and sustainability.

Directors’ duties

Although directors already have a “duty of care” to the company in all Member States’ national laws, the Proposed Directive seeks to clarify, in a harmonised manner, that this general duty is understood and applied in a manner which is coherent and consistent with the due diligence obligations introduced by this Proposed Directive. When fulfilling their duty to act in the best interest of the company, directors of companies should take into account the consequences of their decisions for sustainability matters, including, where applicable, human rights, climate change and environmental consequences, in the short, medium and long term.

The Proposed Directive does not impose personal liability on directors for non-compliance.

Civil liability framework

Notably, the Proposed Directive seeks to establish the civil liability of companies for damages arising due to failure to comply with the due diligence obligations under specific conditions.

The company should be liable for damages if they fail to comply with the obligations to prevent and mitigate potential adverse impacts or to bring actual impacts to an end and minimise their extent. In order to establish liability it will be necessary to show that due to the relevant failure, an adverse impact occurred and led to damage and that this adverse impact should have been identified, prevented, mitigated, brought to an end or its extent minimised through appropriate measures. .

Companies will only   be liable for damages caused by an adverse impact arising as a result of the activities of an indirect partner in  an established business relationship where the test in the Proposed Directive is met.  There will be liability where it was unreasonable, in the circumstances of the case, to expect that the action actually taken, including as regards verifying compliance, would be adequate to prevent, mitigate, bring to an end or minimise the extent of the adverse impact.

In assessing the existence and extent of liability, due account is to be taken of certain efforts by the company relating directly to the damage in question. This will factor in efforts to comply with any remedial action required of the company by a supervisory authority, any investments made and any targeted support provided, as well as any collaboration with other entities to address adverse impacts in its value chains.

In order to ensure that victims of human rights and environmental harms can seek redress where a company has failed to comply with the due diligence obligations, the Proposed Directive requires Member States to ensure that the liability provided for in provisions of national law is of overriding mandatory application. The Proposed Directive requires this to be the case  even where the law applicable to such claims is not the law of a Member State. 

Comment

In the last few years, companies and Member States have already introduced national rules on human rights and environmental due diligence and some companies have taken (reporting) measures of their own volition. However, the Commission is clearly concerned that this does not go far enough. The Proposed Directive now provides an opportunity to harmonise legal standards and provide further legal certainty.

This Proposed Directive will now go to the European Parliament and the Council for approval where it will no doubt be subject to further debate. Once adopted, Member States will have two years to transpose the Proposed Directive into national law.

In any event, it is to be expected that stakeholders in Brussels will extensively lobby this Proposed Directive, on both sides of the spectrum. From our perspective, the civil liability framework in particular deserves further tweaking. In its current form for example, the Proposed Directive contains no guidance on what “appropriate” measures look like and therefore it will be difficult not only for companies to understand what they are expected to do, but also for courts to determine when a company is liable.

The Proposed Directive furthermore does not contain any rules around disclosure or the burden of proof in claim proceedings. This differs from other provisions, including for example the Damages Directive, which set out that Member States needed to ensure that neither the burden nor the standard of proof required for the quantification of harm would render the exercise of the right to damages practically impossible or excessively difficult. The Proposed Directive would benefit from similar wording, to ensure genuine access to justice for victims of human rights and environmental harms.