On Wednesday 23 February, the European Commission will present its proposal for due diligence on corporate accountability (also known as ‘sustainable corporate governance’). EUROPE has obtained a preparatory document, dating from February, which details the content of the text.
The Commission plans to impose obligations on the largest companies to end human rights and environmental abuses in their supply chains. It provides for supervisory authorities to apply the Directive in each Member State.
EU-based companies with a turnover of less than €150 million and fewer than 500 employees are not affected by the Directive. However, in the so-called “high-risk” sectors (textiles, agriculture, fisheries, extraction of mineral resources, metal manufacturing, etc.), these thresholds are lowered to €40 million and 250 employees.
The Directive also applies to non-EU companies operating in the EU. This was a strong demand in the public consultation, which was also raised by some MEPs. All third country companies with a turnover of more than €150 million in the EU are affected. Again, the threshold is lowered to €40 million in high-risk sectors.
Obligations for companies
Companies will have to implement a series of actions to comply with the directive and address “adverse impacts” on the environment and human rights in their supply chain.
The company concerned must first have a due diligence policy detailing its approach to the matter and a code of conduct that includes the rules and principles to be followed and a description of the procedures put in place to effectively apply the due diligence.
A first action will be to identify these potential adverse effects in its supply chain. Then the company should try to “prevent” them. This can be done through an action plan, potential investments (in human resources or infrastructure), or requiring a target partner to provide an assurance that it will comply with the code of conduct. The company can also provide support to an SME in its supply chain to achieve compliance.
If these actions do not achieve their objective, the company will have to temporarily suspend business relations with the partner that poses environmental or human rights problems. Only in the case of “severe” adverse effects, the Commission requires the company to permanently terminate the business relationship with the partner, at least with regard to the activities affected by the violations.
For breaches that could not be prevented or minimised, the company will have to remove them or reduce their impact. To do this, it will be required to: - pay damages to affected individuals or groups; - implement a corrective action plan. Similar to the previous step, it should also : - obtain an assurance from the target partner that they will correct the situation; - make the necessary investments; - providing support to an SME in its supply chain to achieve compliance.
Again, if these measures have proved ineffective, the company will have to temporarily or permanently terminate business relations with the partner causing the breach.
In addition, companies should offer the possibility for individuals, trade unions, civil society affected by the adverse effects or individuals who have good reason to believe that they may be affected, to complain to them. A procedure for dealing with such complaints should be established. Where these are well-founded, an adverse effect is, de facto, automatically identified.
Each year, companies subject to the Directive will have to produce an assessment report detailing their implementation of these obligations.
The proposed directive provides that companies that fail to comply with their obligations will be held legally responsible.
Implementation
Member States will have to designate one or more authorities to oversee the implementation of the directive, according to the European Commission. The full independence of these authorities should be guaranteed.
They will have the power to request information from companies, to conduct investigations, to carry out inspections (while notifying the companies concerned). In the event of a proven violation of the Directive, the authority may require the company to remedy the situation within a certain time limit.
There should also be provision for citizens to raise substantial concerns with the authorities when they have reason to believe that a company is failing in its obligations. It will be mandatory for the authorities to process these applications.
Sanctions
Regarding the actions to be taken against companies that do not comply with the obligations of the text, the Commission foresees that it is the Member States that decide on the sanctions to be imposed in the transposition of the text. It only stresses that these should be “effective, proportionate and dissuasive”.
Obligations for company directors
Supervisors will also need to ensure that business leaders adopt an action plan detailing their business model and showing that their business strategy is compatible with a sustainable economy and in line with the objectives of the Paris Agreement. This action plan should be taken into account in the remuneration of company managers (see EUROPE 12881/16).
Some MEPs have already reacted, following the leak of the proposal. Anna Cavazzini (Greens/EFA, Germany) generally welcomed the proposal, but regretted that all SMEs were excluded from the scope.
See the preparatory document on the proposed directive: https://aeur.eu/f/G7 (Original version in French by Léa Marchal and Pascal Hansens)