The Commission has presented its proposal for a Corporate Sustainability Due Diligence Directive. It aims to force the largest companies to eliminate negative human rights and environmental impacts in their supply chains. This corresponds to the document EUROPE had detailed (see EUROPE 12896/12).
In concrete terms, a company covered by the Directive will have to monitor potential adverse impacts in its own operations, those of its subsidiaries and operations in its supply chains carried out by “entities with which the company has an established business relationship”. Some non-regular subcontractors or suppliers are, in a way, exempted from control and therefore from the Directive.
This proposal, which should have been published in December, was twice rejected by the Regulatory Scrutiny Board. It said that the impact assessment did not provide sufficient evidence that companies, in particular SMEs, were already not taking sustainability aspects sufficiently into account. For MEP Lara Wolters (S&D, Netherlands), who was rapporteur for the own-initiative report to the European Parliament on this subject (see EUROPE 12645/4), the assessment of the Regulatory Scrutiny Board “was not only technical in nature”. Like some of her colleagues, she is concerned that this work has been influenced by companies.
However, the Commission has decided to go ahead and present this text because “it is an important proposal, which is consistent with the Commission’s Green Deal, and many other texts”, according to an EU source.
Scope
These monitoring obligations only apply to European companies with more than 500 employees and a turnover of more than €150 million. Companies established outside the EU, which operate in the Single Market, are not left out: they are affected as soon as their turnover in the EU reaches €150 million.
The Commission foresees lower thresholds in three critical sectors: textiles, agriculture and minerals. Companies with more than 250 employees, a turnover of €40 million and half of their turnover generated in one of the three sectors mentioned are subject to the obligations. However, they have a two-year grace period before they have to apply the transposed directive.
In total, about 16,000 companies will have to comply with the directive.
New rules for companies
“Many companies have adopted due diligence systems based on the recommendations of the Organisation for Economic Co-operation and Development (OECD). However, this number of companies needs to be expanded. A larger scale cannot be achieved with voluntary measures. We need legal certainty”, said the EU Commissioner for Justice, Didier Reynders.
Thus, targeted companies will be required to identify, prevent, and remedy adverse human rights and environmental impacts. They will have to develop a policy, put in place action plans, make investments, etc. (For more information, see EUROPE 12896/12).
Another action is for the company to obtain contractual guarantees from a partner that it will comply with the code of conduct. In this particular case, the Commission states that the company that has obtained such a guarantee has made substantial efforts to avoid negative effects and should therefore not be held liable in court.
Implementation
The Commission foresees, on the one hand, supervisory authorities in each Member State to apply the directive, and on the other hand, a mechanism of civil liability of companies, which will have to answer in court if they fail to fulfil their obligations.
Supervisory authorities will first be able to rely on companies’ declarations under the Corporate Sustainability Reporting Directive (CSRD). Companies that have identified negative impacts in their value chains will also be required to produce annual reports on their actions to address these impacts.
In case of suspicion or a complaint filed, the supervisory authorities will have the possibility to launch investigations, request information, documents and evidence that the company has fulfilled its obligations.
Response
Many MEPs welcomed this proposal as a real step forward. Lara Wolters (S&D, Netherlands), for example, said she is “broadly satisfied with the proposal. It includes almost all the points we mentioned in our report”, she told several journalists.
The Greens/EFA also welcomed the Commission’s proposal, while indicating that they wanted to add SMEs to the scope of the directive.
The proposal, on the other hand, is far from satisfying the Parliament’s The Left group, which denounces a too narrow scope. French MEP Manon Aubry said that she regretted the existence of a civil liability exemption for companies that have signed a contractual clause with a partner: “Instead of actually tracking and acting on human rights abuses in their value chains, companies will simply sign a liability waiver with their direct suppliers”, she said.
The think tank E3G also states that the Commission is “missing the opportunity to really support the transition of businesses to climate neutrality”. Oxfam, Friends of the Earth Europe and BEUC argue as well that the proposal should be stricter.
In the Renew Europe group, French MEP Pascal Canfin welcomed the Commission’s text. However, he regretted that the link between environmental performance and variable remuneration for managers was not mandatory for all. “In the face of the climate emergency, sustainability is not an option for big business”, he said.
A proposal considered too strict by some
The right wing of the Parliament, in particular the EPP, supported the Commission’s proposal and in particular the exemption of SMEs from the obligations. However, they point out that, in order to be effective, the text must target only risky sectors. “Otherwise, the text offers no improvement and, on the contrary, overloads companies with meaningless bureaucracy”, said Axel Voss (EPP, Germany).
This view is broadly shared by industry representatives. EuroCommerce, BusinessEurope, SME United, EuroChambres and the Federation of Sports Goods Industries have all warned against disproportionate measures against the industries. “It is unrealistic to expect that European companies can control their entire value chains across the world”, said the BusinessEurope President, Pierre Gattaz.
See the proposal for a directive: https://aeur.eu/f/gs (Original version in French by Léa Marchal)