There have been changes since the EU Due Diligence proposal was first published for comment and it has received a mixed reaction. It may still be negotiated which would result in further delays before it can be adopted in final form.
Climate change and Director’s duties
Taking action to address climate change is one of the new obligations introduced by the DD proposal. Companies in scope will be required to adopt a climate change action plan to adopt a plan to ensure that their business model and strategy are compatible with a transition to a sustainable economy, as well as with limiting global warming to 1.5 °C (in line with the Paris Agreement). The plan would have to identify the extent to which climate change is a risk for, or an impact of, a company’s operations.
Another new obligation relating to corporate governance are the rules relating to directors who will be required to take into account sustainability matters (including human rights and climate change) in their decisions. This is in addition to being responsible for setting up and overseeing the necessary due diligence measures.
Who does the proposal apply to?
The DD proposal will apply to both EU companies and non-EU companies that are large, limited liability companies.
There are two main groups:
Group 1: applies to companies with 500+ employees and a net EUR 150 million turnover worldwide.
Group 2: applies to companies with high impact sectors with 250 employees and net EUR 40+ million turnover worldwide and operating in high-risk sectors. The high-risk sectors are listed in the DD proposal for example textiles, agriculture, extraction of minerals. The rules will only apply to this group two years later than Group 1.
Third country companies active in the EU with a turnover threshold aligned in Group 1 and 2, generated in the EU.
Micro companies and SMEs are excluded from the DD proposal. This is despite the fact that 99% of companies in the EU are SMEs. Provision is made in the DD proposal to provide supporting measures for SMEs.
The recognition of the role of business in creating a sustainable and fair economy, has been recognised by 70 % of businesses that responded to the public consultation and stated that EU action on corporate sustainability due diligence is needed.
What do business’s need to do?
There are far reaching due diligence requirements in respect of a company’s own operations, its subsidiaries and their value chains. Companies will be allowed to share resources and information within their respective groups of companies.
Key considerations for business are:
- Policies – integrating due diligence into their company policies and have in place a due diligence policy. They will also have to monitor the effectiveness of the due diligence policy and measures.
- Risk assessments – business will have to identify actual and potential human rights and environmental impacts.
- Due diligence – business will have to prevent or mitigate potential impacts. They will also have to bring to an end or minimize actual impacts.
- Complaint procedure- business will have to establish and maintain a complaints procedure. Complaints may be submitted by persons who are affected or have reasonable grounds to believe they might be affected by an adverse impact. Trade Unions and civil society organisations active in areas related to the value change
- Communication and reporting – business will have to publicly communicate what they are doing on due diligence via an annual statement to be published by the 30th of April each year unless subject to reporting requirements under Articles 19a and 29a of Directive 2013/34/EU.
Model contract clauses are to be provided through guidance.
How will the requirements be enforced?
There are three key considerations for business concerning enforcement:
- Administrative supervision – Member states are to designate an authority to supervise and impose’ effective, proportionate and dissuasive sanctions, including fines and compliance orders. To ensure a co-ordinated approach across the EU the Commission will set up a European Network of Supervisory Authorities.
- Civil Liability – member states are to ensure that victims get compensation for damages resulting from a failure to comply with the obligations in the DD proposal.
- Directors Duties – there is now additional enforcement regime if director’s fail to comply with their obligations and Member States will have to enforce through Member States laws.
Decent work and EU import bans
The Commission has published a Communication on Decent Work Worldwide (“the Communication”), to promote decent work at home and abroad and has also confirmed that it is preparing an additional legislative initiative to prohibit goods made with forced labour, including forced child labour, from the EU market.
The proposal will go to the European Parliament and council for approval. Once adopted Member states will have two years to transpose.
How can Ardea help?
Ardea International has been supporting business internationally to develop their due diligence frameworks.
We can benchmark your operations to establish gaps in your processes and policies and support in the development or strengthening of policies.
We provide a wide range of training for companies and directors to gain more technical knowledge about issues.
Working in collaboration with our data partner ANYdata we can help develop a supplier due diligence assessment human rights and environment) and collate all key contractual information
Get in touch with me: email@example.com to discuss.
Contact us to see how we can support you.