With the intent of fostering sustainable and responsible corporate behavior throughout global value chains, the European Commission has laid out the rules for companies regarding human rights and environmental protections in those global networks.
“Companies play a key role in building a sustainable economy and society,” the EC states. “As such, these entities will be required to identify and, where necessary, prevent, end or mitigate adverse impacts of their activities on human rights, such as child labor and exploitation of workers, and on the environment, for example pollution and biodiversity loss.”
According to JD Supra, the new “supply chain due diligence” rules will bring legal certainty and a level playing field while also giving consumers and investors more transparency into the companies that they’re buying from and/or investing in. “The new EU rules will advance the green transition,” it adds, “and protect human rights in Europe and beyond.”
Going Beyond Voluntary Action
The EC says that while some European Union states have rolled out national due diligence rules and some organizations have taken measures at their own initiative, there is now a need for a “larger-scale improvement” that has to go beyond voluntary action. The EC’s proposal could help close this gap by establishing a corporate sustainability due diligence duty to address negative human rights and environmental impacts.
The new due diligence rules applies to all EU limited liability companies of substantial size and economic power; other limited liability companies operating in certain high-impact sectors; and non-EU companies that are active in the EU and that fall into either of the first two categories (i.e., for company size, number of employees and total annual revenues). The EC says that small and medium enterprises (SMEs) do not fall under the scope of its due diligence proposal.
This proposal applies to the companies’ own operations, their subsidiaries and their value chains (direct and indirect established business relationships). In order to comply with the corporate due diligence duty, companies will have to take these steps
- Integrate due diligence into their corporate policies
- Identify actual or potential adverse human rights and environmental impacts
- Prevent or mitigate potential impacts
- Stop or minimize actual impacts
- Establish and maintain a complaints procedure
- Monitor the effectiveness of the due diligence policy and measures
- Publicly communicate on due diligence
“Companies in scope will need to take appropriate measures (‘obligation of means’), in light of the severity and likelihood of different impacts, the measures available to the company in the specific circumstances, and the need to set priorities,” the EC adds. In addition, group 1 companies (those identified as being “of substantial size”) must ensure that their business strategy is compatible with limiting global warming to 1.5°C in line with The Paris Agreement.
A legally-binding international treaty on climate change, The Paris Agreement was adopted by 196 Parties at COP 21 in Paris in 2015 and entered into force the following year. Its goal is to limit global warming to well below 2°C—and preferably to 1.5°C—compared to pre-industrial levels.
Next Steps
The EC says that its 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 EC.
In March 2021, the European Parliament called on the EC to submit a legislative proposal on mandatory value chain due diligence. In 2020, the EC presented a proposal for an EU legal framework on sustainable corporate governance, including cross-sector corporate due diligence along global value chains.
The EC’s proposal responds to these calls and takes into account the responses gathered during an open public consultation on the sustainable corporate governance initiative. To develop the proposal, the EC says it also considered the broad base of evidence collected through two commissioned studies on directors’ duties and sustainable corporate governance, and on due diligence requirements in the supply chain.
