After multiple delays, the European Directive on Corporate Sustainability Due Diligence – comprising mandatory human rights and environmental due diligence (mHREDD) – was published on February 23, 2022. The draft legislation proposes extensive new due diligence requirements for over 13,000 European and 4,000 non-European companies providing products or services in the European Union (EU), subject to employee and revenue thresholds. The proposed obligations cover established business relationships across all tiers of the value chain, and provide for noncompliance to be sanctioned with fines at the member state level. Member states will likely be mandated to transpose the Directive into national law by 2025, but given the scope and stringency of its provisions, now is the time to start preparing your business for a new era of supply chain regulation in the EU.
Delays Have Seen Change in Europe’s Due Diligence Landscape
Anticipation of the Commission’s proposal has grown as multiple targeted release dates elapsed. Initially due for publication in early 2021, the Directive was delayed indefinitely last December, and Europe’s due diligence landscape has evolved significantly in the interim.
National due diligence legislation has now been adopted or implemented in France, Germany and Norway, and proposals are under consideration in a number of countries, with the Netherlands most recently announcing its ambition for a national due diligence law in response to the EU’s continued delays.
If your company is subject to existing or upcoming national-level laws, you have likely already started to take steps towards complying. But how does the new, proposed European Directive impact this process? And how might it affect what you need to get ready?
Scope Negotiations at the Center of the Legislative Process
The Directive requires firms to monitor environmental impacts across their supply chains, and conduct due diligence to identify, prevent and account for human rights violations, according to the UN Guiding Principles on Business and Human Rights (UNGPs) and the OECD Guidelines for Multinational Enterprises. It also introduces new corporate director duties that will enhance companies’ accountability for sustainability issues.
The complex negotiations that culminated in the draft Directive dealt with several contentious technical issues. Foremost among them was the question of whether the proposal would cover due diligence for the entire value chain or only the first tier of the supply chain. Similarly, regulators were required to achieve a consensus on the profile of companies to which the proposed provisions would apply, the extent to which directors’ duties and oversight would be represented, and whether the law would stipulate administrative and civil liability.
Regarding the areas of due diligence covered, debates questioned whether environmental due diligence would extend to corporate climate impacts as well as whether there would be clauses on goods produced with forced labor. While Commission officials determined, ultimately, to exclude provisions pertaining to the production of goods using forced labor, the draft proposal does include a requirement for large and economically strong companies to align their business strategy with the Paris Agreement target of limiting global warming to 1.5 °C.
The Directive’s Scope Spans Beyond Europe
The Directive on Corporate Sustainability Due Diligence proposes to impose its provisions on all European companies that meet either of the following two criteria:
- More than 500 employees and €150 million annual revenue;
- More than 250 employees and €40 million annual revenue, with at least half coming from a high risk industry, such as garments, agrifood, mineral resources extraction, metals, construction materials, fuels, or chemicals.
In addition, non-EU companies will be liable to the proposed law if they have a net turnover of at least €150 million or €40 million in the EU, depending on their sector. Small and medium enterprises (SMEs) are excluded from direct due diligence requirements, but are indirectly affected by the proposal.
The due diligence requirements imposed cover potential and actual adverse impacts in the value chain, across direct or indirect, established business relationships. Upstream and downstream business relationships fall under this scope, even without a contractual relationship, when a business partner is performing operations related to a company’s products or services that are expected to be lasting.
The Proposal also redefines the Duty of Care of directors, extending their mandate to take into account the consequences of their decisions for sustainability matters, including human rights, climate change and environmental consequences. In cases of non-compliance, EU member states will be provided with enforcement powers to impose fines based on the company’s turnover. Even though member states are expected to have until 2025 to transcribe the Directive into national law following its ratification, the expansive scope of the proposed provisions is such that liable companies have no time to lose in preparing.
Meeting the Directive’s Due Diligence Requirements
The Directive imposes a risk assessment focus on value chains, and requires companies to take action where needed as it mandates them to identify, mitigate and remedy negative impacts. To follow these steps, companies must know and work with business partners in its supply chain that pose sustainability risks, including indirect suppliers further up the chain. But while the different components of the Directive on Corporate Sustainability Due Diligence create compliance risks for companies subject to its provisions, it also opens up opportunities for firms that are familiar with their supplier network’s sustainability management practices are thus well positioned to exercise supply chain due diligence.
The EcoVadis sustainability intelligence suite provides organizations with actionable tools to put due diligence into practice and meet the requirements of the European Commission proposal: Through EcoVadis IQ, companies can conduct an active risk assessment across their entire supplier base, highlighting potential environmental, ethical and human rights impacts, and investigate areas of concern through EcoVadis’ comprehensive sustainability rating. If actual or potential impacts are identified after business partners complete their assessment, the integrated corrective action plan feature allows companies to collaboratively work with their partners to address risks and improve performance.
The EU’s clear statement on the importance of environmental and human rights due diligence has been long awaited, but putting it into practice can be accelerated for companies that utilize effective tools to comply.
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