A first step towards due diligence
On 23 February, the European Commission adopted a “Proposal for a Directive on Corporate Sustainability Due Diligence”. The objective is to hold multinational companies liable for adverse human rights and environmental impacts throughout their value chain (i.e. those created by all of their suppliers and subcontractors) (see Due diligence)..
Which companies are concerned?
This text covers two categories of company:
1) companies with more than 500 employees and a net worldwide turnover of more than EUR 150 million.
2) Those operating in “high-impact” sectors posing significant risks of adverse human rights and environmental impacts (textiles, agriculture, ore extraction), and which employ more than 250 employees and realise a net worldwide turnover of more than EUR 40 million (Article 2).
This text also applies to companies from third countries active in the EU, whose turnover threshold is aligned with these thresholds. Only SMEs with 250 or fewer employees will escape this directive. However, they could still be impacted as contractors or subcontractors to companies directly concerned by the directive, and so could economic operators from third countries. That is why the proposal calls on Member States to put in place assistance, websites and platforms to help them meet these due diligence obligations.
What will their obligations be?
To comply with this due diligence requirement in terms of sustainability, they will have to:
1) Integrate due diligence into their policies, in particular by adopting a code of conduct describing the rules and principles to be followed by the company’s employees and describing the processes put in place to implement due diligence (Article 5).
2) Identify actual or potential adverse impacts of their own activities or those of their subsidiaries and, where these are linked to their value chains, their established business relationships, on human rights and the environment. To this end, companies “shall, where relevant, also carry out consultations with potentially affected groups including workers and other relevant stakeholders to gather information on actual or potential adverse impacts” (Article 6). It is worth clarifying and strengthening this provision by involving European Works Councils, where they exist, in the task of identifying these impacts.
3) Prevent or mitigate potential adverse impacts by adopting a prevention action plan, accompanied by a timeline of action and indicators that “is developed in consultation with affected stakeholders” (Article 7). Here too, it can be assumed that European Works Councils too, should be consulted about these plans.
4) Make the necessary investments and provide support for SMEs whose viability might be jeopardised by the code of conduct or prevention plan.
5) Bring actual adverse impacts to an end or minimise their extent, including by the payment of damages (Article 8).
6) Establish and maintain a procedure for dealing with complaints concerning the operations of companies, those of subsidiaries and their value chains, which must be accessible to the persons concerned and also to “trade unions and other workers’ representatives representing individuals working in the value chain concerned” (Article 9).
7) Monitor the effectiveness of the due diligence policy and measures, by means of assessments carried out at least every 12 months, based on qualitative and quantitative indicators (Article 10).
8) Publish an annual due diligence statement, whose content is yet to be specified.
How is climate change taken into account?
Larger companies will also have to adopt a plan to ensure that their business model and strategy are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5° C, in line with the Paris Agreement. The plan will have to include emission reduction objectives where risks or impacts are identified. The variable remuneration payable to company directors, chief executive officers and deputy chief executive officers should include objectives linked to combating climate change (Article 15).
The Commission plans to confer a key role on company directors in taking account of the consequences of their decisions for sustainability matters, including, where applicable, human rights, climate change and environmental consequences, including in the short, medium and long term. They are required to “adapt the corporate strategy to actual and potential impacts identified and any due diligence measures taken”. It will be for the Member States, who will have two years to transpose the directive after it has been adopted, to lay down the rules on sanctions applicable. These must be effective, proportionate and dissuasive (Article 20).
Companies shall incur civil liability if they do not meet their obligations as laid down in Articles 7 and 8, where an adverse impact should have been identified, prevented, mitigated, brought to an end or its extent minimised (Article 22).
Pending the adoption and transposition of this proposal for a directive into national laws, there is nothing to stop these matters being incorporated into the scope of competence of European Works Councils – or even better, EWCs being involved in the process of defining action plans – whenever existing EWC agreements are revised or new agreements are concluded in the meantime.
(Article published in IR Notes 181 – 9 March 2022)
