Mandatory value chain due diligence in the EU

Mandatory value chain due diligence in the EU
14th March 2022 Kwame Taylor
In Insights

A new proposal has been adopted in Europe that will require companies to identify and root out negative human rights and environmental risks in their supply chains. The directive creates substantial new responsibilities for business and should strengthen the visibility of the risks at issue while enabling greater accountability. In this article, I have summarised what is most important to understand about the forthcoming Corporate Sustainability Due Diligence Directive.

What is it?

The European Commission recently adopted a proposal for a directive on corporate sustainability due diligence in hopes of addressing human rights and environmental issues in value chains. This comes as several EU states pass similar national laws on due diligence (the German law on Corporate Due Diligence in Supply Chains, and the French Duty of Vigilance law). The latter increases the likelihood of the EU proposal’s early adoption as one of its goals is to achieve harmonisation and certainty within the Union. It introduces a civil liability regime which imposes liability on companies who fail to comply with the obligations which leads to adverse impacts and damage. The directive has several aims:

  • Better integrate risk management and mitigation processes of human rights and environmental risks and impacts into corporate strategies
  • Avoid fragmentation of due diligence requirements within the EU, fostering legal certainty
  • Increase corporate accountability for adverse impacts
  • Improve access to remedies for those adversely affected by human rights and environmental impacts
  • Complement other EU measures which address specific sustainability challenges (such as the recent Taxonomy Regulation)

Who will it apply to?

Although small and medium enterprises are not explicitly within the scope, they may still be impacted if they operate within the value chain of companies that are. The directive will apply to companies based in the EU and non-EU companies active in the EU who fall into the following groups:

  • EU companies with 500+ employees and EUR 150 million+ in net turnover worldwide
  • Other EU companies with more than 250 employees and a net turnover of EUR 40 million+ worldwide, with at least half of the turnover generated in what are considered high impact sectors:
    1. The manufacture of textiles, leather, and related products (including footwear), and the wholesale trade of textiles, clothing, and footwear.
    2. agriculture, forestry, fisheries (including aquaculture), the manufacture of food products, and the wholesale trade of agricultural raw materials, live animals, wood, food, and beverages.
    3. the extraction of mineral resources regardless from where they are extracted (including crude petroleum, natural gas, coal, lignite, metals and metal ores, as well as all other, non-metallic minerals and quarry products), the manufacture of basic metal products, other non-metallic mineral products and fabricated metal products (except machinery and equipment), and the wholesale trade of mineral resources, basic and intermediate mineral products (including metals and metal ores, construction materials, fuels, chemicals and other intermediate products).
  • Non-EU companies active in the EU who fall in any of the above categories.

What are the obligations?

Companies within the scope of the directive are to ensure a due diligence policy is put in place (and updated annually). It must describe the approach to due diligence, a code of conduct highlighting the rules and principles to be followed by employees and subsidiaries. There must also be a description of the processes used to implement due diligence.

They must also identify actual and potential adverse impacts from their own operations or those of their subsidiaries, and where related to their value chains, from their established business relationships.

Measures must be taken to prevent and mitigate potential adverse human rights and environmental impacts. Companies will be required to develop and implement a prevention action plan in consultation with affected stakeholders, ensuring necessary investments are made to support processes which will facilitate the action plan. Organisations must also seek contractual assurances from business partners that they will ensure compliance with the organisation’s code of conduct and prevention plan. There must be collaboration with others and support given to SMEs the company has a business relationship with, where compliance will be too expensive. If these measures cannot prevent or sufficiently mitigate potential adverse impacts, the organisation may be required to suspend commercial relations with the company at fault.

Companies must take measures to bring adverse impacts to an end or minimise it where this is not possible. This may involve paying damages to those affected and implementing a corrective action plan.

Complaint procedures must also be in place so parties with legitimate concerns can submit them (along with trade unions, workers, and civil society organisations). Complainants will be entitled to request appropriate follow-ups and meetings with company representatives to discuss the subject matter of the complaints.

Periodic assessments should be carried out to monitor the effectiveness of the identification, prevention, mitigation, ending and minimisation of human rights and environmental adverse impacts. These assessments are to be based on qualitative and quantitative indicators carried out every 12 months. Additionally, companies within the scope may have to publish a statement on due diligence matters on their website.

Directors’ duties

The proposal introduces directors’ duties to ensure due diligence is incorporated in the functioning of companies. When fulfilling the duties to act in the best interest of the company, directors will need to reflect on the impact their decisions may have on human rights and environmental issues.

How will this be supervised and enforced?

There will be a European Network of Supervisory Authorities composed of representatives of the supervisory authorities in each EU state, which will facilitate cooperation and alignment. Companies based in the EU will be supervised by the supervisory authority in the state in which they have their registered office. Companies not based in the EU will be supervised by the supervisory authority in which they operate. Where they operate in multiple EU states, their supervisory authority will reside in the state in which they generate most of their turnover.

Powers of supervisory authorities

Supervisory authorities will have the power to request information and carry out investigations related to compliance with obligations. If failures are identified, it can grant the company an appropriate period to take remedial action where possible. In carrying out their duty they also have the following powers as it stands:

  • Ordering cessation of the relevant infringement
  • Imposing pecuniary sanctions
  • Adopting interim measures to avoid the risk of irreparable harm

What next?

The proposal will now be presented to the European Parliament and Council for their approval. If it is adopted EU states will have two years to transpose it into national law. Once the directive enters into force, it will apply to large companies within its scope in two years, and the companies in high impact sectors in four years. While the proposal is far from its final form, the EU Commission estimates that about 13,000 EU companies and 4000 third-country companies will come under its scope. This may not be as far reaching as some stakeholders expected. Nevertheless, it is crucial for companies to monitor its progress and stay up to date with any possible change in due diligence obligations.

To find out more about how sustainable supply chains will become an area of competitive advantage and a bulwark against future threats, get in touch with our consultant Rachel Horigan at rachel.horigan@sancroft.com, and our analyst Kwame Taylor at kwame.taylor@sancroft.com.

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