In February 2022, the European Commission adopted a proposal for a directive that would introduce for some companies the due diligence for corporate sustainability. Due diligence is the process that allows the company to identify, prevent and mitigate real or potential adverse impacts in its operations, supply chain and relationships.  A company may cause, contribute to, or be directly linked to social and/or environmental damage, especially when supply chains are global and involve countries where there is no robust regulation on respect for the environment and human rights.

Lately, investor and civil society expectations about the responsible conduct of companies have increased significantly.  The Organisation for Economic Cooperation and Development (OECD), the United Nations (UN) and other international organisations have been advocating the application of due diligence, especially for multinational companies. However, recent studies have shown that voluntary actions have not led to effective results on a large scale. In the EuropeanXwe observe a legislative fragmentation with different national requirements that regulate (or not) due diligence, thus hindering the internal market. 

To this day, there are only two cases in which due diligence is regulated in a harmonised manner within the Union: Regulation (EU) 995/2010 (Timber Regulation) and Regulation (EU) 2017/821 (Conflict Minerals Regulation) which require European companies to supply timber and certain minerals and metals responsibly.  The new directive would introduce harmonised requirements for multisectoral due diligence in relation to environmental and social risks.

According to the Commission, the directive is clearly set in the context of Agenda 2030, which defines the 17 Sustainable Development Goals (SDGs), which is the result of many legislative initiatives by the Union, some of which have already been adopted and others are being studied.

According to the current proposal, the companies directly involved would be:

• all EU limited liability companies of substantial size and economic power (with 500+ employees and EUR 150 million+ in net turnover worldwide);
• EU limited liability companies operating in defined high impact sectors which have more than 250 employees and a net turnover of EUR 40 million worldwide and more
• companies from non-EU countries that generate turnover in the EuropeanXof more than 150 million euros;
• Non-EU companies that generate in the EuropeanXa turnover of more than 40 million euros, of which at least 50% generated in a high-risk sector.

The high-risk sectors identified are:

• production and marketing of textiles, leather, and related products (such as footwear);
•  agriculture, forestry, and fisheries (including aquaculture), food production and trade in agricultural raw materials, animals, timber, food and drink;
• extraction of mineral resources (including oil, gas, coal, lignite, metals), production of metal and non-metallic goods (except machinery and equipment), trade in mineral resources and intermediate products (including minerals and metals, building materials, fuels, chemicals, or other intermediates).

These are mainly big companies: the current forecasts lead to a direct impact on some 13000 European companies and 4000 non-European companies.

The Directive would provide for due diligence based on the following six steps, as required by the OECD Guide on the Duty of Care for Responsible Business Conduct:

1. integrating responsible business conduct with business management policies and systems
2. identify and assess the actual and potential negative impacts associated with the undertaking’s activities, products, or services;
3.  end or minimise actual impacts;
4. monitor the effectiveness of the due diligence policy and measures;
5.  publicly communicate on due diligence;
6. provide remedial measures.

The proposal will be submitted to Parliament and the European Council for approval. Once adopted, Member States will have two years to transpose it.

Source: European Commission