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Proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence (EU) 2019/1937

23 February 2022

The European Commission has adopted a proposal for a Directive on corporate sustainability due diligence. The proposal aims to foster sustainable and responsible corporate behaviour throughout global value chains.

The proposals bring legal certainty and a level playing field for businesses and more transparency for consumers and investors.  

The salient features of the proposed Directive is as follows:

Objective

The objective is to:

  • improve corporate governance practices
  • better integrate risk management and mitigation processes of human rights and environmental risks and impacts, including those stemming from value chains, into corporate strategies
  • remove fragmentation of due diligence requirements
  • increase corporate accountability for adverse impacts
  • ensure coherence for companies regarding obligations under existing and proposed EU initiatives on responsible business conduct
  • improve access to remedies for those affected by adverse human rights and environmental impacts of corporate behaviour

Scope

This Directive shall apply to companies which are formed in accordance with the legislation of a Member State and which fulfil one of the following conditions:

(a)     the company had more than 500 employees on average and had a net worldwide turnover of more than EUR 150 million in the last financial year for which annual financial statements have been prepared

(b)    the company did not reach the thresholds under point (a) but had more than 250 employees on average and a net worldwide turnover of more than EUR 40 million in the last financial year for which annual financial statements have been prepared

At least 50% of this net turnover was generated in one or more of the following sectors:

(i) the manufacture of textiles, leather and related products (including footwear), and the wholesale trade of textiles, clothing and footwear

(ii) agriculture, forestry, fisheries (including aquaculture), the manufacture of food products, and the wholesale trade of agricultural raw materials, live animals, wood, food, and beverages

(iii) 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)

3rd Country Scope

This Directive shall also apply to companies which are formed in accordance with the legislation of a third country, and fulfil one of the following conditions:

(a) generated a net turnover of more than EUR 150 million in the Union in the financial year preceding the last financial year

(b) generated a net turnover of more than EUR 40 million but not more than EUR 150 million in the Union in the financial year preceding the last financial year, provided that at least 50% of its net worldwide turnover was generated in one or more of the sectors listed in paragraph 1, point (b)

Article 5 - Due Diligence Policies

Companies should:

  • integrate due diligence into all corporate policies
  • have in place a due diligence policy that is updated annually
  • include a description of the company’s approach to due diligence in their policy
  • develop a code of conduct to be followed by their employees and subsidiaries
  • create an overview of the processes put in place to implement due diligence including the measures taken to verify compliance with the code of conduct and to extend its application to established business relationships

Article 6 OECD Due Diligence Steps

The due diligence process set out in this Directive should cover the six steps defined by the OECD Due Diligence Guidance for Responsible Business Conduct:

(1) integrate due diligence into policies and management systems

(2) identify and assess adverse human rights and environmental impacts

(3) prevent, cease or minimise actual or potential adverse human rights and environmental impacts

(4) assess the effectiveness of these measures

(5) communicate how impacts are addressed

(6) provide for or cooperate in remediation

Value Chain in Financial Services (not high-impact)

As regards to regulated financial undertakings providing:

  • loan
  • credit
  • other financial services

“Value Chain” with respect to the provision of such services, should be limited to the activities of the clients receiving such services, and the subsidiaries thereof whose activities are linked to the contract in question.

Clients that are households and natural persons not acting in a professional or business capacity, as well as small and medium sized undertakings, should not be considered to be part of the value chain.

Article 4 - Due diligence elements

Member States shall ensure that companies conduct human rights and environmental due diligence by carrying out the following actions:

(a) integrating due diligence into their policies

(b) identifying actual or potential adverse

(c) preventing and mitigating potential adverse impacts, and bringing actual adverse impacts to an end and minimising their extent

(d) establishing and maintaining a complaints procedure

(e) monitoring the effectiveness of their due diligence policy and measures

(f) publicly communicating on due diligence

Independent Third-party verification

The contractual assurances or the contract shall be accompanied by the appropriate measures to verify compliance. For the purposes of verifying compliance, the company may refer to suitable industry initiatives or independent third-party verification.

Article 12

Model contractual clauses in order to provide support to companies to facilitate their compliance with Article 7(2), point (b), and Article 8(3), point (c), the Commission shall adopt guidance about voluntary model contract clauses.

Article 25 - Directors Duty of Care

Member States shall ensure that, when fulfilling their duty to act in the best interest of the company, directors of companies are to take into account the consequences of their decisions for sustainability matters, including, where applicable, human rights, climate change and environmental consequences in the short, medium and long term. 2. Member States shall ensure that their laws, regulations and administrative provisions providing for a breach of directors’ duties also apply to the provisions of this Article.

Article 26 - Setting Up and Overseeing Due Diligence

Member States shall ensure that directors of companies are responsible for putting in place and overseeing the due diligence actions and in particular the due diligence policy referred to, with due consideration for relevant input from stakeholders and civil society organisations.

The directors shall report to the board of directors in that respect.

The directors shall take steps to adapt the corporate strategy to take into account the actual and potential adverse impacts identified.

Salient Definitions

Business Relationship

A relationship with a contractor, subcontractor or any other legal entities (‘partner’) (i) with whom the company has a commercial agreement or to whom the company provides financing, insurance or reinsurance, or (ii) that performs business operations related to the products or services of the company for or on behalf of the company.

Adverse environmental impact

 

Adverse human rights impact

An adverse impact on the environment resulting from the violation of one of the prohibitions and obligations pursuant to the international environmental conventions listed in the Annex, Part II.

An adverse impact on protected persons resulting from the violation of one of the rights or prohibitions listed in the Annex, Part I Section 1, as enshrined in the international conventions listed in the Annex, Part I Section 2.

Value Chain

Activities related to the production of goods or the provision of services by a company, including the development of the product or the service and the use and disposal of the product as well as the related activities of upstream and downstream established business relationships of the company.

Regarding applicable companies, ‘value chain’ with respect to the provision of these specific services shall only include the activities of the clients receiving such loan, credit, and other financial services and of other companies belonging to the same group whose activities are linked to the contract in question. The value chain of such regulated financial undertakings does not cover SMEs receiving loan, credit, financing, insurance or reinsurance of such entities.

Independent Third-party Verification’

Verification of the compliance by a company, or parts of its value chain, with human rights and environmental requirements resulting from the provisions of this Directive by an auditor which is independent from the company, free from any conflicts of interests, has experience and competence in environmental and human rights matters and is accountable for the quality and reliability of the audit.

 

Severe Adverse Impact

An adverse environmental impact or an adverse human rights impact that is especially significant by its nature, affects a large number of persons or a large area of the environment, irreversible or is particularly difficult to remedy as a result of the measures necessary to restore the situation prevailing prior to the impact

Related Directives & Regulations

Conflicts Mineral Regulations

This regulation lays down the supply chain due diligence obligations of Union importers of minerals or metals containing or consisting of:

  • tin
  • tantalum
  • tungsten
  • gold

Proposed Regulation for Defining Deforestation and Degradation Free Products

Proposed regulation to define relevant commodities as deforestation or degradation free. Regulation defining “relevant commodities”:

  • cattle
  • cocoa
  • coffee
  • oil palm
  • soya 
  • wood

The regulation refers to the prohibition of placing or making available on the Union market, or exporting from the Union market, the relevant commodities and products in scope that are not compliant with this regulation, accompanied by the clarification of a due diligence statement

The country benchmark can recognize countries as low-risk and therefore are subject to simplified due diligence sourcing relevant commodities and products from a country or parts thereof that has been assessed as low risk according to the country benchmarking

Data should be captured on the geographic location of the origin or production of the commodity by longitude and latitude in order to verify the origin of the commodity for compliance assessment to determine if the risk is negligble or non-negligble

‘Deforestation’ means the conversion of forest to agricultural use, whether human induced or not

‘Forest degradation’ means harvesting operations that are not sustainable and cause a reduction or loss of the biological or economic productivity and complexity of forest ecosystems, resulting in the long-term reduction of the overall supply of benefits from forest, which includes wood, biodiversity and other products or services

‘Deforestation-Free’ means (a) that the relevant commodities and products, including those used for or contained in relevant products, were produced on land that has not been subject to deforestation after December 31, 2020, and (b) that the wood has been harvested from the forest without inducing forest degradation after December 31, 2020

 

 

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