The EC announced on February 23, 2022, that it adopted a proposal for a Directive on corporate sustainability due diligence. According to the EC, the proposal is intended to foster sustainable and responsible corporate behavior throughout global value chains. Companies would be required to identify and, where necessary, prevent, end, or mitigate adverse impacts of their activities on human rights, such as child labor and exploitation of workers, and on the environment, for example, pollution and biodiversity loss. The new due diligence rules would apply to the following companies and sectors:

  • EU companies:
  • Group 1: All EU limited liability companies of substantial size and economic power (with 500+ employees and more than €150 million EUR in net turnover worldwide); and
  • Group 2: Other limited liability companies operating in defined high-impact sectors that do not meet both Group 1 thresholds, but have more than 250 employees and a net turnover of more than €40 million EUR worldwide. For these companies, rules would start to apply two years later than for group 1.
  • Non-EU companies active in the EU with turnover threshold aligned with Group 1 and 2, generated in the EU.

The EC notes that small and medium enterprises (SME) would not be directly in the scope of the proposal.

This proposal would apply to the company’s own operations, their subsidiaries, and their value chains (direct and indirect established business relationships). According to the EC, to comply with the corporate due diligence duty, companies would need to:

  • Integrate due diligence into policies;
  • Identify actual or potential adverse human rights and environmental impacts;
  • Prevent or mitigate potential impacts;
  • Bring to an end or minimize actual impacts;
  • Establish and maintain a complaint procedure;
  • Monitor the effectiveness of the due diligence policy and measures; and 
  • Publicly communicate on due diligence.

The proposal would require group 1 companies to have a plan to ensure that their business strategy is compatible with limiting global warming to 1.5 °C, in line with the Paris Agreement. The proposal would also introduce directors’ duties to set up and oversee the implementation of due diligence and to integrate it into the corporate strategy. When fulfilling their duty to act in the best interest of the company, directors would have to consider the human rights, climate change, and environmental consequences of their decisions.

The EC will present the proposal to the EP and the Council for approval. Once adopted, EU member states will have two years to transpose the Directive into national law and communicate the relevant texts to the EC.