23/02/2022

On 23 February 2022, the European Commission adopted a Proposal for a Directive on Corporate Sustainability Due Diligence. The aim of this Directive is to foster sustainable and responsible corporate behaviour and to anchor human rights and environmental considerations in companies’ operations and corporate governance. The new rules will ensure that businesses to identify and address adverse impacts of their actions, including in their value chains inside and outside Europe. 

Businesses play a key role in creating a sustainable and fair economy and society. Sustainability is anchored in EU values and companies show a commitment to respecting human rights and to reducing their impact on the planet. Despite this, companies' progress in integrating sustainability, and in particular human rights and environmental due diligence, into corporate governance processes remains slow. 

A number of Members States have already introduced national rules on due diligence and some companies have taken measures at their own initiative. However, there is need for a larger scale improvement that is difficult to achieve with voluntary action. 

A broad range of stakeholder groups, including civil society representatives, EU citizens, businesses as well as business associations, have been calling for mandatory due diligence rules. The Commission's proposal responds to these calls, taking closely into account the responses gathered during an open public consultation on the sustainable corporate governance initiative launched by the Commission on 26 October 2020. 

For businesses these new rules will bring legal certainty and a level playing field. For consumers and investors they will provide more transparency. The new EU rules will advance the green transition and protect human rights in Europe and beyond. 

Which companies will the new EU rules apply to? 

Large EU limited liability companies:

• Group 1: Group 1: all EU limited liability companies of substantial size and economic power (with 500+ employees and EUR 150 million+ in net turnover worldwide)
• Group 2: Relatively smaller companies, with more than 250 employees and a net turnover of EUR 40 million worldwide and more, operating in defined high impact sectors, e.g. textiles, agriculture, extraction of minerals (For this group, the rules start to apply two years later than for group 1) 

Non–EU companies:

• Companies active in the EU with turnover threshold aligned with Group 1 and 2, generated in the EU. 

This is roughly 13 000 companies in EU and 4000 companies outside EU. They produce in total up to two thirds of EU production. 

SMEs are not concerned by the proposed rules. However, the proposal provides supporting measures for those SMEs, which could be indirectly affected. 

The obligations for companies and their directors 

There are two types of obligations this directive imposes on the companies:

1. Corporate due diligence obligation 

This Directive establishes a corporate due diligence duty. Companies need to:

• integrate due diligence into policies;
• identify actual or potential adverse human rights and environmental impacts in the company’s own operations, their subsidiaries and their value chains;
• prevent or mitigate potential impacts;
• bring to an end or minimize actual impacts;
• establish and maintain a complaints procedure;
• monitor the effectiveness of the due diligence policy and measures;
• and publicly communicate on due diligence. 

In addition, certain large companies need 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. 

2. Duties for directors 

The Directive also introduces duties for the directors of the EU companies covered. These duties include setting up and overseeing the implementation of the due diligence processes and integrating due diligence into the corporate strategy. In addition, when fulfilling their duty to act in the best interest of the company, directors must take into account the human rights, climate change and environmental consequences of their decisions. 

How will the new rules be enforced?

National administrative authorities appointed by Member States will be responsible for supervising these new rules and may impose fines in case of non-compliance. In addition, victims will have the opportunity to take legal action for damages that could have been avoided with appropriate due diligence measures.

The rules of directors' duties are enforced through existing Member States' laws. The directive does not include an additional enforcement regime in case directors do not comply with their obligations under this directive. 

Next steps 

The proposal will be presented to the European Parliament and the Council for approval. Once adopted, Member States will have two years to transpose the Directive into national law and communicate the relevant texts to the Commission.