On 23 February 2022, the EU Commission published its proposal for a directive on corporate sustainability due diligence obligations, which aims to foster sustainable and responsible corporate behaviour throughout global value chains.

Scope

The new due diligence rules will apply to:

  • all EU limited liability companies with 500+ employees and EUR 150 million+ in net turnover worldwide (“Group 1”); and
  • other limited liability companies operating in defined high impact sectors (e.g. the textile, mining and agriculture industries), which do not meet both Group 1 thresholds, but have 250+ employees and a net turnover of EUR 40 million+ worldwide (“Group 2”). For these companies, rules will start to apply 2 years later than for Group 1.

This proposal applies to the company’s own operations, their subsidiaries and their value chains (direct and indirect established business relationships), covering approximately 13,000 EU companies and 4,000 non-EU companies. Although SMEs are not directly in the scope of the proposal, they might be indirectly affected by the new rules as a result of the effect of large companies’ actions across their value chains.

Due Diligence Obligations

In practice, the new proposal will require the companies within its scope to:

  • Integrate due diligence into policies.
  • Identify actual or potential adverse human rights (e.g. on workers’ access to adequate food, clothing, water and sanitation) and environmental impacts that run contrary to multilateral environmental conventions.
  • Prevent or mitigate potential impacts.
  • Bring to an end or minimise actual impacts.
  • Establish and maintain a complaints procedure.
  • Monitor the effectiveness of the due diligence policy and measures.
  • Publicly communicate on due diligence.

The proposal also introduces duties for the directors of the EU companies that it covers. According to Article 26 of the proposed Directive, these duties include setting up and overseeing the implementation of the due diligence processes, as well as integrating due diligence into the corporate strategy. When acting in the interest of the company, directors must also take into account any short-, mid- and long-term consequences of their decisions for sustainability matters (e.g. human rights, climate change and environmental consequences) pursuant to Article 25 of the proposed Directive.

In addition, the proposal further requires Group 1 companies to adopt a plan to ensure that their business strategy is compatible with limiting global warming to 1.5 °C in line with the Paris Agreement.

Enforcement

The new due diligence rules include both public and private enforcement provisions. National administrative authorities appointed by Member States will be responsible for supervising these rules and may impose fines in case of non-compliance. In addition, victims will be able to bring a civil liability claim before the competent national courts where the harm could have been identified, and prevented or mitigated, with appropriate due diligence measures.

Key Takeaways

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. In the meantime, companies within scope of the draft directive should prepare now for the upcoming enhanced due diligence obligations by developing or reassessing existing responsible sourcing programs to ensure they are prepared to meet upcoming legal requirements. Such steps should include processes for appropriately auditing their supply chains for adverse human rights and environmental impacts and implementing risk-based, robust and effective supply chain due diligence practices to mitigate potential risks before they arise.

We will continue to monitor the development of the proposal and provide updates accordingly.

Author

Adeel Haque is an Associate in Baker McKenzie's London office. Adeel qualified in September 2019 and has spent time working in the Firm's Hong Kong office. He advises clients on international trade (trade sanctions and export controls), competition, product regulatory, environmental, anti-bribery and corruption and customs law issues.

Author

Anahita Thoms heads Baker McKenzie's International Trade Practice in Germany and is a Member of our EMEA Steering Committee for Compliance & Investigations. Anahita focuses her practice on global investigations, particularly in the fields of international trade law and data protection. She has significant experience advising on internal compliance programs, accompanying internal and external investigations and self-disclosures in cases of breaches of sanctions, export control and foreign investment review, closely collaborating with the competent authorities. She also has considerable experience in the area of data protection and business and human rights.

Author

Rachel MacLeod is an Associate in Baker McKenzie's London office. She advises companies on the "cradle-to-grave" regulation of a broad range of products sold on the EU and UK markets and also advises companies on how to comply with their operational environmental and health & safety obligations.

Author

Graham Stuart is a partner in Baker McKenzie's London office specialising in product regulation and environmental, health and safety law. Graham advises on the regulation of pharmaceuticals, medical devices, chemicals, food, and a wide range of consumer and industrial products, acting for clients in connection with global integrations and reorganisations; product manufacturing, marketing, supply and distribution; EU and UK product authorisation regimes; non-conformities, regulatory investigations and prosecutions. His practice also covers operational environmental, health and safety matters for industrial and manufacturing facilities; the assessment and management of environmental risk in complex multi-jurisdictional projects, mergers and acquisitions; and climate change law and emissions trading.

Author

Alexander Ehrle is a member of the Firm's International Trade Practice in Baker McKenzie's Berlin office. Alexander studied law at the Universities of Heidelberg, Montpellier (France), Mainz, Munich and New York (NYU) specializing in Public International and European Law. He worked as advisor and member of a delegation of a developing country at the United Nations before qualifying for the German bar. He spent his clerkship with the Higher Regional Court in Berlin, the German Ministry of Foreign Affairs in Berlin and Tokyo as well as an international law firm in Frankfurt and Milan. He wrote his doctoral dissertation on the structural changes of public international law and their conceptualization in academic discourse basing his research on the governance of areas beyond national jurisdiction. Alexander is admitted to practice in Germany and New York.