On 23 February, the European Commission published proposals for a new directive in the area of sustainability. According to the proposal, large companies must work proactively to identify, counteract and mitigate sustainability risks through, among other things, due diligence of the supply chain. The aim of the proposal is to speed up and ensure that companies act sustainably throughout their value chain and to ensure similar requirements within the EU.
Large companies both inside and outside the EU are affected by the directive
It is proposed that the requirements apply to EU companies with either:
- more than 500 employees and net global sales of more than EUR 150 million (category 1), or
- more than 250 employees and net global sales of more than EUR 40 million and with a turnover that is at least 50 percent attributable to certain specific sectors including textiles, clothing and footwear, agriculture, forests, food and beverages, minerals and metals (category 2).
The proposal also includes certain companies outside the EU to the extent that their turnover is generated within the EU and is in line with the above.
Requirements for a large number of measures
The proposed directive requires the companies concerned to implement a large number of measures. Management must explicitly take sustainability risks into account as part of corporate governance and monitor due diligence processes regarding human rights and the environment. Management and the board of directors must also consider human rights and environmental impact when making decisions.
The proposed directive stipulates that the companies concerned must implement measures including:
- Conduct due diligence to identify actual and potential adverse impacts on human rights and the environment. The obligation covers the company's own operations, as well as subsidiaries and established contractual relationships in the company's value chain.
- Draw up a due diligence policy and ensure that due diligence is integrated into all of the company's other policy documents.
- Implement measures to prevent or mitigate potential adverse impacts on human rights and the environment and to halt or minimise the extent of actual adverse impacts. Examples of such measures include action plans, contractual terms and support for collaborative partners, but also, if so required, terminating or not entering into contractual relationships that breach the requirements of the directive.
- Introduce a complaints procedure.
- Regularly review, evaluate and develop the company's systems and procedures for due diligence.
- Annually communicate due diligence measures implemented, as well as adverse impacts identified and measures taken.
Category 1 companies must also adopt a plan to ensure that their business model and business strategy are compatible with the transition to a sustainable economy and the Paris Agreement's limitation of global warming to 1.5 degrees.
It is possible that companies that do not comply with the requirements will receive fines based on turnover. Furthermore, companies that cause damages that could have been avoided by complying with due diligence requirements shall be liable.
Reasons to adapt your business right now
The proposal will now be considered further by the European Council and the European Parliament. However, there is substantial agreement on the proposal as a whole, although the process to come will certainly result in some adjustments.
Our recommendation is to start reviewing your work now on due diligence in the supply chain in relation to sustainability risks, and human rights and the environment in particular. Although the strict demands are a number of years away, they are coming.
The requirements only formally affect large companies. Nevertheless, small and medium-sized companies will also be affected in their capacity as suppliers and customers of large companies. In addition, having good procedures and processes in this regard is an important aspect of sustainable business and will increasingly become a hygiene factor – regardless of company size.
If you any have questions or concerns surrounding the new proposal or other queries relating to requirements for sustainable business, you are most welcome to contact us.