Mandatory Due Diligence – Threat or Opportunity?

Mandatory due diligence is a sensitive subject which evokes many different reactions. In this series (see part 1 and 2), it is already discussed what due diligence is, why it is becoming mandatory and what companies’ views are on this obligation. Considering it has been one year since the European Commission adopted the Corporate Sustainability Due Diligence Directive (hereinafter: Directive), in this blog the contents of the difficult-to-read Directive will be clarified.

As discussed in the first blog, this Directive establishes a corporate human rights and environmental due diligence duty, which is based on the voluntary norms set out in the UNGPs and the OECD Guidelines, to stimulate responsible and sustainable corporate behaviour. The new rules should reduce adverse impacts of business conduct, inside and outside of Europe. 

The five core elements of mandatory due diligence are: identifying, bringing to an end, preventing, mitigating and accounting for negative impacts on human rights and the environment. This covers the operations of the company itself, their subsidiaries and their value chains. In addition, certain large companies need to have a plan which ensures that their business strategy is compatible with the Paris Agreement. For companies’ directors, the duties include setting up and overseeing the implementation of the due diligence processes, and integrating due diligence into the corporate strategy. In addition, directors must take into account the consequences of their decisions on human rights, climate change and the environment, when fulfilling their duty to act in the best interest of the company.

The Directive will be enforced through Member States’ supervision on the one hand, and civil liability on the other. First of all, Member States need to appoint a supervising authority, and to impose effective, proportionate and dissuasive sanctions, such as fines and compliance orders. Secondly, the European Commission will set up a ‘European Network of Supervisory Authorities’ bringing together Member States’ representatives, to ensure a coordinated approach. Besides that, Member States must ensure that victims get compensation for damages, resulting from companies’ failure to comply with the obligations of the new proposal. 

To whom does this Directive apply? Only a relatively small group of companies are directly in the scope of the Directive, requiring over 500 employees and a turnover of more than €150 million worldwide (or in case of non-EU companies, generated in the EU). Two years after entry into force, the rules will also apply to EU companies in ‘high impact sectors’ (textiles, agriculture and minerals), with more than 250 employees and over €40 million turnover worldwide (including non-EU companies with the same minimum turnover generated in the EU). Micro companies and small and medium enterprises (SMEs) are not concerned by the proposed rules. However, these companies, both inside and outside the EU, could be indirectly affected when being part of the value chain of an in-scope company.

What’s next? The text of the Directive is not final yet. The European Council has adopted its negotiating position (‘general approach’), and the European Parliament is expected to vote on its position during its plenary in May. Negotiations between the Council, Parliament and Commission are expected to start in the summer, possibly reaching an agreement on the final text by the end of 2023. We will keep you posted on the developments, in our series on mandatory due diligence.