Recently, the European Commission published a proposal for a Directive on Corporate Sustainability Due Diligence in February, 2022. This publication proposes an EU standard for human rights & environmental due diligence. The main aim of this Directive is to bring international standards into the European law to prevent the negative consequences of global business activities.
It would require the companies to identify adverse environmental and human rights impacts and prevent and cease them across their organizations and the other entities with whom the company maintains an established business relationship.
The Directive, standing today, is stated to be further discussed and approved by the European Parliament and the Council but still gives an insight into the prospective EU legislation based on the OECD Guidelines for multinational companies and the UN Guiding Principles.The Directive is also meant to complement other EU initiatives like the Employers Sanctions Directive, Taxonomy Regulation, and the proposed Sustainable Products Initiative and the Regulation on Deforestation-free Supply Chain.
EU Companies with any of the following attributes:
Non-EU Companies with any of the following attributes:
Based on the recent statistics, almost 4,000 non-EU companies and 13,000 EU companies will fall under this criteria. An interesting point to note is that even when small and medium-sized companies are excluded from the Directive directly, as part of the value chain, they will still have to bear the consequences.
An established business relationship, as per the Directive, is a direct or indirect lasting relationship with another party (like contractors) that doesn’t represent a mere ancillary part of the value chain. It means that the proposed Directive is vital for all types and sizes of companies and should be understood by them.
At this point, you should also note that the duties to prevent and cease the adverse impacts will mean preparing action plans and investing in legal work. Companies, for example, would have to get auditable contractual assurances from the partners they do business with to prevent or correct the adverse impacts.
In line with this, the Member States will also have to ensure that their laws that provide for breach of directors’ duties apply to the duty of care provisions mentioned in the Directive.
Environmental impacts refer to the EU regulations on toxic chemicals, ozone depletion, biodiversity, carbon emissions, and hazardous waste, amongst others. While not much is clearly stated in the current publication in detail, the draft Directive as of now asks the Member States to ensure that they adopt a business model and strategy that is compatible with the transition to a sustainable economy. The plan must assess if climate change can be a risk factor in the company’s operations and if yes, define objectives to reduce emissions as well. It should, under the Paris Agreement, ensure that global warming is limited to 1.5℃ and outline the steps the company can take to achieve the goal. We will keep you updated as this topic develops, subscribe to our newsletter today.
The Directive will provide for the Member States to enforce sanctions on non-compliance with the obligations mentioned. The sanctions will be ‘effective, dissuasive, and proportionate’ and might also include financial penalties per the company’s net turnover. The National administrative authorities who are appointed by the Member States will be responsible for supervising these new rules.
There will also be a new civil liability regime introduced by the Directive. Here, the companies will be liable for damages if the non-compliance to due diligence obligation had led to the damage. It gives the option for potential victims to take legal action, thereby fostering an increase in environment-related litigation and human rights.
Once all the changes have been made by the authorities and the Directive has been adopted, the Member States will have two years to transpose the same into national law. The EU and non-EU companies with over EUR 150 million net turnovers will have two years after the Directive enters into force, and the EU and non-EU companies with over EUR 40 million net turnovers will have four years for the same.
Timber Exchange, a SAAS-based global trade automation platform, aims to become a high-trust network for importers, exporters and freight companies in the forestry industry. Every company on the platform goes through a thorough vetting process that ensures only those with compliant documentation are on board. Apart from this, Timber Exchange has 100+ advanced supply chain tools, a regularly-updated market data hub, and trade-finance & trade-compliance services that make the entire supply chain process from the inquiry to the delivery of timber as smooth and hassle-free as possible.
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