In our previous blog we already announced that the European Commission was preparing a proposal for a sustainable corporate governance directive. Breaking news: on 23 February 2022, the Commission published its proposal for the Directive on Corporate Sustainability Due Diligence (hereinafter to be referred as the “Directive”).
In the future, this proposed Directive will have great impact on the way in which companies have to commit themselves to the compliance with human rights and the prevention of climate damage. The Directive not only provides for a roadmap that (large) companies have to follow in order to protect man and the environment, but also provides for civil liability of companies and possibly also their directors in the event of non-compliance with these obligations.
In this blog, we will describe the outlines of the proposal for you. In our previous blog we described the history and objective of the proposed Directive. In brief, sustainability interests and human rights must be part of the decision-making process and business operations within companies. Maximum profitability can of course still be aimed for, but the way in which this is done must be made more sustainable.
Many European companies, particularly larger ones, source goods and services from outside Europe. This may make it harder to guarantee that compliance with human rights or environmental impacts. If more companies are obliged to investigate these value chains more elaborately and to report on this, more data becomes available to ensure better protection of these interests. Besides, at present there is no clarity yet about the standards companies have to meet. The call of companies for clearer regulations is big, also in order to create a level playing field and to prevent a hotchpotch of regulations. This proposed Directive imposes minimum obligations, which the Member States will have to implement in their local legislation.
To whom will the Directive apply?
Article 2 of the draft Directive sets out to which companies the Directive applies. Initially, the Directive will impose obligations on very large companies, with more than 500 employees on average and a net turnover of more than EUR 150 million. Companies with 250 employees and a turnover of EUR 40 million (of which a minimum of 50% originates from specific sectors mentioned in the Directive within which greater risks of negative impact on climate or violation or human rights exist) get a little more time to adjust; for these companies, the Directive will be applicable two years later. Moreover, the rules from the Directive will be applied to companies outside the EU that achieve the turnovers described above within the EU (within the high-risk sectors)
Which obligations are proposed?
The draft Directive prescribes that Member States have to impose due diligence obligations on companies in the scope of the protection of human rights and the environment. Due diligence, which means due diligence in the field of human rights and the environment here, includes a number of steps. In summary these steps are: (a) to make a policy, (b) to identify adverse human rights and environmental impacts; (c) to prevent, cease or minimise those identified threats; (d) to put into operation effective complaint procedures; (e) to assess their own policy regularly; and (f) for the companies to be transparent by publication on their website and/or in their annual reports. These steps, which can be found in Articles 5 to 11 of the draft Directive, will be elaborated below:
(a) Making a policy
Companies have to incorporate due diligence in their policies. This means that their policy must include a description of the (long-term) approach in the field of human rights and the environment, that the companies will draw up rules of conduct describing the rules and principles the employees have to comply with, and finally that the process must be described with which the due diligence will be implemented and enforced. This due diligence policy must be updated annually.
(b) Identifying
In addition, companies have to take measures to identify (possible) adverse effects of breaches of (international) environmental regulations and human rights as a result of the activities of the company. To enable companies to do this, Member States have to (perform and) make available relevant information and investigations.
(c) Taking measures
Subsequently, companies are obliged to take measures to prevent, mitigate and/or bring to an end these i) potential or ii) actual adverse consequences of human rights violations and impact on climate.
i) Measures to prevent potential negative consequences may imply, for example, that an improvement plan is prepared, that (reasonable and non-discriminatory) contractual arrangements are made with business partners, that certain investments are made, targeted support is given to smaller companies with which the company has commercial relations in order to comply with the rules of conduct, and that (within the scope of competition law) cooperation is sought with other companies to achieve the standards.
If these measures offer insufficient solace, the company may make arrangements with companies in the chain with which it has no direct relationship.
If this also fails to produce sufficient result, the relationship with the partner concerned must be suspended (if improvement in the near future is possible), or be terminated. The Member States must provide legislation that makes such suspensions or terminations possible.
ii) Measures to prevent or mitigate actual adverse consequences may imply that the negative impact is reasonably removed, for example by financially compensating the affected persons or communities. If the adverse consequences cannot be removed directly, the measures as described under i) above shall be taken.
(d) Complaints procedure
Companies shall also create a complaints procedure in which persons or organisations that have concerns regarding adverse consequences of the company’s activities can report this. Member States shall ensure that this complaints procedure has appropriate procedural rules and that appropriate follow-up is given to it. If a complaint is well-founded, the subject matter of the complaint is deemed to be ‘identified’ as referred to in step (b).
(e) Monitoring
Companies will be required to monitor and assess their own policies and measures and those of their business partners on a regular basis. According to the outcome of the evaluation, the policy must be adjusted.
(f) Practise transparency
Companies must then publish their policies on the website and in annual reports.
How can companies meet these obligations?
The Commission will support companies in taking the measures described above through models for contractual clauses and through guidelines. Besides, the Member States are expected to support the companies by providing information via websites, platforms or portals. Member States may give financial support to smaller businesses in order to allow them to take the necessary measures.
Fight against climate change
The Directive (Article 15) prescribes that the Member States must prescribe that the companies to which this Directive applies shall adopt a plan to achieve the transition to a sustainable economy with the limiting of global warming to 1.5 °Celsius, as agreed in the Paris Agreement. Where a company has found in its identification that there is a risk for climate damage, the emissions should be reduced. If a variable remuneration has been agreed with the director, this variable remuneration must be linked to the achievement of the long-term and sustainability targets.
Supervision and enforcement
The Member States will have to establish an independent supervisory body with enforcement powers that supervises compliance with the obligations described in the Directive. Persons and legal persons may also report potential non-compliances with the Directive to this supervisory body. The Commission will set up a network of the supervisory bodies of all Member States in order to facilitate exchange of information and cooperation.
Sanctions and civil liability
Member States shall sanction non-compliance with the obligations from the Directive, including with penalties. Member States have to enshrine in their laws that in the case of non-compliance with step (c) (taking measures), the company will be liable for the adverse consequences that third parties suffer as a result of this non-compliance.
Directors’ duty of care
The Directive also prescribes that Member States shall ensure that the remit of directors of companies to which the Directive applies includes that they will take into account the consequences of their decisions for sustainability matters, including human rights, climate change and environmental consequences in the short, medium and long term. The laws of the Member States shall provide for a regulation to address breaches of this directors’ duty of care.
Conclusion
The long-awaited Directive offers a roadmap to induce (large) companies to make their policies more sustainable. This road towards a more sustainable policy is not only made subject to administrative-law sanctions; the Commission also wants to create a ground for civil liability for cases in which persons suffer damage from the provision of insufficient measures. The Commission even goes so far as to say that directors who takes these sustainability aspects into account insufficiently fulfil their duty improperly. In the Netherlands, a group of professors proposed earlier to incorporate sustainability aspects into the statutory duties of directors and supervisory directors. In literature, the direct imposition of such a duty of care on directors, rather than only on the company, has been met with criticism. However, the European Commission now appears to be following the line of the professors.
This proposal is expected to give rise to debate before it will be approved and enter into effect. It is therefore hard to predict when the large companies will have to meet these rules. We are convinced that companies, not only the large ones, would do well not to await this legislation, but to start making policies in order to prevent a negative impact of their activities in the field of human rights, climate and the environment. Kennedy Van der Laan will be happy to assist you in this transition.
