Proposal for Corporate Sustainability Due Diligence Directive

Compromise package on a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937

Update

In March 2024, the Council of the European Union (EU Member States) reached a compromise agreement on a Corporate Sustainability Due Diligence Directive that establishes stricter due diligence obligations for large companies, meaning they must identify, prevent, and bring to an end any adverse impacts on human rights and the environment that arise from their operations. Most non-EU producers and suppliers will not be directly addressed by these obligations. But they will be required to provide more information on production and processing that will help large companies demonstrate that they meet new due diligence obligations. For the largest companies, the new due diligence obligations will apply from approximately mid-2027.

What is changing?

The aim of due diligence

This Directive sets out rules obliging large companies to identify any potential adverse impacts their business operations may have on human rights or the environment, and take steps to prevent or mitigate and remedy those impacts. This process of managing human rights and environmental adverse impacts is termed “due diligence”. Companies must pay attention to adverse impacts that occur along the entire supply chain, both upstream and downstream, including sourcing, manufacture, and supply of raw materials.

The companies that must perform due diligence

The Directive is aimed at larger companies that must comply directly with due diligence obligations. These are:

• EU companies with more than 1,000 employees and a turnover above €450 million (or the parent company of a group that reaches these thresholds)
• non-EU companies with a net turnover above €450 million within the EU in the financial year before the most recent financial year (or the parent company of a group that reaches these thresholds).

Operators who supply large companies will be indirectly affected, as they will have to provide information and data to help these companies demonstrate due diligence.

Which rights and obligations?

Companies’ due diligence obligations cover the following.

• Rights listed in human rights instruments (including civil, political, social, and economic rights), provided they can be abused by a company (rather than a state), and provided that the company could have reasonably foreseen them in specific circumstances. These include the right to a fair wage/ adequate living wage, rights around child labour and forced labour, rights to freedom of association and collective bargaining, and rights to equal treatment (in line with the International Labour Organization conventions). A detailed list can be found in Annex I, Part I of the proposed Directive.
• Environmental prohibitions and obligations set out in conventions. Companies must not cause any environmental degradation, such as harmful soil change, water or air pollution, harmful emissions, excessive water consumption, or degradation of land or other natural resources. Companies are expected to put in place a transition plan, including targets for reducing greenhouse gas emissions, aimed at limiting global warming to 1.5°C. A detailed list can be found in Annex I, Part II.

Key due diligence obligations

Companies directly impacted by the Directive must take the following measures.

– Integrate risk-based due diligence into all corporate policies and develop:

• a long-term approach to due diligence
• a code of conduct
• processes for implementing due diligence/ verifying compliance with code of conduct (Art. 5).

– Identify actual or potential adverse impacts on human rights/ the environment, and prioritise these identified impacts based on their severity and likelihood (Art. 6).

– Prevent potential adverse impacts, and end actual adverse impacts (Arts. 7 and 8). Measures will depend on whether the impact is caused by the company and/or its direct or indirect business partners, and on the company’s ability to influence its partners. Measures can include:

• implementing an action plan (possibly through an industry/ multi-stakeholder initiative)
• demanding contractual assurances from a direct business partner, or from their partners, to meet the company’s code of conduct
• upgrading facilities
• modifying business plans/ purchasing practices
• providing support to SME business partners
• suspending or terminating relations with suppliers who do not comply with the obligations, where doing so does not cause more adverse impacts on human rights/ the environment (this is known as “responsible disengagement”).

– Engage with stakeholders (employees of subsidiary companies, trade unions, consumers, local communities) to gather information on adverse impacts and formulate action plans (Art. 8).

– Establish a complaints procedure to allow stakeholders to submit complaints about adverse impacts (Art. 9).

– Monitor their implementation of due diligence (Art. 10).

– Publish on the company’s website an annual statement (detail to be defined in later legislation). Companies already reporting on sustainability under Directive 2013/34/EU (see New sustainability reporting obligations) do not need to publish this statement (Art. 11).

Managing due diligence

The European Commission will develop guidance and best practice on how to manage due diligence, particularly for identifying and prioritising adverse impacts, adapting purchasing practices, responsible disengagement, remediation, and engaging with stakeholders. Sector-specific guidance will also be developed. These guidelines will be available 2.5 to 3 years after the Directive enters into force.

Penalties for companies that fail to respect due diligence obligations

Member States must establish “effective, proportionate and dissuasive” penalties for due diligence infringements, with any fines based on the company’s net worldwide turnover (Art. 20). If a company intentionally or negligently fails to end and/or remediate an adverse impact, it will be liable for any such failure that directly leads to damage to individuals (civil liability) (Art. 22).

Why?

The Directive is a response to:

• growing demand from EU citizens to address the impacts of business on human rights and the environment
• the introduction of national laws on corporate due diligence in EU Member States (e.g. France, Germany; planned initiatives in Belgium, Luxembourg, Sweden) – different national approaches create different trading conditions for companies across the EU, potentially increasing costs and distorting competition among EU companies
• doubts about the ability of individual initiatives, particularly private voluntary standards, to make significant improvements to the supply chain.

Timeline

The Council of the EU (Member States) reached a compromise agreement in March 2024. If the European Parliament agrees to the new text in April, it will be formally approved and enter into force in the second quarter of 2024.

EU Member States will adopt national laws to implement the Directive within 2 years (approximately by mid-2026).

The due diligence obligations will apply from mid-2027 to mid-2029, depending on the size of the company (see Table 1 for details).

What are the major implications for exporting countries?

Impacts on non-EU producers and suppliers

In practice, large companies with due diligence obligations will have to map out in detail their operations and those of their business partners. This includes an in-depth assessment of areas where adverse impacts may occur and are likely to be most severe. Where companies identify a higher risk of adverse impact, they will have to provide detailed information. This information can come from public sources or from suppliers. Companies are expected to reach out to business partners in the supply chain closest to where the adverse effects may occur. This means that the information does not necessarily need to be passed sequentially down the supply chain (as required, for example, in food safety traceability).

Companies are expected to engage with non-EU stakeholders (exporters, processors, producers) in order to assess adverse impacts. They should do this every 12 months, or whenever they believe risks may arise, such as when sourcing from a new geographical region. Suppliers must always be prepared to provide the type of information on human rights and the environment required by this Directive.

Large companies with due diligence obligations must develop their own codes of conduct, and may place clauses in contracts with suppliers that require compliance with their codes. However, these contractual assurances are not enough to demonstrate that a buyer has met due diligence requirements, and stakeholder engagement will still be required.

Participation in third-party voluntary schemes

Voluntary schemes that aim to support social and environmental standards, initiated by governments, industry, or non-governmental organisations, can be used by larger companies to demonstrate that they are taking appropriate measures to identify and manage adverse impacts, provided the scheme is objective and independent of the company. Participating in such schemes is not a guarantee for large companies that they meet due diligence requirements, but can be used as evidence of good practice.

Can due diligence bring improvements for smallholders?

Among the human rights that must be respected is the right “to enjoy just and favourable conditions of work, including a fair wage and an adequate living wage for employed workers and an adequate living income for self-employed workers and smallholders”. The recognition of this right has been welcomed by those advocating for fair trade (FTAO 2024).

Recommended Actions

Exporting agri-food sectors will need to work together to ensure they can respond to the demands of the Directive. The precise information required by large companies will become clearer over time (clarified by future Commission guidance), but the following actions will probably be needed (European Commission 2022).

• Engaging with large EU companies to ensure that each human right and labour/ environmental standard has clearly defined and agreed actions for implementation, metrics for measurement and reporting, and the means to meet due diligence requirements. Producers and suppliers need to be proactive to control social and environmental priorities and to develop and manage action plans.
• Establishing definitions and systems for the collection, verification, and publication of relevant data. International standards such as OECD’s Due Diligence Guidance for Responsible Business Conduct and Guidelines for Multinational Enterprises on Responsible Business Conduct (OECD 2018; OECD 2023) are important reference points.
• Upgrading voluntary standards initiatives. Existing initiatives may not cover the range of economic, social, and environmental issues covered by the new Directive, and users of standards will have to adapt to changing requirements.

Background

This proposal is in the form of a Directive. Individual EU Member States will have to adopt national legislation that implements the agreed objectives.

Resources

Sources

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Regulation

Compromise package on a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence

What is changing and why?

The EU believes that companies are not doing enough to ensure their products are made in a way that respects human rights and the environment. The efforts companies are currently making are not sufficient, so new rules are needed.

The new rules are aimed at larger companies (EU companies with more than 1,000 employees and worldwide a turnover above €450 million, and non-EU companies with a net turnover within the EU above €450 million). These companies will have to identify any business activities that have an adverse effect on the environment or human rights. They must then take steps to lessen and rectify these negative impacts, prioritising those that are most severe. This could include implementing action plans, upgrading facilities, changing purchasing practices, or possibly suspending or terminating business relationships, provided this does not cause more severe negative impacts. This responsible practice is known as “due diligence”. To help with this, companies will need to develop rules for how they operate (codes of conduct); set up ways for people to complain about adverse effects; and inform the public about their due diligence policy.

Most non-EU companies that supply agri-food products to the EU market do not qualify as “larger companies”, and will not need to apply the new due diligence rules. But larger companies will need their suppliers to provide information showing how they meet the due diligence obligations. For example, importers may include requirements about respecting people's rights and the environment in their agreements with suppliers. The new rules will therefore impact businesses throughout the supply chain. Private voluntary sustainability standards (e.g. social and environmental certification schemes) can potentially be used to show compliance with due diligence.

Actions

Once the new rules are finalised, sectors in non-EU countries supplying to the EU will need to:

• engage with larger EU companies to ensure that each human right and labour/ environmental standard has a clearly defined and agreed action plan
• update private voluntary sustainability standards to align with the new requirements
• set up measurement systems to monitor if companies are respecting environmental and human rights rules – useful resources are OECD’s Due Diligence Guidance for Responsible Business Conduct and Guidelines for Multinational Enterprises on Responsible Business Conduct.

Timeline

The new law is due to be adopted and published in the second quarter of 2024.

The date that the due diligence obligations will apply depends on the size of the company (see Table 1 for details).

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