News – 02.03.2022

Sustainability and Green Transition blog: A step towards legalization of Corporate Sustainability: mandatory value chain due diligence as a game-changer?

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Lotta Uusitalo

Partner, Attorney at Law, LL.M. (Bruges), Trained on the Bench

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Sustainability and EU Commission’s Green Deal project European values and the legalization of corporate sustainability is moving forward. Sustainability has long rested on voluntary action of companies. The EU Commission has on 23 February 2022 adopted the proposal for a Directive on corporate sustainability due diligence, and when transposed to national law a legal duty will be established to address negative human rights and environmental impacts.  

Companies will be required to identify, prevent and mitigate the adverse impacts of their activities on human rights such as child labour and exploitation of workers, and on the environment, such as pollution and biodiversity loss. The due diligence rules will not, however, apply as a level playing field to all companies, but to companies with substantial size and economic power (Group 1) or to companies operating in defined high impact sectors (Group 2). There will be different transition periods for rules to apply for the different groups. The rules will also apply to certain non-EU companies.  The directive is not proposed to be applied directly on small and medium sized enterprises (SME’s). It can, however, have an impact on such companies as part of a supply chain.

In addition to the company’s own operations and subsidiaries, the proposal applies to companies’ value chains. The companies need to

  • integrate due diligence into policies
  •  identify actual or potential adverse human rights and environmental impacts
  • prevent or mitigate potential impacts
  • bring to and end or minimize actual impacts
  • establish and maintain a complaints procedure
  • monitor the effectiveness of the due diligence policy and measures
  •  publicly communicate on due diligence.

National administrative authorities appointed by Member States will have authority to supervise the new rules and impose fines. Also, victims will have the opportunity to seek damages in a case where damage could have been avoided with appropriate due diligence measures.

In particular, the proposal introduces the duty of care for the directors of the company: they will have the duty to establish and supervise the implementation of due diligence into corporate strategy. When fulfilling their duty to act in the best interest of the company, directors must take into account the human rights, climate change and environmental consequences of their decisions.

The proposal aims to hold business to account for human rights or environmental violations. The proposal will be presented to the European Parliament and the Council and if approved, the Member States will have two years to transpose the Directive into national law.  Even though the proposal is not as tough as originally planned, together with other legal instruments such as the Sustainable Financial Disclosure Regulations, sustainability and green transition is a step closer towards establishing stricter legal duties for companies rather than adhering to these values by mere voluntary action and it will be backed up by robust enforcement regulations.