The European Commission proposal for a Directive for Corporate Sustainability Due Diligence is out

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The European Commission proposal for a Directive for Corporate Sustainability Due Diligence is out

Is your company ready?

A EU Corporate Sustainability Due Diligence Directive has just been proposed that will require companies to identify and act on adverse environmental and human rights impacts across their own organisation – and their entire supply chain. What does the proposed Directive entail? Is your company in scope? And if so, what do you need to do to prepare?

Since the UN launched its voluntary guidelines for business and human rights in 2011, the EU has stepped up its regulatory focus on human rights due diligence. On 23 February 2022, the European Commission published a proposal for a Corporate Sustainability Due Diligence Directive that provides due diligence guidelines for both environmental and human rights issues throughout global value chains. The proposed directive, if enforced, will further extend the accountability of companies outside of their own operations. This will give potential victims better opportunities for legal action, but it will also bring transparency and a level playing field.

Which companies are in scope?

The proposed Directive applies to the following companies:

  • EU companies with more than 500 employees and more than 150 million euros global net turnover
  • EU companies operating in high-impact sectors with more than 250 employees and a global net turnover of 40 million euros
  • Non-EU companies that are active in the EU and generate turnover in the EU exceeding the above-mentioned thresholds

What is expected of these companies?

Companies are expected to monitor and optimise their performance in relation to issues like child labour, exploitation of workers, safe and healthy working conditions, biodiversity loss and pollution. To do so, they must perform the following due diligence activities:

  • Integrate due diligence into policies
  • Identify actual or potential adverse human rights and environmental impacts
  • Prevent or mitigate potential impacts
  • Bring to an end or minimise actual impacts
  • Establish and maintain a complaints procedure
  • Monitor the effectiveness of the due diligence policy and measures
  • Publicly communicate on due diligence

Directors are responsible for setting up and overseeing the implementation of due diligence activities and embedding this into their organisation’s strategy. Member states are expected to impose effective sanctions, including fines and compliance orders, and to ensure that victims get compensation for damages.

Relation to the Corporate Sustainability Reporting Directive and EU Taxonomy minimum social safeguards

The proposed directive is closely related to other EU requirements and proposals such as the Corporate Sustainability Reporting Directive (CSRD) and the EU Taxonomy’s minimum social safeguards. The Corporate Sustainability Due Diligence Directive proposal, however, goes beyond reporting duties. It imposes duties on implementing due diligence measures and assigns accountability beyond your company’s own operations into the supply chain. However, complying with this proposed Directive can help you substantiate the reporting requirements under the CSRD and EU Taxonomy. More fundamentally, it will help you to effectively identify and act on environmental and human rights impacts.

Looking ahead

We don’t know exactly what the final Corporate Sustainability Due Diligence Directive will look like, or when it will be implemented. What we do know, however, is that at some point in the near future, companies will need to implement human rights and environmental due diligence to all the entities in their organisation – plus their supply chain. Moreover, they will need to demonstrate to external stakeholders that they have done so.

We have been seeing a trend in the corporate sector towards measuring impact and value creation and communicating about this to stakeholders. Aligning operations with the requirements of the Directive can help demonstrate impact and value creation throughout the value chain. Of course, getting sustainability due diligence implemented is not going to happen overnight. However, the proposed EU directive shows you where to start. And once compliant due diligence activities are in place, you will enjoy the added benefit of gaining more control over your value chain risks.

As member states await the final version of the EU’s Corporate Sustainability Due Diligence Directive, they are poised to implement their own versions of the Directive on a national level. Germany and Norway have already done so, and the Netherlands also has a proposal ready for implementation.

Start with a plan

To move towards compliance with the proposed directive, your company will need to put solid plans in place. And the time to get started is now. A good idea is to kick off with a baseline assessment of your current due diligence activities to identify potential gaps or areas for improvement. A risk and impact assessment could then shed light on the environmental and human rights topics that should be prioritised. After this a roadmap can be established to implement an effective due diligence framework targeting environmental and human rights risks.

How can we help?

Deloitte can support you with experience and subject matter expertise. Together, we can draft an effective and fit-for-purpose plan and implement the required due diligence activities. Deloitte has already developed a human rights due diligence framework (see figure 1) that helps companies to implement due diligence effectively, ensuring compliance with upcoming regulations. This framework could help to embed the right processes into your existing governance structures.

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