Last week the European Commission released its new Proposal for a Corporate Sustainability Due Diligence Directive. For the first time ever, the draft law would require EU businesses with more than 500 employees and revenue of €150 million to conduct better due diligence on their entire supply chains to prevent human rights and environmental abuses. In sectors where the risk of exploitation is higher, such as agriculture and garments, businesses with more than 250 employees and revenue of €40 million or more would be covered, while small and medium-sized businesses would be exempt. Non-EU companies that generate more than these turnover levels in the single market would be covered. In this article, we will explore the key aspects of the proposal and what it could mean for your business. Click below to skip to a specific section or scroll down to read the entire article:
- Why did the EU draft this proposal?
- What are the key provisions of the proposal?
- How will the new rules be enforced?
- Is it enough?
- The duty of company directors
- What are the potential challenges with implementation?
- What are the next steps?
- What do you need to do?
- How Impactt can help you
Why did the EU draft this proposal?
The elimination of child labour and forced labour is at the centre of this endeavour. According to the UN, decent work is still not a reality for many people throughout the world, and more work remains to be done: 160 million children – one in ten worldwide – are in child labour, and 25 million individuals are in a condition of forced labour. A diverse group of stakeholders, including civil society representatives, EU citizens, businesses, and business organisations, have called for stronger due diligence requirements. 70% of businesses that responded to the EU’s public consultation in 2020 on this, indicated that EU action on corporate sustainability due diligence is urgently required.
What are the key provisions of the proposal?
The proposal’s fundamental components include identifying, ending, preventing, mitigating, and accounting for negative human rights and environmental effects in a company’s operations, its subsidiaries, and its supply chains. Businesses would be required to:
Implement a climate change strategy: Have a strategy in place to ensure that their operations are consistent with the Paris Agreement’s goal of limiting global warming to 1.5 °C.
Enforce due diligence policies: Integrate due diligence into policies that describe the company’s approach to due diligence, its code of conduct, and a description of the procedures put in place to carry out due diligence. Policies will be required to be updated and published annually.
Perform full supply chain due diligence: Identify actual or potential negative human rights and environmental effects not just in the company’s own supply chain but also those of its subsidiaries, partners, and established business connections.
Introduce a prevention action plan: Implement a prevention action plan, with clearly defined timelines and indicators, as well as seek contractual assurances from business partners that will guarantee compliance with the company’s code of conduct.
Perform supply chain compliance checks: Implement processes, procedures, and necessary checks to verify compliance within its supply chain.
Prevent, reduce and eliminate harms: Prevent or terminate actual harms, or reduce harms that have already occurred, by neutralising the impact and remediating harms, including payment of damages to the affected persons or communities.
Implement grievance mechanisms: Establish and support a complaints procedure to report and investigate harms in its supply chain.
Monitor and evaluate due diligence policies: Monitor the effectiveness of the due diligence policy and measures on an annual basis.
Communicate and report due diligence efforts annually: Publicly communicate and report on due diligence efforts by 30 April each year.
How will the new rules be enforced?
The proposal envisages two ways of enforcing the new rules:
- Primary responsibility for enforcement will be assigned to the Member States, and they will be required to select a competent authority to receive and investigate complaints, as well as take enforcement action where appropriate.
- Businesses would be legally obligated to conduct due diligence on their suppliers. In case of non-compliance, businesses would be forced to take “appropriate corrective action,” such as termination of the business relationship.
Individuals negatively affected by an EU company’s operation will be allowed to bring the company to court in an EU member state if it failed to do enough to prevent, minimise, end, or repair the harmful consequences of its business activities.
Is it enough?
The current drafting has been criticised for some important loopholes. For an excellent digest of where more stringent rules and application may be required see Shift’s analysis.
The duty of company directors
Under the proposed legislation, company directors would be held responsible for incorporating sustainability concerns into their decision-making process. Directors must also consider the human rights, climate change, and environmental consequences of their decisions while executing their fiduciary duty to act in the best interests of the company.
What are the potential challenges with implementation?
There are several challenges associated with the effective implementation of the proposal in a company’s daily operations, including:
- The sheer scale and complexity of conducting due diligence on a global supply chain.
- The need for businesses to have expert knowledge in a range of disciplines, including human rights, environmental law, and sometimes cross-border commercial law.
- The need for ready access to information on the part of companies, which is not always forthcoming, particularly in relation to small and medium-sized businesses.
- The need for cooperation among businesses, civil society organisations, and other stakeholders to identify and mitigate potential harms.
- The cost of implementing due diligence measures, which could be prohibitive for some businesses.
What are the next steps?
The proposal will now be sent to the European Parliament and the Council for adoption. It is expected that businesses will have two to three years to implement measures once the new law will come into force.
So, what do you need to do?
Be prepared, and if the rules apply to you, start thinking about how you will comply. This is only a proposal, and the text may well change, so keep your eyes open and watch for changes, particularly in scope and required content of due diligence.
How Impactt can help you
With over two decades of expertise, Impactt has extensive experience in how to assess, identify and eliminate forced labour through our fieldwork in India, Bangladesh, China, Africa, Southeast Asia, and the Middle East. Our tried and tested approach is practical and draws on real-life examples from our work in investigating and remediating aspects of forced labour globally. Our specialists can assist you with policy reviews and creation, capacity building, and training requirements for your business and your supply chain. We’d be delighted to talk you through all the options.