On 14 December 2023, the Council and the European Parliament reached a provisional agreement on the directive on companies’ due diligence obligations for sustainability of their activities. The obligations are a result of the negative impact (effective and potential) of business activities on the environment and human rights. Pending final approval, can companies start preparing?
On 23 February 2022, the Commission submitted a proposal to the European Parliament and the Council for a directive on companies’ obligations for the sustainability of their activities. Almost two years later, on 14 December 2023, Parliament and Council reached a provisional agreement on the text. If, as seems likely, this text will be approved and formally adopted, the directive will require companies to responsibly manage the human rights and environmental consequences originating from the activities of companies, their subsidiaries and, more generally, their partners and those in their supply chains.
In fact, one of the main objectives of the proposed directive is “to address the concerns of consumers who do not want to buy products made with the use of forced labor or that destroy the environment” (Věra Jourová, Vice-President of the European Commission).
The proposed CSDD requires companies, in compliance with the duty of company due diligence imposed therein (see Art. 4), to:
(i) identify the negative impacts (actual and potential) of their business activities on human rights and the environment (see Art. 6);
(ii) adapt business strategies to prevent, eliminate or mitigate possible negative impacts (see Art. 7);
(iii) minimize or, where possible, cease business activities that have adverse impacts (see Art. 8);
(iv) establish a non-judicial notification and grievance mechanism (see Art. 9). More specifically, member states will have to ensure that each company is equipped with a sort of in-house complaints desk;
(v) monitor and review the effectiveness of measures taken to fulfil their obligations under the Directive (see Art. 10);
(vi) disclose to the public, information on their due diligence activities and consult affected stakeholders throughout the proceedings (see Art. 11).
(vii) adopt business models compatible with the goal of limiting global warming to 1.5 °C (see Art. 15), in line with the provisions of the Paris Agreement on Climate Change.
To make these obligations effective, the draft directive provides for individual member states to identify both the applicable sanctions in the event of violation of the national provisions to be adopted in implementation of the directive, and the authority responsible for ensuring the effective implementation of the provisions in question (see Art. 18).
The proposal also provides for a civil liability regime for the companies covered by the rules. Member States will have to ensure that injured parties can obtain compensation for any damage caused by a failure to comply with the above-mentioned due diligence obligations (see Art. 8(3)(a)).
For the purpose of intercepting possible circumvention phenomena in supply chains characterized by chains of contractors, the proposal for a directive also pays particular attention to the relationship between purchasing companies and business partners.
Indeed, under the CSDD, companies will have to integrate the aforementioned sustainability obligations in all their company policies and at all operational levels, and to this end draw up a code of conduct, compliance with which will also have to extend to existing business relationships. In other words, the code of conduct will have to be applied to all relevant corporate functions and activities, including, therefore, procurement decisions (see Recital 28). In particular, the contractor will be required to comply with the contracting company’s code of conduct and, if necessary, to have an operational plan in place to prevent possible breaches thereof. That is not all: the contractor may in turn be required to impose equivalent guarantees on its business partners to the extent that the latter’s activities are part of the value chain of the ordering company (so-called contractual cascade system, see Art. 7, paragraph 2, letter b).
In the event of breach of the obligations referred to above, the draft directive provides for suspension or, in the most serious cases, termination of the relationship (see Art. 7(5)). It should be specified that, where the compliance verification measures are implemented with respect to an SME, the costs of the independent third-party verification will be borne by the contracting company (falling within the scope of the CSDD).
In particular, the scope of the proposed directive includes large companies. Three years after its entry into force, the directive will also apply to third-country companies with a net turnover above certain thresholds generated in the EU. However, even smaller companies, apparently not affected by the directive directly, could v be involved in the above procedures where they are part of the supply chain of larger client companies or suppliers.
In conclusion, pending the final approval of the proposed CSDD, companies can start preparing themselves by implementing certain actions. These include, for instance, risk mapping, tracing the supply chain in which they participate, identifying their direct and indirect business partners and, finally, identifying any new current or potential risks to the environment and/or human rights.
Starting from this information, companies could, already at this stage, identify gaps and assess possible changes to be implemented in their organizational structures. In this way, companies could reduce the complexity of compliance when it will be actually required.
DISCLAIMER: This article merely provides general information and does not constitute legal advice of any kind from Macchi di Cellere Gangemi which assumes no liability whatsoever for the content and correctness of the newsletter. The author or your contact in the firm will be happy to answer any questions you may have.