Last week, the European Union completed the adoption process for the Directive on corporate sustainability due diligence. This Directive aims to foster sustainable and responsible corporate behaviour in companies' operations and across their global value chains. This article provides an overview of the core obligations for companies under the Directive, the scope and timeline of its application, compliance costs, and the anticipated benefits for both citizens and businesses.
The Directive introduces a corporate due diligence duty, which focuses heavily on the identification, assessment, prevention, mitigation, and remediation of adverse impacts on human rights and the environment.
Adverse impacts refer to negative effects that a company's operations, including those of its subsidiaries, business partners, and supply-chain can have on human rights and the environment. These impacts can be both potential (risks that might occur) and actual (issues that have already occurred).
Examples of potential adverse impacts:
Examples of actual adverse impacts:
Addressing these adverse impacts requires a systematic approach. Companies must integrate due diligence into their operations through a series of defined steps to ensure they meet the Directive’s requirements:
Integrate due diligence into policies and risk management systems: This includes developing a due diligence policy in consultation with employees and their representatives, which should describe the company's approach to due diligence, include a code of conduct, and outline processes to ensure compliance with the code and extend its application to business partners.
Identify and assess adverse impacts: This covers actual and potential adverse human rights and environmental impacts arising from operations, subsidiaries, and business partners. The process requires companies to map their operations to identify high-risk areas and conduct in-depth assessments where adverse impacts are most likely and severe. Prioritisation of impacts is based on their severity and likelihood.
Prevent and mitigate adverse impacts: This includes developing and implementing prevention action plans with clear timelines and measurable indicators, seeking contractual assurances from business partners, making necessary operational adjustments, and providing support to SMEs. If impacts cannot be prevented or mitigated, companies may need to suspend or terminate business relationships as a last resort.
Provide remediation for actual adverse impacts: This involves establishing mechanisms for addressing grievances and providing compensation or remediation to affected parties.
Engage stakeholders: Companies are required to conduct meaningful engagement with stakeholders, including employees, local communities, and other affected parties. This engagement helps ensure that the company's due diligence process incorporates stakeholder concerns and feedback.
Establish a notification mechanism and complaints procedure: Companies must establish and maintain mechanisms for stakeholders to report concerns and for the company to address these complaints effectively. This includes setting up a complaints procedure.
Monitor effectiveness: Companies must continuously monitor and assess the effectiveness of their due diligence policies and measures. This involves regular reviews and updates to ensure the due diligence process remains effective and responsive to emerging risks and impacts.
Public communication: Companies are obligated to publicly communicate their due diligence activities and outcomes. This ensures transparency and allows stakeholders, including investors and consumers, to make informed decisions based on the company’s commitment to sustainability.
Additionally, large companies must adopt a transition plan for climate change mitigation aligned with the 2050 climate neutrality objective of the Paris Agreement and intermediate targets under the European Climate Law.
The new EU Directive rules apply to:
Large EU limited liability companies & partnerships: Approximately 6,000 companies with over 1,000 employees and a turnover exceeding EUR 450 million worldwide.
Large non-EU companies: Around 900 companies with a turnover exceeding EUR 450 million within the EU.
While micro companies and SMEs are not directly covered by the proposed rules, the Directive includes supporting and protective measures for SMEs that might be indirectly affected as business partners in value chains.
Businesses will need to bear costs related to establishing and operating the due diligence process and making necessary transitions to comply. The Directive gives Member States two years to transpose it into national law. Companies will start applying the rules gradually, with a phase-in period between three and five years after the Directive comes into force.
Multiple benefits are anticipated as a result of the Directive, both for citizens of the EU and for the participating companies.
Benefits for EU citizens:
Benefits for companies:
Navigating the complexities of advancing sustainability legislation, whether from the EU or elsewhere, can be challenging for any business. By choosing FutureTracker as your partner, you can prepare your business for a sustainable future and whatever comes with it.
If you’d like to learn more about FutureTracker, get in touch with as at enquiries@futuretracker.com or book a demo here.
