European Commission: Proposal for a Directive on supply chain due diligence
1 MARCH 2022On 23rd February, the European Commission has published its much anticipated Proposal for a Directive on corporate sustainability due diligence.
Under the proposed directive, the Commission would proposed due diligence rules and obligations that would apply to the three groups of companies (large EU companies – Group 1; smaller EU companies in high impact sectors – Group 2; and non-EU companies active in the EU who meet the Group 1 and 2 thresholds for their the EU), and in relation to certain sectors for Group 2 companies (high impact sectors are textiles, agriculture, extraction of minerals). The rules will be enforced by administrative supervision by Member States with the possibility of civil liability in the case of non-compliance with the rules.
The proposal will go to the European Parliament and the Council for approval. Once adopted, Member States will have two years to transpose the Directive into national law and communicate the relevant texts to the Commission
1. SCOPE
EU companies
-Group 1: all EU limited liability companies of substantial size and economic power (with 500+ employees and EUR 150 million+ in net turnover worldwide).
-Group 2: Other limited liability companies operating in defined high impact sectors, which do not meet both Group 1 thresholds, but have more than 250 employees and a net turnover of EUR 40 million worldwide and more. For these companies, rules will start to apply 2 years later than for group 1.
Non-EU companies active in the EU with turnover threshold aligned with Group 1 and 2, generated in the EU.
Small and medium enterprises (SMEs) are not directly in the scope of this proposal. However, the proposal provides supporting measures for SMEs, which could be indirectly affected.
Businesses will have to bear the costs of establishing and operating the due diligence procedures and transition costs, including the expenditure and investments to change a company’s own operations and value chains to comply with the due diligence obligation, if needed.
1.1. High Impact Sectors
(i) the manufacture of textiles, leather and related products (including footwear), and the wholesale trade of textiles, clothing and footwear;
(ii) agriculture, forestry, fisheries (including aquaculture), the manufacture of food products, and the wholesale trade of agricultural raw materials, live animals, wood, food, and beverages;
(iii) the extraction of mineral resources regardless from where they are extracted (including crude petroleum, natural gas, coal, lignite, metals and metal ores, as well as all other, non-metallic minerals and quarry products), the manufacture of basic metal products, other non-metallic mineral products and fabricated metal products (except machinery and equipment), and the wholesale trade of mineral resources, basic and intermediate mineral products (including metals and metal ores, construction materials, fuels, chemicals and other intermediate products).
2. DUE DILIGENCE OBLIGATION
The obligation on due diligence will apply to the company's own operations, their subsidiaries and their value chains (direct and indirect established business relationships).
In order to comply with the corporate due diligence duty, companies will need to:
-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;
-and publicly communicate on due diligence.
3. ENFORCEMENT
The rules will be enforced through:
- Administrative supervision: Member States will designate an authority to supervise and impose effective, proportionate and dissuasive sanctions, including fines and compliance orders. At European level, the Commission will set up a European Network of Supervisory Authorities that will bring together representatives of the national bodies to ensure a coordinated approach.
- Civil liability: Member States will ensure that victims get compensation for damages resulting from the failure to comply with the obligations of the new proposals.
The European Commission will set up a European Network of Supervisory Authorities that will gather together representatives of the national bodies in order to ensure a coordinated approach and enable knowledge and experience sharing.
4. APPLICATION AND ENTRY INTO FORCE
The proposal will go to the European Parliament and the Council for approval. Once adopted, Member States will have two years to transpose the Directive into national law and communicate the relevant texts to the Commission.
The new rules would apply to Group 1 companies after two years once the law is in force and to Group 2 companies two years after the rules begin to apply to Group 1 companies.
More information:
Text of the Proposal https://ec.europa.eu/info/publications/proposal-directive-corporate-sustainable-due-diligence-and-annex_en
Questions and Answers: Proposal for a Directive on corporate sustainability due diligence
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Contact: Lebo Mofolo, lmofolo@frucom.eu