The proposed corporate sustainability due diligence directive: a huge challenge that companies need to be prepared for

December 10 marks the 75th anniversary of the Universal Declaration of Human Rights, adopted by the United Nations on December 10, 1948. While the European Parliament has promoted many initiatives in the field of human rights, the proposed corporate sustainability due diligence directive will be a watershed moment for businesses, in terms of their engagement and responsibilities.

On the occasion of this anniversary, a new edition of the Garrigues Sustainable Dialogs has brought together Adrián Vázquez Lázara, Chair of the European Parliament Committee on Legal Affairs, and Garrigues Labor partner Eva Díez-Ordás and Corporate/Commercial partner and coordinator of the Corporate Governance area Sergio González Galán, both of whom are members of the firm’s ESG Committee, to discuss the implications for businesses and the progress made by the European Union in the legislative process for the future directive.

Following lengthy negotiations which are still ongoing, the corporate sustainability due diligence directive is currently entering the final stage of the process for its potential definitive approval. December 13 will mark the next milestone in the process, with the holding of a new tripartite meeting between the Council of the European Union, the European Parliament and the European Commission. In any event, a definitive agreement will need to be reached by February 15 to enable the directive to be passed in this legislative period.

As Adrián Vázquez explained, approving legislation in this area at European level will help prevent fragmented regulation among Member States which would pose greater obstacles for companies operating across different jurisdictions.

Eva Díez-Ordás highlighted that the directive will require companies falling within its scope of application to identify, prevent, mitigate, eliminate and remedy any negative human rights and environmental impacts arising from the their own activities and those of their subsidiaries and value chains. As she pointed out, it is a complex directive that will pose a major challenge for companies operating in the single market.

Both Garrigues experts commented on the level of detail regarding the measures to be applied by companies in the European Commission’s proposal and, in particular, in the amendments proposed by the European Parliament, which Adrián Vázquez explained forms part of a concerted effort to achieve common legislation across all Member States. They also highlighted the possibility raised by the directive of companies suspending or ending commercial relations with companies in their value chains in the event of breach of the preventive and corrective measures designed to combat negative impacts.

In terms of the thresholds determining which companies will be affected by the new directive, Vázquez stated that they are expected to remain in line with the European Commission’s proposal, as backed by the European Council, that is, it would apply to companies with more than 500 employees and turnover in excess of €150 million, with the thresholds of 250 employees and turnover in excess of €40 million being reserved for companies in high-impact sectors (still to be agreed). In any event, Adrián highlighted that he has witnessed first-hand how many of the companies he has visited over the course of the process are already prepared for the incoming legislation and have made significant progress in their non-financial information reporting.

The discussion also addressed questions such as the civil liability (rather than criminal liability, as initially proposed at the start of the legislative process) that may be incurred by companies as a result of the new European regulation. Vázquez stated that, in drafting the legislation, an attempt has been made to keep a tight control on the end result, with the aim of ensuring that companies are responsible and protect the environment and human rights but without this undermining the competitiveness of the European business infrastructure.

One of the aspects that has drawn the most attention is the liability attributed to directors in this area, as stated by Sergio González Galán and acknowledged by Vázquez. Two articles of the directive – article 25 (regarding the obligation of directors to take into account the consequences of their decisions for sustainability matters) and article 26 (establishing the responsibility of directors for setting up and overseeing due diligence measures) – address this issue. Article 26 has already been removed from the text of the directive following the amendments made by the European Parliament. It is still to be seen what will ultimately happen with article 25, but it is likely, give the Council’s position, that it will also be removed. In any event, the European Parliament’s amendments added other references to directors’ liability in article 15 on combatting climate change, which are also currently under negotiation.

As Vázquez explained, the issue of directors’ liability, the regime governing sanctions and the measures concerning the financial sector are the three most delicate aspects of the negotiations underway at the tripartite meetings that could potentially jeopardize the approval of the directive.

Impact on SMEs

As regards SMEs, all three participants agreed that SMEs will be affected by the new regulations, albeit indirectly, since they form part of the value chain of other, larger companies. The chair of the European Parliament Committee on Legal Affairs recalled that aid for these types of companies will be more in the hands of Member States, who must implement measures to help SMEs respond to the demands they will face as part of the value chain.

Sergio González Galán invited the European Parliament representative to make some recommendations to help companies withstand the regulatory tsunami headed their way in terms of sustainability. Adrián Vázquez explained that the due diligence directive seeks to create a regulatory framework that, in many cases, refers to aspects that companies are already largely complying with, either as part of good governance recommendations or because they have already been partly addressed in more specific industry regulations. In any case, he recommended that companies make sure they are well-informed and seek good advice with an eye on Brussels, one of the main sources of legislative initiatives regarding sustainability.

*A few days after this Garrigues Sustainable Dialog, on December 14, the Council and the European Parliament have reached a provisional agreement on the future directive on corporate sustainability due diligence as we reported here.