28 Feb 2022
New sustainability corporate governance/due diligence rules
The European Commission has released new draft legislation on due diligence requirements for businesses in global value chains, with potential implications for Irish agri co-operatives.
The legislation will require businesses to identify and, where necessary, end, prevent or mitigate any adverse impacts of their activities on the environment, in terms of pollution and biodiversity loss and on human rights, and introduces additional duties in this regard for directors.
The legislation will initially only apply to businesses operating in the EU with more than 500 employees and a worldwide net turnover of €150 million or above. However, after two years the rules would extend to businesses in “high impact” sectors, which include agricultural businesses and those involved in the manufacture of food, with more than 250 employees and €40 million in turnover worldwide. Small- and medium-sized enterprises are not covered by the proposal, though they could be affected indirectly as larger businesses seek to apply the rules throughout their value chains.
The scope of the directive applies to a business’s own operations, their subsidiaries and their value chains (including direct and indirect established business relationships).
The legislation is another key piece of the new sustainability architecture which the EU is building to regulate corporate sustainability standards, together with the Taxonomy Regulation, the Corporate Sustainability Reporting Directive and the Regulation on Deforestation Free Supply Chains. The aims and ambitions of these proposals are welcomed and supported by the sector, however the excessive cumulative administration burden they pose is causing concern, and a lot of questions re being raised on their ability to be implemented concretely given the complexity of modern supply chains.
Here are the key provisions of the draft Directive on Corporate Sustainability Due Diligence:
- Governance: Under the directive, businesses will need to have adequate governance and management systems to crack down on human rights and environmental abuses in their operations and supply chains. This means businesses will need to identify and take action to bring to an end and prevent any potential negative impacts on the environment or human rights, establish and maintain a complaints procedure and publicly communicate on due diligence.
- Sanctions: It will be up to each EU country to establish what sanctions will apply in the event of an infringement of the rules, and civil liability provisions will mean injured parties can take the businesses to court in pursuit of damages.
- Director Responsibility: The proposal introduces directors’ duties to set up and oversee the implementation of due diligence and to integrate it into the corporate strategy. In addition, when fulfilling their duty to act in the best interest of the company, directors must take into account the human rights, climate change and environmental consequences of their decisions.
The directive will now be discussed, amended and needs to be approved by the European Parliament and Council before becoming a law. EU countries will then have two years to translate the text into national law.
Alison Graham – European Affairs Executive