EU Due Diligence Legislation Proposal: A Deep Dive

If you’ve been keeping an eye on the latest updates coming from Brussels, you probably already know that the EU’s commitment to a more sustainable future is starting to bring about significant changes for European businesses. However, according to the new EU Due Diligence Legislation, these impacts might also soon be felt beyond the block’s borders.

As these proposed rules are set to affect a wide range of players, we’ve prepared this article to help you understand all about what’s on the horizon and the potential repercussions for your organisation.

Want someone with deep experience and connections in the EU to help guide your sustainability strategy? Get in touch!

What is the new Due Diligence Proposal?

Adopted by the EU Commission in late February, the proposal for a Corporate Sustainability Due Diligence Legislation has been designed to promote more sustainable and socially responsible practices among European companies, their suppliers and their value chains, regardless of their location.

Main requirements for subject companies

  • The impacts of the proposed legislation on each organisation may differ depending on size, means that are reasonably available to them, the industry to which they belong and where they operate but generally speaking, these are the requirements outlined in the document:
  • Due diligence requirements will need to be part of companies’ internal policies;
  • These policies should establish a corporate duty to identify, prevent, mitigate, bring to an end and account for any actual and potential adverse impacts within the company’s own operations, subsidiaries and part of their value chains, inside and outside European borders;
  • Responsibilities refer to adverse impacts on both the environment and on human rights that are listed in the Annexes of the legislation;
  • Companies must implement and maintain effective complaints procedures;
  • Companies need to publicly communicate their due diligence policies, the impacts that they have identified and any action taken in the framework of their due diligence;
  • The effectiveness of the due diligence policies and their related corrective actions should be measured and continuously monitored to guarantee results;
  • Business strategies taking into account global warming limitations stated in the Paris Agreement will be required from specific companies;
  • In addition to integrating due diligence policies into corporate strategies, company directors will be required to weigh the potential social and environmental impacts of their decisions, be it in the short or long term;
  • Company directors will also be tasked with overseeing the implementation of corporate processes required to support the new due diligence regulations.

Who will the new Due Diligence regulations apply to?

The organisations subject to the due diligence legislation proposed by the European Commission were determined and divided into two main groups, considering the type of industry in which they operate, number of employees and financial turnover.

Here is an estimation of how many companies will be affected in each group:

EU Companies

  • Group 1 – Large Organisations: Approximately 9,400 companies with 500+ employees and more than €150 million of turnover worldwide.
  • Group 2 – Large Organisations in High Impact Sectors: Approximately 3,400 companies with 250+ employees and more than €40 million of turnover worldwide generated in a number of high impact sectors like textiles, agriculture, and mineral extraction.

NON-EU Companies

  • Group 1 – Large Organisations: Approximately 2,600 companies with 500+ employees and more than €150 million of turnover generated in Europe.
  • Group 2 – Large Organisations in High Impact Sectors: Approximately 1,400 companies with 250+ employees and more than €40 million of turnover generated in Europe in sectors like textiles, agriculture, and mineral extraction.

Note: For companies in Group 2, the rules will start to apply two years later than for those belonging to Group 1.

Although the proposal is clearly aimed at large organisations, micro, small and medium companies are still mentioned in the document. Given the integrated nature of the global economy and business, supporting measures were added to the proposal to guide SMEs that might be indirectly affected.

What are the potential consequences of non-compliance?

The European Commission plans on enforcing these rules using two main approaches: administrative supervision and civil liability.

Administrative supervision means that the Commission will leave it to the Member States to nominate an authority responsible for monitoring and punishing organisations that do not fulfil their due diligence obligations. In this instance, non-compliant businesses can expect a variety of potential sanctions, ranging from fines to compliance orders. Although the authority to enforce the rules will lie with each Member State, the proposal mentions the creation of a European Network of Supervisory Authorities to guarantee a coordinated approach within the block.

But this is not all that organisations who fail to comply with the new due diligence legislation will have to deal with. Under the civil liability approach, Member States are also tasked with guaranteeing that individual victims of the damages generated by non-compliant companies are adequately compensated, even for issues caused by subsidiaries or, under certain circumstances, by value chain partners.

What does it all mean for your organisation?

Not surprisingly, a thorough assessment of potentially negative impacts to human rights and the environment throughout the value chain is a natural first step for any company expecting to be affected by this legislation.

However, the EU Due Diligence Legislation is shaping up to be an initiative that will deeply change how European organisations operate, requiring more than simple adjustments to current operational standards.

The implementation of this proposal significantly increases the need for well-thought-out sustainable business strategies, and that’s where a public affairs experts’ advice, like the one offered by Ohana’s team of consultants, can make a world of difference. At Ohana, we can support you and explain the latest policy developments between now and the adoption of the EU Due Diligence legislation, so you always have the latest information and inputs on what is happening, how this will affect your organisation, and what to expect from the EU.

 

 

Want someone with deep experience and connections in the EU to help guide your sustainability strategy? Get in touch!

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