Don’t sweat the small stuff? The new proposal for the EU directive on corporate sustainability due diligence

by: in Law

On 23 February 2022, the European Commission released the much anticipated proposal for the Directive on Corporate Sustainability Due Diligence. The aim of this Directive is to reduce human rights violations and environmental harms across the global value chain by making large companies carry out ESG due diligence and aligning their corporate policies more with various international commitments such as the Paris Climate Agreement (Article 15) and the Universal Declaration of Human Rights (Annex).

The main obligation of the proposed Directive is spelled out in Article 4, which states that Member States must “ensure that companies conduct human rights and environmental due diligence.” More specifically, the proposed Directive would require companies not only to integrate human rights and environmental due diligence into their corporate policy (Article 5), but to identify actual and potential adverse impacts (Article 6), and to prevent, mitigate, and end these potential impacts (Articles 7 and 8). This could entail companies terminating or not engaging with problematic entities or taking corrective action such as “payment of damages to the affected persons and of financial compensation to the affected communities” (Article 8(3)(a)).

The proposed Directive also requires companies to: create a complaints procedure, where interested parties can submit complaints (Article 9), establish monitoring that would require even the operations of their subsidiaries to be assessed (Article 10), and communicate their efforts to the public (Article 11). Furthermore, Article 17 requires Member States to designate a supervisory authority to ensure compliance to the Directive and laying down the powers assigned to the authority (Article 18), including the ability to impose appropriate sanctions in cases of infringement (Article 20). Perhaps most notably, Article 22 would enable victims to seek out civil liabilities as the article requires Member States to “ensure that companies are liable for damages” if companies fail to prevent potential adverse impacts (Article 7) or fail to end actual adverse impacts (Article 8). Directors of companies would also be compelled to “take into account the consequences of their decisions for sustainability matters, including, where applicable, human rights, climate change and environmental consequences in the short, medium and long term” in accordance with Article 25.

In short, the proposed Directive would hold companies more accountable for harms committed not only within the EU, but by their subsidiaries, contractors and suppliers located abroad (or as Article 1 notes, any entity within a company’s value chain operations “with whom the company has an established business relationship”), not to mention that it could potentially give foreign victims of corporate malfeasance an opportunity to access EU courts. Thus, this proposal can be optimistically characterized as progress in the right direction. However, various uncertainties still linger: Whether the European Parliament will approve the proposal is likely the most immediate concern, but perhaps more importantly, even if the proposal is adopted (likely with some amendments), just how much impact it will have on reducing human rights violations and environmental harms by corporate malfeasance remains quite uncertain. For example, take into consideration the proposal’s limited scope of application. According to Article 2, the proposed Directive would only apply to the following entities:

  1. companies based in the EU with more than 500 employees on average with a net worldwide turnover of more than 150 million euros in the last financial year (Article 2(1)(a));
  2. companies based in the EU with more than 250 employees on average and 40 million euros in the last financial year, where at least 50% of that net turnover was generated from high risk sectors (e.g. textiles, leather, agriculture, extractive sector, etc.) (Article 2(1)(b)); or
  3. companies established outside the EU with either a net turnover in the EU of more than 150 million euros (Article 2(2)(a)) or a net worldwide turnover of more than 40 million euros, if at least 50% of that turnover was generated in high risk sectors (Article 2(2)(b)).

While the Commission estimates that “13,000 EU companies and 4,000 third-country companies would be within the scope of the Proposed Directive,” according to Eurostat, this proposal would only apply to less than 0.2% of EU companies. Of course conducting due diligence is a costly affair for companies, which is why SMEs were completely exempt from the proposed Directive’s application. However, as the Explanatory Memorandum to the proposal notes, this would mean that “around 99% of all companies in the Union are excluded from the due diligence duty”. As the European Coalition for Corporate Justice notes, “by restricting the scope so dramatically, the proposal willfully ignores many harmful business operations.” So while going after large multinationals is a good start – and a sensible one at that – many wonder just how effective this Directive will be at actually rooting out human rights violations and reducing environmental harms from the global value chain.

Above and beyond the limited scope of companies that the proposed Directive targets, other lingering concerns include, but are not limited to the fact that the proposal does not necessarily ease the difficulty of foreign plaintiffs brining cases against large multinationals in EU courts. Not only is the process still cost prohibitive for most, but the proposal – as it stands – does not give plaintiffs any increased access to necessary evidence that would help them substantiate their claim that a company’s wrongdoing actually caused them harm. The proposed Directive also does not shift the preliminary burden of proof on companies for them to prove that they did nothing wrong (instead of continuing to require plaintiffs to laboriously find evidence of wrongdoings by companies). Of course the establishment of a supervisory authority described in Article 17 could contribute to plaintiffs making their case in subsequent civil suits, but the proposal does not explicitly address whether the information obtained by the supervisory authority can be disclosed and shared with foreign plaintiffs.

In weighing the good and the bad of the proposed Directive, however, perhaps it is more prudent to celebrate all the things that the proposed Directive has, rather than focusing on what it does not. As the old adage goes, you cannot do big things if you are distracted by the small things. But then again, it is often the small things that eventually add up to make a big difference. So in this instance, perhaps it may be worthwhile to indeed sweat the small stuff?

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