The Corporate Sustainability Due Diligence Directive introduces a number of obligations for large and medium-sized companies. These concern the need to implement due diligence procedures in all ESG areas, such as against child labor and worker exploitation, environmental responsibility, anti-pollution and biodiversity protection.
Who will the new regulations cover?
The new rules will apply to the following companies:
- Group 1: all EU-registered companies with more than 500 employees and a worldwide net turnover of more than €150 million, and non-EU-registered companies with a turnover of this amount within the Union.
- Group 2: all EU-registered companies with more than 250 employees and a global net turnover of at least €40 million that operate in selected sectors (manufacture and sale of clothing, leather and related products, including footwear, agriculture, forestry, fishing, manufacture and sale of food and beverages, extraction and sale of all mineral resources and manufacture and sale of primary products made therefrom), and non-EU-registered companies with a turnover of this amount within the Union. For these companies, the regulations will take effect 2 years later than for Group 1.
The directives do not impose direct obligations on small and medium-sized enterprises (SMEs). They will, however, be indirectly affected by the regulations if they cooperate with companies directly affected by the directive.
What requirements will companies have to meet?
The obligations imposed by the directive will provide an impetus for business to work more closely with their supply chain to identify potential impacts, relevant topics and put in place effective and functional due diligence policies and systems.
Responsibilities of companies covered by the directive will include:
- create a due diligence policy;
- Identify actual or potential negative impacts on human rights and the environment;
- prevent or mitigate potential impacts;
- end or minimize the actual impact;
- Establish and maintain procedures for reporting violations;
- Monitor the effectiveness of due diligence policies and measures;
- publicly report on due diligence.
In addition, Group 1 companies must ensure that their business strategy is consistent with the goal of limiting global warming to 1.5 °C in accordance with the Paris Agreement. Strategic goals in this regard must be reflected in the company's management compensation policy.
It should be remembered that the provisions of the directive apply both to the company's own operations and to its subsidiaries and the entire value chain. The relevant authorities at the national level will be responsible for monitoring compliance with the provisions of the directive.
A number of accompanying measures are envisaged that will support companies in meeting the directive's obligations. The European Commission may also supplement the support provided by member states with new measures, including assistance to companies in third countries.
The topic of expanded corporate responsibility in terms of due diligence mechanisms in value chains is not a new one. Back in 2020, the European Commission presented a Report describing case studies and possible directions for legislation on due diligence in the context of human rights, among others. In the aforementioned report, one of the potential regulatory paths was the introduction of obligations covering businesses registered and doing business within the European Union. A tangible effect of implementing the described directive is to be the protection of human rights contained in international conventions.
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