EU corporate sustainability due diligence: what changes now for companies?

By Domenico Sorrentino, Research Assistant, Public Policy Brussels

The transition to a climate-neutral and green economy is a political priority for the current European leadership. It is said to be essential for the well-being of our society and planet. Sustainability is part of the EU’s stated values, and companies now increasingly show a commitment to respecting human rights and to reducing their environmental impact voluntarily. For the European Commission, this is still not enough.

On the 23rd of February, the European Commission adopted a proposal for a Directive on corporate sustainability due diligence. The intention is to ensure that the Union acts in full respect of its international commitments in terms of protecting human rights and fostering sustainable development. If approved, this Directive would avoid fragmentation of due diligence requirements in the EU’s huge single market and increase legal certainty for business regarding their expected behaviour and liability.

The Directive would require companies to identify, prevent, end, mitigate and account for adverse impacts of their activities on human rights and the environment. Large companies would also need to ensure that their business strategy is compatible with limiting global warming to 1.5 °C.

The proposal would provide tangible benefits to EU citizens, who would see better protection of human rights, a healthier environment, and better access to justice. Companies that comply with the law would benefit from a harmonised legal framework in the EU, greater customer trust and employees’ commitment, increased attractiveness for talent, and better access to finance.

However, the proposal failed to meet the expectations of those who had been waiting for it for a long time, considering the 238-day delay in the arrival of the text. For instance, according to the European Trade Union Confederation, the draft legislation falls short on the concrete involvement of workers and trade unions in shaping and monitoring sustainable business due to diligence strategies. Among other skeptics, BusinessEurope President Pierre Gattaz said it is unrealistic to expect that European companies can control their whole value chains across the world.

The European Parliament also gave the proposal mixed reviews. MEP Heidi Hautala, who chairs the Working Group on Responsible Business Conduct, “welcomed the idea that the Commission provides guidance and expertise on best due diligence practices.” Yet for her, model contract clauses are a step in the wrong direction. MEP Anna Cavazzini has criticised the full exemptions of SMEs from the proposed Directive, even those operating in high-risk sectors such as textiles, agriculture, food and minerals.

The draft proposal arguably delivers much too little to incentivise the desired behavioural changes by business, for example preventing  human rights violations or damage to the environment. Companies, for their part, argue that the risks of sanctions and civil liability might deter investment to the detriment of economic development. In addition, for non-EU companies, its application is very limited. As MEP Lara Wolters noted, the right balance would have to be found so that businesses don’t disengage from anywhere in the world or any sector or geographical area where there might be problems.

The Commission proposal will now be subject to amendments and approval by the European Parliament and the Council in the months ahead.

If you would like more information about this proposal or to get involved in the debate, please reach out to us at brussels@instinctif.com.