On 10 March 2021, the European Parliament voted in favour of a resolution to recommend the drawing up of a directive on corporate due diligence and corporate accountability (the Proposed Directive)1. Below is a succinct overview of the Proposed Directive.
The Proposed Directive seeks to reach its aims by imposing mandatory due diligence requirements at EU level. These due diligence requirements will impose an obligation on undertakings to take all proportionate measures and make efforts within their means to prevent adverse impacts on human rights, the environment or good governance from occurring in their value chains, and to address such impacts when they occur.
In practice, the Proposed Directive will require undertakings to devise processes which can identify, assess, prevent, mitigate, cease, monitor, communicate, account for, address and remedy the potential and/or actual adverse impacts on human rights, including social, trade union and labour rights, on the environment, including the contribution to climate change, and on good governance, in its own operations and its business relationships in the value chain.
Importantly, the Proposed Directive does not view due diligence as a 'box-ticking' exercise but, rather, sees it as an exercise which should consist of an ongoing process and assessment of risks and impacts, which are dynamic and may change on account of new business relationships or contextual developments. In this regard, undertakings are called to monitor and adapt their due diligence strategies in an ongoing manner.
The idea behind imposing mandatory due diligence is to foster greater levels of harmonization, legal certainty and the securing of a level playing field in order to give undertakings subject to them a competitive advantage, inasmuch as societies are increasingly demanding from undertakings that they become more ethical and sustainable. To this end, the Proposed Directive also proposes the imposition of sanctions for non-compliance. In particular, the Proposed Directive will require Member States to designate one or more national authorities to monitor the correct implementation by undertakings of their due diligence obligations and ensure the proper enforcement of the Proposed Directive. The national authorities will be entitled to carry out appropriate checks, on their own initiative or based on substantiated and reasonable concerns raised by stakeholders and third parties, and impose effective proportionate and dissuasive administrative sanctions, taking into account the severity and repetition of infringements, in order to ensure that undertakings comply with the obligations set out in the national law.
The European Parliament has proposed that the Proposed Directive should apply to:
(i) all large undertakings governed by the law of a Member State, established in the European Union or operating in the internal market, regardless of whether they are private or state-owned and of the economic sector they are active in, including the financial sector;
(ii) all publicly listed SMEs; as well as
(iii) (unlisted) high-risk, SMEs. In this regard, the European Parliament has proposed that the European Commission should identify high-risk sectors of economic activity with a significant impact on human rights, the environment and good governance in order to include the SMEs operating in those sectors within the scope of the Proposed Directive.
The European Parliament will be forwarding its resolution as well the text of the Proposed Directive to the European Commission and the European Council, and to the governments and national parliaments of Member States for their consideration.
While the imposition of due diligence obligations in terms of the Proposed Directive may still be a while away, relevant market participants would do well to start reviewing their processes in order to ensure that they are not caught off guard when the time comes.
Furthermore, it is pertinent to note that the Proposed Directive was proposed by the European Parliament, which, needless to say, is composed of representatives from across the EU. Viewing the European Parliament as a distillation of European society (and markets), one should therefore note that the Proposed Directive underscores the value and import which the markets place on ESG concerns and sustainability generally. It is therefore imperative for businesses, including local ones, to read the signs of the times and ensure that their business models and operations are congruent with this seemingly unstoppable shift in focus, because to do otherwise would certainly be detrimental.
1 The text of the Proposed Directive can be found on page 15 et seq of the Resolution
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