On 23.2.22, the European Commission adopted the proposed directive on due diligence and ESG(Environment, Social, Governance) to ensure the social and environmental sustainability of large companies operating in the EU. (1)
This will go a long way toward defining the responsibility of corporations alone for violations of rules protecting human rights and ecosystems wherever perpetrated upstream in their supply chains. Especially in ‘high-impact’ sectors. (2)
1) Due diligence and ESG. Goals of the directive
The aim of the directive is to facilitate the development of the internal market in the ‘full transition to a sustainable economy‘. Indeed, ‘duediligence‘ (literal translation of due diligence) aspires to:
– empower economic actors, on whom will fall the duties to analyze and mitigate the risks of negative impacts of their supply chains on human rights (e.g., child labor, worker exploitation) and the environment (e.g., pollution, loss of biodiversity),
– Ensure a harmonized approach so that large companies operating in the EU can exercise due diligence and communicate ESG on an equal and transparent basis in the shared interest of stakeholders.
2) Scope of application
2.1) ‘High impact’ production sectors.
High-impact production sectors , regardless of the location of supply chains and their branches, are:
– textiles, leather and related products (including textiles, clothing and footwear), in the manufacturing and wholesale stages,
– Agriculture and animal husbandry, forestry, fisheries and aquaculture, food. Primary production, processing and wholesale trade of agricultural raw materials, live animals, wood, food and beverages. In apparent overlap with the draft EU regulation on due diligence in the palm, soybean, coffee, cocoa and timber supply chains, (2)
– mineral resources (including crude oil, natural gas, coal, lignite, metals and metal ores, and all other nonmetallic minerals and quarry products). Mining and manufacturing of basic metal products, other nonmetallic mineral products and metal products (except machinery and equipment), wholesale trade in mineral resources, basic and intermediate mineral products (including metals and metal ores, building materials, fuels, chemicals and other intermediate products).
2.2) Responsible operators
The European Commission proposes to apply ESG due diligence to several categories of companies, estimated at about 2,600 in total:
– EU-based limited liability companies with more than 500 employees and worldwide net sales of more than €150 million in the last financial year,
– limited liability companies operating in high-impact production sectors (see upper paragraph) with more than 250 employees and worldwide net sales > 40 million,
– non-EU companies active in the European Union with an EU-generated turnover threshold in line with the previous two groups, provided that at least 50 percent of their worldwide net turnover was generated in one or more of the high-impact production sectors (see above).
2.3) SMEs and unfair trade practices
SMEs-which account for 99 percent of European companies-are not subject to the general due diligence requirements prescribed only for large companies mentioned above. Instead, they should receive protection as suppliers to the giants obligated to apply due diligence.
Unfair commercial practices-hitherto regulated, at least in theory, in the agribusiness sector alone (3)-should therefore be regulated in the broader scope of this proposed directive. Where large companies are expected to guarantee SMEs:
– ‘fair, reasonable and non-discriminatory‘ contract clauses,
– financial support for compliance with ESG(Environment, Social, Governance) due diligence measures if they jeopardize their profitability.
3) Requirements
3.1) Responsibility of large enterprises
Large companies subject to the obligations introduced in the proposed directive (see 2.2 above) will be responsible for integrating due diligence into all company policies (Art. 5). Applying an economic development model that considers and includes ESG(Environmental, Social and Governance) factors, through:
(a) A description of the company’s approach, including long-term,
(b) a code of conduct describing rules and principles to be followed by the company, employees and subsidiaries,
(c) a description of the procedures put in place to implement due diligence, including measures taken to verify compliance with the code of conduct. These procedures should also be extended to established business relationships.
3.2) Specific Requirements
The procedures described above shall:
– Identify adverse effects (actual or potential) on human rights and the environment that may occur throughout the value chain. To this end, ‘where appropriate,’ consultations should be carried out with workers and other relevant social partners to gather information on actual or merely potential adverse effects (Art. 6),
– prevent or at least ‘minimize‘ potential negative environmental impacts arising from its own activity and that of all enterprises operating along the value chain by taking appropriate measures (Art. 7),
– Make its ESG due diligence policies public (Art. 11),
– Adopt a specific plan to ensure that the organization’s business model and strategy are compatible with the transition to a sustainable economy and the limitation of global warming to 1.5°C, in line with theParis Agreement on Climate Change (Art. 15),
– Appoint directors responsible for overseeing the implementation of due diligence and its integration through appropriate corporate sustainability strategies in the short, medium and long term, taking due consideration of human rights and environmental consequences (Art. 25, 26),
– Identify a representative in the EU, for non-EU organizations, to deal with all matters necessary for the reception and implementation of this directive (Art. 16).
4) Obligations of member states
EU member states will have to:
– Ensure that responsible operators update their ESG due diligence policies annually,
– ensure that each takes appropriate measures to identify and prevent actual or potential adverse human rights and environmental consequences from its operations. And where appropriate take any appropriate measures to end and minimize their negative impacts,
– Establish and maintain a grievance procedure that can be activated by labor unions, workers and social organizations active in the affected areas against responsible operators. In any case of legitimate concerns about even potential negative impacts (Art. 9),
– monitor the effectiveness of ESG due diligence policies and measures and evaluate the level of prevention and minimization of negative impacts (Art. 10).
4.1) Supervision and procedures
Therefore, European Union member countries will also have to:
– designate a supervisory and monitoring authority, which will ensure companies’ compliance with ESG due diligence (Art. 17). Representatives of national supervisors will participate in the European Network of Authorities and Supervisors to facilitate and ensure coordination and alignment of regulatory, investigative and sanctioning activities and information sharing (Art. 21),
– guarantee the right of any person, whether natural or legal person, to apply to the authority of the relevant member state, based on his or her habitual residence, or registered office, or based on the place of work or of the alleged violation. Where it has reason to believe, given objective circumstances, that a responsible operator is not adequately complying with the provisions of the directive (Art. 20),
4.2) Protection of whistleblowers and sanctions
Whistleblowers are to be protected, under the terms set forth in EU dir. 2019/1937 on the protection of persons who report violations of EU law (Art. 23).
Penalties are to be determined by member states with an approach based on effectiveness, deterrence-which is also to be promoted through stop orders and remedy action-and proportionality to the turnover of companies (Article 20).
4.3) Civil liability
The civil liability of companies subject to ESG due diligence requirements is also to be introduced into national laws (Art. 22). Companies will incur civil liability, if they cause adverse impacts and harm to human rights and the environment in the course of their business, for disregarding ESG due diligence obligations.
Companies could be declared exempt from liability only in cases of adverse impacts derived from the actions of indirect partners if they demonstrate that they have put in place all measures (contracts, audits) to prevent them. Unless such measures are inferred to be objectively insufficient to ‘prevent, mitigate, terminate or minimize the extent of adverse impacts.’
5) Next steps
The draft legislation on ESG due diligence will now be submitted to the European Parliament and Council for political consideration for approval. Once adopted, member states will have two years to transpose the directive into national law and communicate the relevant texts to the Commission.
There is ample room for improvement, with precise regard to the scope of practitioners involved and concrete demonstration of commitments and achievements. The transition from greenwashing to actual share value should go through incorruptible technologies of recording key data, such as public blockchain. (4) It will be seen.
Dario Dongo and Elena Bosani
Cover image from Blagues & Dessins https://pin.it/58IFann
Notes
(1) European Commission. Proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937. COM(2022) 71 final. https://bit.ly/3JgLyx3
(2) Dario Dongo. Due diligence, the EU draft directive on socio-environmental responsibilities in the value chain. GIFT(Great Italian Food Trade). 7/27/21, https://www.greatitalianfoodtrade.it/progresso/due-diligence-il-progetto-di-direttiva-ue-sulle-responsabilità-socio-ambientali-nella-catena-del-valore
(3) Dario Dongo. Unfair trade practices in the agribusiness supply chain, Leg. 198/2021. ABC. GIFT (Great Italian Food Trade). 26.2.22, https://www.greatitalianfoodtrade.it/mercati/pratiche-commerciali-sleali-nella-filiera-agroalimentare-d-lgs-198-2021-l-abc
(4) Dario Dongo. Public blockchain and agribusiness supply chain, sustainability for producers and consumers. GIFT(Great Italian Food Trade). 28.2.21, https://www.greatitalianfoodtrade.it/progresso/blockchain-pubblica-e-filiera-agroalimentare-sostenibilità-per-chi-produce-e-chi-consuma
Dario Dongo, lawyer and journalist, PhD in international food law, founder of WIISE (FARE - GIFT - Food Times) and Égalité.
Lawyer in Milan and Frankfurt am Main. An expert in family, juvenile and criminal law, she is now enrolled in a university master's programme in food law
