In June last year, Germany adopted a new Law on Corporate Due Diligence in Supply Chains (the so-called Supply Chain Act). Hot on its tail, the European Commission recently published its proposal for a new Corporate Sustainability Due Diligence Directive (let’s call it the Value Chain Directive). The aim is to create legal obligations on companies to identify, and tackle, a range of negative human rights and environmental impacts within their own organisations and throughout their value chains.
The impacts which companies will need to monitor and address are as follows:
• Violations of rights and prohibitions under international human rights conventions and fundamental freedoms conventions
These include: the rights to life, freedom of thought, safe working conditions and in respect of trade unions; the prohibitions on child labour, slavery and human trafficking; and the rights of indigenous peoples.
• Violations of internationally recognised environmental objectives and prohibitions under international environmental conventions
These include: objectives in relation to biodiversity; controls on hazardous chemicals, pollutants and pesticides; and prohibitions on discharge of ozone-depleting substances and hazardous waste.
Surprisingly, the list of relevant environmental impacts does not includeclimate change (although that will be further reviewed). Even so, the largest companies (Group 1 – see below) will have to consider how well they are doing on their climate transition plan when making any director pay awards linked to long-term strategy and sustainability. It is, of course, possible the European Parliament will move over the coming months to toughen the proposed link between ESG compliance and senior executive pay.
On the current proposal, three groups of companies are identified as being subject to the due diligence obligations:
Group 1:
EU-based companies with more than 500 employees and a net worldwide turnover of over €150 million.
Group 2:
EU-based companies with more than 250 employees and a net worldwide turnover of over €40 million which operate in “high-impact sectors” such as agriculture, food, textiles and mining).
Group 3:
Non-EU companies whose net turnover generated within the EU exceeds the threshold of either Group 1 or Group 2 (for in high-impact sectors), regardless of number of employees.
In addition to monitoring and publicly reporting on the listed negative impacts, companies will be required to take steps to prevent, or significantly mitigate, those impacts. This specifically includes paying financial compensation to affected communities. The right of those affected communities to sue non-compliant companies will hopefully ensure that paying compensation is not seen as an easy out, particularly as communities are tending now to assertively demand that corporates actually meet their ESG obligations.
If eventually adopted by the European Parliament and Council, the new Value Chain Directive could come into effect as early as 2023, with Member States required to implement it into national laws by 2025. Nevertheless, the largest companies within Groups 1 to 3 are likely to start gearing up to adapt to the new regime ahead of time. As the new directive will give companies the right to terminate contracts which may be implicated in negative impacts, this will inevitably cause a compliance cascade throughout the value chain, at every level; as it is intended to.
