The European ESG vision: non-binding is over

Environmental, social and governance (ESG) is on the agenda everywhere, including at European level. On 23 February 2022, the European Commission published a proposal for a due diligence directive for corporate sustainability. This proposal for a directive aims to tackle negative impacts on human rights and the environment.

The impact of the proposal is significant: the proposal contains human rights and environmental obligations for major companies based or operating in the EU. These obligations not only concern the company’s own activities, but also the activities of subsidiaries and activities carried out by entities with which the company has a permanent business relationship. In this way, ESG must occupy an important place in the behavior of companies, and ESG can no longer be easily bypassed.

Scope of the Corporate Sustainability Due Diligence Directive

The proposed directive applies to companies that exceed certain thresholds and that are established or active within the EU. European companies that have more than 500 employees and a worldwide net turnover of more than 150 million or more than 250 employees and a worldwide net turnover of 40 million, where 50 percent of this turnover is generated in one or more high-risk sectors, fall within the proposed scope of application of the directive. The proposed directive also applies to non-European companies that have a turnover within the EU of more than 150 million euros or a turnover within the EU of more than 40 million euros, where at least 50 percent of this turnover is generated in one or more risk sectors. It is expected that the proposed directive will apply to approximately 13,000 companies within and 4,000 companies outside the EU.

Obligations Corporate Sustainability Due Diligence Directive

Under the current proposal for a directive, a large number of (international and European) treaties, declarations, agreements and conventions for the protection of people and the environment will apply to companies. These often contain general principles, particularly aimed at governments. This ensures that the precise obligations and concrete handles for companies are limited.
A company that falls within the scope of the proposed directive has a duty to assess potential and actual negative impacts on human rights and the environment in relation to its own activities, those of its subsidiaries and activities in the value chain carried out by entities that establish, prevent, limit, terminates or minimizes that the company has an ongoing business relationship.

Duty of care: 6 steps

This general duty of care can be divided into six steps that a company must take:

  • Step 1. The first step is for due diligence obligations to be incorporated into the policy and a separate ‘due diligence policy’ to be established. Among other things, this policy must contain a description of the approach to due care in the short and long term. In addition, a company must have a code of conduct that must be adhered to.
  • Step 2. The company must then take appropriate measures to identify potential and actual negative impacts on human rights and the environment.
  • Step 3. The third step concerns the management of potential and actual adverse effects. Once these impacts have been identified, a company should respond appropriately to prevent, mitigate and, if necessary, remedy the impact. This could include preparing and executing a preventative action plan and attempting to obtain contractual guarantees from business associates.
  • Step 4. Fourth, companies should establish a complaint procedure. This grievance procedure is intended for cases where there are legitimate concerns about potential and actual adverse effects of business operations on human rights and the environment.
  • Step 5. The fifth step concerns monitoring the implementation and effectiveness of the established due diligence policy and the measures taken. At least once every 12 months, the company should conduct reviews to verify the effectiveness of steps 2 and 3.
  • Step 6. Finally, the draft directive stipulates that companies must annually (externally) communicate all relevant information about the due diligence policy they conduct, as well as the processes and activities carried out to detect and address potential and actual negative effects.

Status of the proposed directive

Although several steps must still be taken before the proposal for a directive is formally adopted and implemented, it is worth noting that the proposal has come about at a reasonable pace and that there is broad support for the proposal’s content and scope. To increase the pressure on Europe, several member states have decided to introduce national legislation in anticipation of the final directive. We therefore expect the final directive to be issued fairly quickly.

Everyone must deal with ESG

ESG is no longer a topic that applies without obligation to certain ‘progressive’ companies. Every company already has, and will only increasingly have to deal with ESG. A good development for us. However, this means that companies will have to look (more) critically at the performance of their own activities, but also at the activities of ordinary business relationships. Especially when one can question the way in which this relationship does the work. In addition, it is worth considering in new contracts how compliance with ESG obligations will be handled.

Authors: Arnout Rodewijk and Daniëlle Kronenburg are lawyers at HVG Law LLP (arnout.rodewijk@hvglaw.nl and danielle.kronenburg@hvglaw.nl)

This article appeared in cm: 2022, ep. 7.

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