The European Commission published in February a proposal for a Directive on Corporate Sustainability Due Diligence. The proposed rules address the regulatory fragmentation on environmental and human rights due diligence and foster responsible and sustainable corporate behaviour across value chains.
With this proposal, the Commission aims to set a global golden standard on due diligence and recognises the transformative role businesses can play in enhancing sustainable practices and in building a robust, socially responsible, and sustainable economy. To read a more in-depth analysis, please find one by clicking here.
Brief overview:
The scope of application would extend to two groups of companies operating in the EU. First, those with 500 or more employees and with an EU-generated turnover of above EUR150 million. And secondly, companies with between 250-500 employees and an EU-generated turnover of above EUR40 million, where at least 50% of the specified turnover was generated in high impact sectors.
The proposal introduces requirements that extend to subsidiaries and direct and indirect ‘established business relationships’, transcending Tier 1 suppliers and including the whole value chain. These include the implementation of formal policy and risk management procedures, risk identification, risk prevention and, mitigation and monitoring, and public disclosure. The proposal also introduces a linkage between a company’s climate-mitigating business strategy and a director’s variable renumeration. In the case of non-compliance with the obligations, companies would be faced with sanctions.
What’s the impact for UK business?
Whilst increased transparency would enable businesses to meet investors’ and consumers’ increasingly ESG-dominated demands, UK businesses operating in the EU would be faced with increased costs and enhanced administrative burdens. Large companies are expected to pass on demands to their suppliers. Despite SME exclusion from the scope, they face the risk of being affected through business relationships with companies in scope. The proposed requirements would make companies responsible for factors beyond their control and hard to comply with, and potentially undermine certain companies’ ability to remain competitive worldwide.
What happens next?
The file has progressed to the European Parliament and the Council for legislative scrutiny. The several delays for its adoption and rare two-time rejection from the Regulatory Scrutiny Board reflect the contentious nature of this proposal, which is not foreseen to cease in upcoming negotiations. Subsequently, we expect significant amendments to the most contentious elements.
Once adopted, the proposal establishes a two-year transposition period for ‘Group 1’ companies, and of four years for ‘Group 2’ companies.
At CBI, we will continue to work with BusinessEurope to ensure close EU-UK cooperation on ESG matters (find the BusinessEurope position here). We will push for the international alignment and the interoperability of reporting requirements to minimise the administrative burden on UK businesses.
If you would like to discuss the proposal in more detail and get involved, get in touch with our Brussels team.