The adoption of the new EU Directive on Corporate Sustainability Due Diligence marks a turning point in corporate governance within the European Union (EU). the directive, based on French laws on duty of care and anti-corruption (Sapin II), establishes comprehensive rules that promote corporate responsibility.
The directive applies to EU-based companies with more than 250 employees and a global turnover of more than €40 million, covering all sectors, including financial services. Furthermore, parent companies with more than 500 employees and a global turnover of more than €150 million are also covered. Non-EU companies with a turnover of more than €150 million, provided at least €40 million of that turnover is generated within the EU, are also included.
Established Goals and Rules
The directive sets out clear due diligence rules covering human rights and the environment, with the aim of addressing concerns such as child labor, slavery, labor exploitation, pollution, environmental degradation and loss of biodiversity. The rules also extend to the companies' value chain partners., including suppliers, dealers, transport companies, waste storage and management.
To fight global warming, companies must create and adhere to a transition plan to limit global warming to 1.5°C. for larger companies, over 1000 employees, compliance with the targets established in this plan will have a direct impact on the directors' variable compensation, as a bonus.
Failure to comply with the new rules entails significant sanctions., applicable by national supervisory authorities. These sanctions may include fines of at least 5% of the company's global net sales and, in certain cases, the ban on public procurement within the EU.
Adaptation to the French Corporate Scenario and the Sapin II Law
Companies can learn valuable lessons from the French corporate scene, where similar principles have been in force since 2016. As the EU enters a new era of sustainable corporate governance, companies must prepare for the challenge, ensuring they are ready and compliant with new rules and regulations.
The French duty of care and Sapin II laws have pioneered corporate sustainability and anti-corruption legislation since 2016. The duty of care law requires French companies with more than 5.000 employees in France or more than 10.000 employees globally to develop and implement a “surveillance plan”. This plan must include measures to identify and mitigate serious human rights risks, fundamental freedoms, human health and safety and the environment.
A Sapin II necklace, in turn, was implemented in 2016 to fight corruption, making France one of the leading countries in this effort. The law applies to French companies with at least 500 employees and a turnover of more than €100 million. It requires the implementation of comprehensive anti-corruption programs, including a code of conduct, risk mapping, internal reporting mechanism, regular customer reviews, suppliers and intermediaries, training programs for employees exposed to corruption risks, in addition to internal or external audit procedures to ensure effective implementation of the program.
These French laws had a significant impact on corporate practices, leading companies to invest in robust internal control systems, anti-corruption measures and fostering a culture of transparency and accountability.
Transposition and Application of the Directive
As the EU directive on corporate sustainability due diligence is adopted by the European Parliament, the legislative process is not yet complete. The directive needs to be formally adopted by the Council of the European Union, and will be published in the Official Journal of the European Union after signature by the Presidents of the Parliament and the Council. The transposition into national laws will take place during the period determined by the EU, usually two years after the entry into force of the directive.
Once transposed into national laws, the provisions of the directive will apply and national authorities will be responsible for supervising and enforcing sanctions for breaches. The European Commission will also monitor the correct transposition and application of the directive in all member states..
Given this schedule, companies should start preparing for the implementation of the new directive, even if it is not yet directly applicable. The French experience with the duty of care law and the Sapin II law provides valuable lessons for effective preparation, and the time to act is now.
The EU Directive on Corporate Sustainability Due Diligence seeks to raise standards of corporate responsibility across the EU and establish a new paradigm for sustainable corporate governance on a global scale. Companies have the opportunity to adapt to this new era, ensuring compliance with future rules and regulations and promoting sustainable and responsible practices in their operations and supply chains.
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