The European parliament approved, in day 23/04/2024, a new round of European ESG guidelines (Environmental and Social Corporate Governance). In this article we will explore in question and answer format, some developments of these guidelines and how they will impact the production chain and companies that supply or want to supply products to the EU.
New European Corporate Sustainability Directive (due diligence): ESG – Questions and answers
Why is the Commission presenting this initiative?
The transformation to a sustainable economy is a key EU policy priority. It is essential for the well-being of our society and our planet. Businesses play a fundamental role in creating a sustainable and fair economy and society, but they need support in the form of a clear framework. EU-level legislation on corporate sustainability due diligence will promote the green transition and protect human rights in Europe and beyond.
In addition to the European Parliament and the Council, civil society and businesses also call for action. Near 70% of the companies that participated in the preliminary study of 2020 about due diligence, as well as in the open public consultation of 2021, agreed that a harmonized EU legal framework on human rights due diligence and environmental impacts is needed. Based on the consumer survey of 2020, almost eight out of every 10 Respondents indicate that sustainability is important to them.
Why voluntary corporate action is not enough to address human rights and environmental impacts?
Many companies are already implementing corporate sustainability tools. For example, in the study of 2020 on due diligence requirements along the supply chain, a third of respondents from companies across all sectors stated that their companies carry out work in this area, taking into account all human rights and environmental impacts. These own commitments or voluntary initiatives are commendable and, to a certain extent, helped solve sustainability problems.
Nonetheless, Research shows that when companies take voluntary action, focus on the first link in supply chains, while harm to human rights and the environment occurs more frequently further down the value chain. Furthermore, progress is slow and uneven.
That's why it's time to establish clear rules.
What companies will be forced to do?
The new proposal establishes a duty of corporate due diligence to identify, prevent, finally, mitigate and account for adverse impacts on human and environmental rights in the company's own operations, in its subsidiaries and in its value chains. It is based on the United Nations Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises and responsible business conduct, and complies with internationally recognized human rights and labor standards.
In practice, the new proposal will require companies falling within its scope:
- Integrate due diligence into policies.
- Identify actual or potential adverse impacts on human rights and the environment.
- Prevent or mitigate potential impacts.
- End or minimize real impacts.
- Establish and maintain a complaints procedure.
- Monitor the effectiveness of policy and due diligence measures.
- Communicate publicly about due diligence.
In order to achieve a significant contribution to the transition to sustainability, Due diligence under this Directive should be carried out with respect to all adverse impacts on human and environmental rights identified in its Annex.
This means that companies must take appropriate measures to prevent, end or mitigate impacts on rights and prohibitions included in international human rights agreements, for example, with regard to workers’ access to adequate food, clothing, water and sanitation in the workplace. Companies are also required to take measures to prevent, end or mitigate negative environmental impacts that go against a series of multilateral environmental conventions.
Furthermore, the new proposal requires certain large companies to adopt a plan to ensure that their business strategy is compatible with limiting global warming to 1,5 °C, in compliance with the Paris Agreement.
What are administrators required to do and how will their duties be fulfilled?
The directive also introduces duties for directors of EU companies covering. These functions include creating and overseeing the implementation of due diligence processes and integrating due diligence into corporate strategy. Furthermore, when directors act in the interests of the company, must take into account the consequences of their decisions in terms of human rights, climate and environmental issues and the likely long-term consequences of any decision. Companies must take due account of compliance with corporate climate change plan obligations when setting any variable remuneration associated with a director's contribution to the company's business strategy and long-term interests and sustainability.
The rules relating to the duties of directors are applied through existing laws in the Member States.
All companies will be affected by these rules?
The new rules will only apply to large limited liability companies with substantial economic strength. Small and medium-sized companies (PME) are excluded from the direct scope. These are companies with more than 500 employees and a net turnover exceeding 150 million euros worldwide. Two years after the new rules came into force, the new rules will also be extended to other limited liability companies with more than 250 workers and a net turnover exceeding 40 million euros worldwide, in sectors where there is a high risk of human rights violations or damage to the environment. It was identified, for example. in the farming, textiles or minerals. The directive will also apply to companies from third countries, active in the EU with a turnover threshold aligned with the above, generated in the EU.
SMEs will be affected by the new rules?
SMEs do not fall within the scope of the directive. Nonetheless, may be indirectly affected by the new rules, as a result of the effect of the actions of large companies on their value chains. Therefore, the proposal provides for specific support aimed at SMEs, such as guidelines and other tools to help them gradually integrate sustainability considerations into their business operations. Member States should provide additional technical support and may provide financial support to SMEs to facilitate adaptation. The proposal will also contain elements to protect SMEs from excessive demands by large companies.
What happens if companies don't comply with the new rules?
Member States will supervise companies' compliance with their due diligence obligations. Member States may impose fines on companies or issue orders requiring the company to comply with the due diligence obligation.
It is particularly important to allow victims to obtain compensation for damages. Therefore, the proposal will also give people affected by the damage the opportunity to hold companies accountable. This means that victims will have the possibility to bring a civil liability claim before the competent national courts. This civil liability concerns the operations of the companies themselves and their subsidiaries and the established commercial relationships with which a company cooperates on a regular and frequent basis., where the harm could have been identified and avoided or mitigated, with appropriate due diligence measures.
How effective implementation will be guaranteed?
Member States will designate an authority to ensure effective implementation. The directive also requires Member States to adapt their civil liability rules to cover cases where damage results from a company's failure to comply with due diligence obligations., based on their existing civil liability regimes.
At European level, the Commission will create a European Network of Supervisors that will bring together representatives of national bodies, in order to ensure a coordinated approach and enable the sharing of knowledge and experience.
What are the benefits for citizens?
Citizens will become more aware of the impact of the products they buy and the services they use. The main benefits will be as follows:
- More transparency and reliability in the way products are manufactured and services provided.
- Protection of human rights – sustainable business models must prevent human rights violations.
- Healthier environment and a long-term commitment to the environment by companies. Citizens may also feel more motivated to protect the environment, knowing that they are not alone in their efforts and that companies are also doing their part.
What are the benefits for companies?
For the first time, companies operating in the EU market will have common and clear rules on corporate sustainability due diligence. The main benefits will be as follows:
- Prevent legal fragmentation. Some EU countries have developed national rules (like France, Germany or the Netherlands) or intend to do so (for example, Austria, Belgium, Finland, Denmark), but the scope of these measures varies greatly from one country to another. Furthermore, there are many voluntary initiatives in place. This causes legal uncertainty for businesses across the EU.
- Meeting consumer expectations. Consumers are increasingly attracted to products manufactured in an ethical and environmentally sustainable way, for example, without using harmful substances. They also perceive greater benefits and value from products sold by a socially responsible company, like ethical cocoa.
- Meeting investor expectations. Investors call for transparency requirements. No mandatory measures, investors and consumers would lose consistent benchmarks for certainty about value chain standards.
- Strengthen risk management. Thanks to the new rules, companies will have a clearer view of their operations and supply chain, including greater awareness of its negative impacts, and will be able to detect problems and risks (including reputational risks) early.
- Generating economic benefits. Research shows that companies that incorporate sustainability factors into their policies generate higher returns.
- Increasing resilience. Researchers found that companies that integrated social considerations, environmental and health strategies in their strategies weathered the COVID-19 crisis better and saw a smaller drop in share prices during the pandemic than those that did not.
What are the costs for companies?
The new rules on due diligence will apply to companies of significant size and economic power and those operating in high-impact sectors, like textiles, agriculture and mineral extraction. Although SMEs are not subject to direct obligations in the proposal, accompanying measures will support SMEs that may be indirectly affected.
To comply with the new rules, companies may incur costs related to the establishment and operation of due diligence processes and procedures. Furthermore, Companies may also incur additional transition costs arising from investments required to change their own operations and value chains to address adverse impacts.
How will this proposal ensure that EU companies remain competitive?
The competitiveness of companies increasingly depends on their ability to guarantee sustainable practices throughout their value chains. Consumers are increasingly aware of the choices they make in their purchases, increasing demand for sustainable and responsibly sourced products and services. At the same time, Investors also increasingly consider the sustainability of companies when looking for new investment opportunities. The various existing and planned national rules on due diligence, as well as the numerous voluntary initiatives, cause legal uncertainty for businesses across the EU, fragmentation of the single market, additional costs and complexity. Visa proposal, therefore, provide a harmonized framework, clear and coherent. It will also potentially become a global model in sustainable value chains.
By helping companies better address impacts in their value chains, the proposal will not only improve the competitiveness of companies, but also its efficiency and financial performance, long-term preparedness and resilience.
What is the impact of the new rules on developing countries?
The new rules will bring multiple benefits to developing countries, including better protection of human rights and the environment, better adoption of international standards and facilitating better access to solutions for victims of harmful business practices.
The proposal is expected to achieve the most significant positive impacts on the EU's main trading partners in developing countries. The Commission looks forward to continuing to work with the EU's trading partners to ensure mutually reinforcing initiatives, including the development of voluntary sustainability standards, support for multilateral alliances and industrial coalitions, as well as accompanying support provided through EU development policy and other international cooperation instruments.
The proposal also aims to address potential negative effects on trading partners in developing countries., which may include the withdrawal of companies from high-risk territories if they are unable to mitigate damage due to systemic issues. In this regard, the proposal contains accompanying measures, such as supporting capacity development for SMEs, with a view to mitigating these possible impacts. The objective is to make it clear that companies must prioritize involvement in commercial relationships in the value chain, instead of shutting down, which should remain the last resort.
There are international standards on corporate sustainability due diligence?
The United Nations Guiding Principles on Business and Human Rights 2011 state that companies must avoid infringing the human rights of others and must address adverse human rights impacts they are involved in in their own operations and through their direct and indirect business relationships. The OECD Guidelines for Multinational Enterprises, the Guidance on Responsible Business Conduct and sector guidance further specify and develop this concept of due diligence. The recommendations of the ILO Tripartite Declaration of Principles relating to Multinational Enterprises and Social Policy also incorporate this concept. The OECD framework has expanded the application of due diligence to cover environmental damage.
What are examples of mitigating measures?
The Commission carried out a comprehensive mapping of existing EU-funded actions, whose objectives and results accompany the implementation of the directive. The mapping identified approximately 75 relevant ongoing Commission actions. An example of such action is the clothing traceability project with UNECE and ITC. This project provides tools for companies that are immediately relevant to their due diligence obligations.
Find out more by consulting the official documentation:
And see more about the certifications we work with below:
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The Importance of the Global Reporting Standard adopted by Brazil (bio3consultoria.com.br)
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