The European Commission has proposed sweeping new rules on corporate sustainability due diligence, in the latest tranche of proposals under the EU’s Green Deal. The proposed directive would require large EU and foreign companies (i) to take measures to identify and prevent any adverse human rights or environmental impact of their operations anywhere in the world (including of their subsidiaries and down the value chain); and (ii) to adopt a transition plan to ensure that their business model and strategy are compatible with limiting global warming to 1.5°C. The proposal complements various EU policy instruments, existing and proposed, including the Sustainable Finance Disclosure Regulation and the Taxonomy Regulation, which create a parallel sustainability-related regime for investors.
The proposal is subject to discussion, change, and approval by the European Parliament and the Council of the EU – presenting a window of opportunity for stakeholders to provide input to the legislative process. After adoption, the directive will be implemented by EU Member States. Initial reactions indicate that some NGOs may advocate to make the proposal more demanding, broadening the scope of companies covered and strengthening the obligations and/or enforcement modalities.
In any event, even in their current form, the new rules will have a profound impact on the operations of the companies concerned. Companies should begin preparing for the new regime, by carefully reviewing their own operations and supply chains, to identify potential human rights and sustainability issues that could be implicated by the obligations, and plan on how they will demonstrate compliance for themselves and their suppliers.