April 2022

By Mathilde Defarges

This article follows on from an earlier piece about the inception of the European Union’s (EU) corporate sustainability agenda.

At the end of February 2022, the European Commission released its much awaited proposal for a Directive on Corporate Sustainability Due Diligence. This is but the latest step in the EU’s push to set a global trend of more sustainable corporate governance. The text will be the subject of intense debate between EU member states, the European Parliament, and the European Commission in coming months. However, despite some actors’ reluctance to embrace the EU’s push, the European institutions’ perseverance in moving the ball forward on corporate sustainability and the corporate world’s slow but steady acquiescence to the concept mean that the EU’s text is likely part of a broader global trend that is here to stay.

 

Gaining momentum

 

The road that led to the Commission’s proposed directive was predictably bumpy. The proposal was initially slated for release in early 2021 but was set back twice due to negative assessments from the Commission’s internal audit body. Media reports made it clear that corporate lobbying had at least in part contributed to the audit body’s red lights. Beyond the corporate world, certain EU member states, most notably in Northern Europe, were worried that some of the more onerous provisions of the EU’s corporate sustainability framework would harm free enterprise.

However, in the run-up to the proposal’s release in February, several national governments, the European Parliament, and some voices in the business sector were calling on the EU to rapidly release and implement an effective framework for corporate sustainability. For instance, in February 2022, over 100 companies, including Danone, signed a statement expressing “deep concern by the serious delay” in the proposal’s release and calling for “a paradigm shift […] driving better outcomes for people and planet across globalised value chains.”

 

The proposed Directive’s content

 

The first thing to note is that the EU’s proposal only targets very large companies with a turnover of more than €150 million a year or companies with a smaller €40 million a year turnover but who operate in certain high-risk sectors: textile, agriculture, or mineral extraction. The rules will also apply to non-EU companies whose turnover inside the internal market meets one of those criteria. Small and medium enterprises are not explicitly targeted by the new framework. However, the proposal provides supporting measures for SMEs which are indirectly affected.

The proposed directive would mainly create two new obligations for the companies that meet the thresholds described above. Firstly, it would create a corporate due diligence duty. Companies would have to ensure that neither they, nor their subsidiaries, nor the contractors along their supply chain negatively impact human rights and the environment through their operations. They would have to identify, bring to an end, prevent, and mitigate those negative impacts or face civil liability in all member states’ courts of law. In addition, very large companies with a turnover of more than €150 million would have to ensure that their business strategy is compatible with limiting global warming to 1.5 °C.

In addition to making companies liable for their operations’ negative impact on human rights and the environment, the directive also introduces duties for company directors. These duties include elaborating and implementing the strategy that will allow the company to fulfill its due diligence duty. The directive also requires directors to take human rights, climate change, and environmental considerations into accounts when acting in the best interests of their company.

 

No going back

 

The Commission’s proposal will now make its way to the European Parliament and the Council for approval. In the course of this process, the text will likely undergo some changes from its current form. Some business groups have called the proposed text unworkable and are sure to do everything in their power to water down its provisions. However, their staunch opposition may end up being counterproductive. Already, civil society stakeholders including unions and NGOs have criticized the Commission for its lack of ambition. Most notably, some organizations highlight the fact that the EU’s text falls short of pre-existing UN and OECD principles on the issue.

With Brussels eager to pave the way on this subject, attempts by hard-line opponents of the EU’s corporate sustainability due diligence directive to further weaken the proposal will face resistance from the institutions. And sustained efforts to water down a text already considered insufficient by civil society risk creating a reaction in the European Parliament or in the Council where elected officials have much to lose from opposing pro-human rights or pro-climate legislation. The angry reactions and boycotts that have followed certain companies’ decision to continue doing business in Russia despite its invasion of Ukraine shows that the general public cares enough about these issues to cause financial loss to unscrupulous businesses.

At a time when geo-economic competition between democracies and autocracies is intensifying, companies based in democracies have much to gain from the EU’s push for corporate sustainability. The negotiations around the Commission’s proposed directive could be a chance for companies to work hand in hand with other economic actors, like unions, and build a more symbiotic relationship between business and democracy.