On 23 February 2022, the European Commission adopted a proposal for a Directive on corporate sustainability due diligence. On 24 May 2024 the Council of the European Union approved the political agreement, thereby completing the adoption process. The aim of this Directive is to foster sustainable and responsible corporate behaviour in companies’ operations and across their global value chains. The new rules will ensure that companies in scope identify and address adverse human rights and environmental impacts of their actions inside and outside Europe.
What are the benefits of these new rules?
- Better protection of human rights, including labour rights.
- Healthier environment for present and future generations, including climate change migration.
- Increased trust in businesses.
- More transparency enabling informed choices.
- Better access to justice for victims.
- Harmonised legal framework in the EU, creating legal certainty and level playing field.
- Greater customer trust and employees’ commitment.
- Better awareness of companies’ negative human rights and environmental impacts, less liability risks.
- Better risk management, more resilience and increased competitiveness.
- Increased attractiveness for talent, sustainability-oriented investors and public procurers.
- Increased incentives for innovation.
- Better access to finance.
- Better protection of human rights and the environment.
- Sustainable investment, capacity building and support for value chain companies.
- Improved sustainability-related practices.
- Increased take-up of international standards.
- Improved living conditions for people.
What are the obligations for companies?
This Directive establishes a corporate due diligence duty. The core elements of this duty are identifying and addressing potential and actual adverse human rights and environmental impacts in the company’s own operations, their subsidiaries and, where related to their value chain(s), those of their business partners. In addition, the Directive sets out an obligation for large companies to adopt and put into effect, through best efforts, a transition plan for climate change mitigation aligned with the 2050 climate neutrality objective of the Paris Agreement as well as intermediate targets under the European Climate Law.
Which companies will the new EU rules apply to?
Large EU limited liability companies & partnerships:
+/- 6,000 companies - >1000 employees and >EUR 450 million turnover (net) worldwide.
Large non–EU companies:
+/- 900 companies - > EUR 450 million turnover (net) in EU.
The Directive contains provisions to facilitate compliance and limit the burden on companies, both in scope and in the value chain.
SMEs
Micro companies and SMEs are not covered by the proposed rules. However, the Directive provides supporting and protective measures for SMEs, which could be indirectly affected as business partners in value chains.
What are the estimated costs of the new rules for companies?
Businesses will have to bear:
- The costs of establishing and operating the due diligence process.
- Transition costs, including expenditure and investments to adapt a company’s own operations and value chains to comply with the due diligence obligation, if needed.
How will the new rules be enforced?
The rules on corporate sustainability due diligence will be enforced through:
- Administrative supervision: Member States will designate an authority to supervise and enforce the rules, including through injunctive orders and effective, proportionate and dissuasive penalties (in particular fines). At European level, the Commission will set up a European Network of Supervisory Authorities that will bring together representatives of the national bodies to ensure a coordinated approach.
- Civil liability: Member States will ensure that victims get compensation for damages resulting from an intentional or negligent failure to carry out due diligence.
Why does the EU need to foster sustainable corporate behaviour?
The Directive will contribute to the just transition to a sustainable economy, in which businesses play a key role.
A broad range of stakeholder groups, including civil society representatives, EU citizens, businesses as well as business associations, have been calling for mandatory due diligence rules. 70% of the businesses who responded to the public consultation sent a clear message: EU action on corporate sustainability due diligence is needed.
A third of companies recognised the need to act and are taking measures to address adverse effects of their actions on human rights or the environment, but progress is slow and uneven. The increasing complexity and global nature of value chains makes it challenging for companies to get reliable information on business partners’ operations. The fragmentation of national rules on corporate, sustainability-related due diligence obligations further slows down the take-up of good practices. Stand-alone measures by some Member States are not enough to help companies exploit their full potential and act sustainably.
EU rules will provide a uniform legal framework and ensure a level playing field for companies across the EU Single Market. Such rules will also foster international competitiveness, increase innovation and ensure legal certainty for companies addressing sustainability impacts. The Directive will steer businesses towards responsible behaviour and could become a new global standard with regard to mandatory environmental and human rights due diligence.
What are the next steps?
The Directive will enter into force 20 days after its publication in the Official Journal of the European Union. Member States will have two years to transpose the Directive into national law and communicate the relevant texts to the Commission. One year later, the rules will start to apply to companies, with a gradual phase-in between 3 and 5 years after entry into force.
A set of guidelines to be issued by the Commission will help companies to conduct due diligence.