19 Aug Corporate Social Responsibility: the proposal for an EU Directive

Authors: Raffaella Cesareo, Giada Iovane, Francesca Tugnoli

On 23 February 2022, the European Commission adopted its Proposal EU for a Directive on Corporate Sustainability Due Diligence (hereinafter, the “Directive”). This proposal is part of a European and international regulatory framework[1] aimed at making companies responsible for respecting human rights and the environment[2] and making business more sustainable, including within global value chains[3]. The Directive also requires companies to fulfil their due diligence obligations within their supply chains[4].

The main elements of the proposed Directive

The new rules contained in the Directive will apply to large limited liability companies established in the EU, as well as companies that meet the following thresholds generated in the European Union[5], e.g., those that:

• • • have a net turnover of EUR 150 million worldwide and more than 500 employees; or
    • belong to sectors where a high risk of human rights violations or environmental damages has been identified (e.g., textiles, agriculture, mining) and have a net turnover of EUR 40 million worldwide and more than 250 employees.

Article 1 of the text of the Directive[6] explains the general due diligence obligation to which companies will be subject. Specifically, companies will have an obligation to prevent their activities from having a negative impact on human rights and the environment, i.e., they will have an obligation to not violate prohibitions, obligations or rights provided for in the international conventions listed in the Directive[7]. Companies must also undertake to verify that their suppliers comply with these requirements.

The reference made in the Directive to environmental and climate protection is also worth mentioning: art. 15 of the Directive introduces the obligation to assess the risk of negative impacts on the climate deriving from the company’s operations. Specifically, companies will have to adopt a plan to ensure that the business model and strategy pursued are compatible with the transition to a sustainable economy and the limitation of global warming to 1.5º C, in accordance with the Paris Climate Agreement[8].

What are the measures that enable companies to fulfil this due diligence obligation, and which must be implemented?

The proposed Directive (Art. 4 et seq.) identifies the following:

• • • Adoption of specific procedures in order to comply with the due diligence obligation: this provision requires the adoption of specific policies, codes of conduct containing rules and principles to which the company must adhere in order to ensure the protection of human rights and the environment;
    • Identification of current and potential negative impacts on human rights and the environment, both caused by the company’s own activity and those which take place within the company’s supply chain.
    • Prevention of potential negative impacts on human rights and the environment. Where it is not possible to prevent them, the company has an obligation to “sufficiently mitigate” them. If it is not possible to mitigate the negative impacts, the company shall cease the activities which lead to the negative impacts or, alternatively, minimise them.
    • Periodic evaluation of the activities and measures taken by the company, including within the company’s supply chains and its business relationships, to monitor the effectiveness of actions to detect, prevent, mitigate, cease and minimise negative human rights impacts and negative environmental impacts.

The proposed Directive also covers the area of corporate governance and introduces duties for company directors to define and oversee due diligence processes.

Focus on contractual clauses as possible due diligence obligation instruments of companies

According to Art. 12 of the Directive, the EU Commission will be obliged to adopt guidelines on non-binding model clauses to be included by companies in their commercial contracts with their partners in the same “value chain”. This means that companies, by signing such clauses, will be able to comply with the due diligence obligation also through their suppliers. In the case of potentially serious negative impacts, as stipulated in Art. 5 d) of the Directive, the company may also terminate the contractual relationship with the partner.

Companies will also have to ask their partners to apply similar measures in their business relations (contractual cascading). Therefore, it is clear that the contractual instrument can be useful to fulfil the due diligence obligation along the supply chain and to avoid that third parties – with whom companies have contractual relationship (whether direct or indirect) – may violate human rights and produce negative environmental impacts.

Conclusion

It is certainly necessary for companies – falling under the scope of the Directive – to plan the activities to be implemented in due time, and specifically those indicated above in points 1) to 4), in order to be able to comply with the forthcoming regulatory obligations. Companies will have to take into consideration the costs related to this new process, including new investments in relation to their operations and supply chains, in order to comply with the new due diligence obligation.

This also underlines the importance for companies to make use of specialised corporate social responsibility consulting services, in order to support the development of their corporate sustainability strategy and to coordinate, both centrally and peripherally, corporate activities within the global value chain.

[1] European Commission has already adopted relevant acts and regulations in order to protect human rights and the environment, such as the proposed Corporate Sustainability Reporting Directive (CSRD), which will amend Directive 2014/95/UE (Non-Financial Reporting Directive). The importance of responsible corporate conduct and respect for human rights at the international level has already been professed and confirmed by the United Nations (UN), the Organisation for Economic Cooperation and Development (OECD) and the International Labour Organisation (ILO) for years.. We refer, to name a few, to the Guiding Principles on Business and Human Rights: Implementing the United Nations ‘Protect, Respect and Remedy’ Framework (2011) of the United Nations and the OECD Guidelines for Multinational Enterprises (2011).

[2] On this point “the so-called ‘material scope’ is primarily focused and structured on the due diligence obligation of companies and includes negative impacts on human rights and the environment that can be clearly defined in certain international conventions” (p. 16, of the Directive). They are referred by the Directive as follows: “international human rights agreements (Part I, Section 1), human rights and fundamental freedoms conventions (Part I, Section 2) and violations of internationally recognised goals and interdictions laid down in environmental conventions” (p. 26 of the Directive). We point out that human rights are inalienable human rights, thus the rights that must be granted to every person by the mere fact of belonging to the human race, regardless of the person’s origins, belonging or place. We also point out, for the purpose of framing human rights in the context of social responsibility, The Corporate Responsibility to Respect Human Rights: an Interpretive Guide, 2012, https://www.ohchr.org/en/publications/special-issue-publications/corporate-responsibility-respect-human-rights-interpretive, published by the UN Human Rights Office of the High Commissioner, containing guiding principles to be followed by governments to ensure and promote corporate respect for human rights; providing a roadmap  and offering a set of benchmarks for stakeholders to assess corporate respect for human rights.

[3] We would like to point out that ‘global value chains’ in which companies participate should be considered to be all activities related to the production of goods and services and business/commercial relations with third-party partners (both up and down the supply chains).

[4] See “Corporate social responsibility (CSR) and its implementation into EU Company law” p. 9.

[5] For completeness, we point out that the text of the Directive provides for the applicability of the new rules to companies with a registered office outside the EU but with the following characteristics: (i) generation of a net turnover of more than EUR 150 million within the EU; (ii) generation of a net turnover of less than EUR 150 million, but more than EUR 40 million in the EU, if at least 50 per cent of the overall net turnover was generated in one or more sectors considered high-risk by the Directive.

[6] Art. 1 specifies the content of the Directive, providing that it lays down rules on “a) obligations for companies regarding actual and potential human rights adverse impacts and environmental adverse impacts, with respect to their own operations, the operations of their subsidiaries, and the value chain operations carried out by entities with whom the company has an established business relationship; (b) liability for breaches of those obligations”.

[7] Relevant conventions include, for example, those against the exploitation of child labour, workers, or aimed at protecting individuals against acts of discrimination. The Annex to the Directive indicates the relevant international human rights and environmental conventions.

[8] In line with the Paris Agreement, EU countries agreed to become the first climate-neutral economy and society by 2050. As stipulated in the agreement, the EU presented its long-term emissions reduction strategy and updated climate plans before the end of 2020, committing to reduce its emissions by at least 55% by 2030 compared to 1990 levels.