Policy & Regulation
What will happen to the Corporate Sustainability Due Diligence Directive ?
The Corporate Sustainability Due Diligence Directive is part of the broader ambitions by the European Union, as set out in the European Green Deal and the European Climate Law. The due diligence process aims to cover the six steps defined by the OECD Due Diligence Guidance for Responsible Business Conduct, which include: integrating due diligence into policies and management systems; identifying and assessing adverse human rights and environmental impacts; preventing, ceasing or minimising actual and potential adverse human rights, and environmental impacts; assessing the effectiveness of measures; communicating; and providing remediation.
Under Article 2 of the proposed Directive, EU companies with more than 500 employees on average and a worldwide net turnover exceeding EUR 150 million in the financial year preceding the last financial year are required to comply with due diligence. Companies that do not reach this criteria but have more than 250 employees on average and more than EUR 40 million worldwide net turnover in the financial year preceding the last financial year and which operate in one or more high-impact sectors, due diligence would apply two years after the end of the transposition period of the Directive. The Directive also applies to third-country companies that generated a net turnover of at least EUR 150 million in the Union in the financial year preceding the last financial year or a net turnover of more than EUR 40 million but less than EUR 150 million in the financial year preceding the last financial year in one or more of the high-impact sectors. The selection of high-impact sectors for the purposes of this Directive is based on existing sectoral OECD due diligence guidance.
Article 4 of the Directive obligates Member States to ensure that due diligence measures are enacted and followed. Article 5 requires Member States to obligate companies to integrate due diligence into all their corporate policies and, in addition, have a due diligence policy in place, that includes a long-term plan, a code of conduct, and a descriptive overview of processes in place. Article 7 requires Member States to obligate companies to prevent and mitigate potential adverse human rights and environmental impacts, in line with Article 6 of the Directive, and to bring such impacts to an end.
The Directive also requires Member States to ensure that the liability provided for in provisions of national law transposing the Directive is of overriding mandatory application in cases where the law applicable to claims to that effect is not the law of a Member State. Article 24 denies companies that have been sanctioned, pursuant to this Directive, of receiving any public funds due to failures to comply with the directive. This means that companies can be fined for activities in third countries and be restricted in applying for public funds if they have been found to be in violation.
Though there were developments in late 2023 that the Directive was on the way to being enacted, recent weeks have questioned Germany’s support for the final version. The pro-business party Free Democrats has, together with four major German business associations, been very critical on the practical impact that following the Directive will impose. BDI, the Federation of German Industries, recently published an assessment of the implementation of the Supply Chain Due Diligence Act (LkSG). Though it is just an opinion survey, most respondents predict that the Act will have a high impact on creating extra bureaucracy for both directly and indirectly affected companies. In addition, the survey highlights that this will make companies avoid high-risk suppliers and suppliers that are difficult to check. Furthermore, the number of suppliers that a company has a relationship with is predicted to decrease. The survey also highlights the challenges in following the Act, as 54% of the surveyed companies will use either consulting or legal services for the implementation.
Interestingly, the survey is being amplified among the German business sector, highlighting the results as more factual than mere opinions. This, coupled with the response by pro-business politicians, does mean that there is a meaningful opposition in Germany that must be overcome, if the legislation were to be enacted. Whether this means additional concessions or a failure of enactment remains to be seen.
While it is reasonable to assume that the Directive will increase legal workload and will change certain business operations, corporate lawyers should look forward to the Directive. The conditions set clearly establish high-risk operations and would motivate companies to reduce their potential to risk – whether through severing relationships with certain risky suppliers or decreasing the proportion of outsourcing to have a better QA overview in-house.
While it is worrying that almost none of the respondents would look the German Act as a “seal of quality” – with only 3% of respondents thinking that way, in opposition to 77%, who think that it makes them less attractive to suppliers from abroad – the potential of this legislation cannot be overlooked. By standardising due diligence practices to this extent would enable corporate lawyers in Europe to facilitate transactions in a much more streamlined way and would reduce overhead whenever new partnerships with other European companies are created.
Overall, this legislation will enable corporate lawyers to elevate their position within their businesses and will let them act as trusted advisors. European company lawyers will be instrumental in ensuring that the risk and new challenges that will arise from due diligence can be mitigated appropriately and can establish new internal policies and training, in order to do so. This will also provide opportunities for lawyers to specialise further in corporate sustainability, as expert lawyers will be in high demand