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EU due diligence law to make corporate governance more sustainable

25 February 2022, 18:09 CET
EU due diligence law to make corporate governance more sustainable

Didier Reynders - Photo © European Union 2022

(BRUSSELS) - The European Commission unveiled its long-awaited proposal Wednesday for an EU law that establishes a corporate sustainability due diligence duty on companies over a certain size.

Under the proposal, companies will be required to identify and, where necessary, prevent, end or mitigate adverse impacts of their activities on human rights, such as child labour and exploitation of workers, and on the environment, for example pollution and biodiversity loss.

"This proposal is a real game-changer in the way companies operate their business activities throughout their global supply chain," said Justice Commissioner Didier Reynders: " With these rules, we want to stand up for human rights and lead the green transition."

The new due diligence rules will apply to the following companies and sectors:

EU companies:

Group 1: all EU limited liability companies of substantial size and economic power (with 500+ employees and EUR 150 million+ in net turnover worldwide).

Group 2: Other limited liability companies operating in defined high impact sectors, which do not meet both Group 1 thresholds, but have more than 250 employees and a net turnover of EUR 40 million worldwide and more. For these companies, rules will start to apply 2 years later than for group 1.

Non-EU companies active in the EU with turnover threshold aligned with Group 1 and 2, generated in the EU.

Small and medium enterprises (SMEs) are not directly in the scope of this proposal.

The proposal applies to the company's own operations, their subsidiaries and their value chains (direct and indirect established business relationships). In order to comply with the corporate due diligence duty, companies need to: integrate due diligence into policies; identify actual or potential adverse human rights and environmental impacts; prevent or mitigate potential impacts; bring to an end or minimise actual impacts; establish and maintain a complaints procedure; monitor the effectiveness of the due diligence policy and measures; and publicly communicate on due diligence.

More concretely, this means more effective protection of human rights  included in international conventions. For example, workers must have access to safe and healthy working conditions. Similarly, this proposal will help to avoid adverse environmental impacts contrary to key environmental conventions. Companies in scope will need to take appropriate measures ('obligation of means'), in light of the severity and likelihood of different impacts, the measures available to the company in the specific circumstances, and the need to set priorities.

National administrative authorities appointed by Member States will be responsible for supervising these new rules and may impose fines in case of non-compliance. In addition, victims will have the opportunity to take legal action for damages that could have been avoided with appropriate due diligence measures.

In addition, group 1 companies need to have a plan to ensure that their business strategy is compatible with limiting global warming to 1.5 °C in line with the Paris Agreement.

To ensure that due diligence becomes part of the whole functioning of companies, directors of companies need to be involved. This is why the proposal also introduces directors' duties to set up and oversee the implementation of due diligence and to integrate it into the corporate strategy. In addition, when fulfilling their duty to act in the best interest of the company, directors must take into account the human rights, climate change and environmental consequences of their decisions. Where companies' directors enjoy variable remuneration, they will be incentivised to contribute to combating climate change by reference to the corporate plan.

The proposal also includes, accompanying measures, which will support all companies, including SMEs, that may be indirectly affected. Measures include the development of individually or jointly dedicated websites, platforms or portals and potential financial support for SMEs. In order to provide support to companies the Commission may adopt guidance, including about model contract clauses. The Commission may also complement the support provided by Member States with new measures, including helping companies in third countries.

The aim of the proposal is to ensure that the Union, including both the private and public sectors, acts on the international scene in full respect of its international commitments in terms of protecting human rights and fostering sustainable development, as well as international trade rules.

As part of its 'Just and sustainable economy package', the Commission also presents today a Communication on Decent Work Worldwide. It sets out the internal and external policies the EU uses to implement decent work worldwide, putting this objective at the heart of an inclusive, sustainable and resilient recovery from the pandemic.

Proposal for a Directive on corporate sustainability due diligence + Annex

Questions and Answers on corporate sustainability due diligence

Factsheet on corporate sustainability due diligence

Webpage on corporate sustainability due diligence

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