The European Commission has adopted a proposal for a Directive on corporate sustainability due diligence. According to the Commission’s press release, the proposal would aim to foster sustainable and responsible corporate behaviour throughout global value chains. Companies shall 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.

Several EU Members States have already introduced national rules on due diligence and some companies have taken measures at their own initiative. However, there is need for a larger scale improvement that is difficult to achieve with voluntary action according to the European Commission. The proposal shall therefore establish a corporate sustainability due diligence duty to address negative human rights and environmental impacts.

The new due diligence rules shall apply to all companies located in the EU i) with more than 500 employees and more than EUR 150 mio. in net turnover worldwide or ii) companies operating in defined high impact sectors, which do not meet those thresholds, but that have more than 250 employees and a net turnover of more than EUR 40 mio. worldwide. Companies from third countries operating in the EU and generating turnover equivalent to these thresholds within the EU should also be in the scope of the directive. Although small and medium enterprises (SMEs) are not directly in the scope of the proposal, they might be indirectly affected by the new rules because of the effect of large companies’ actions across their value chains. The directive would not only apply to a company’s own operations, but also to its subsidiaries and its value chains (direct and indirect established business relationships).

In a next step the proposal will be presented to the European Parliament and the Council. If adopted, EU Member States will have two years to transpose the directive into national law. Only then would the regulations also apply to companies.