The European Commission will order certain large companies to conduct current due diligence within human rights and the environment. And the Commission is proposing new rules on the enforcement of non-compliance with the due diligence obligations and specification of the management’s obligations. The Council's negotiations concerning the proposed directive are at the final stage.
Horten will guide you through the main points of the proposed directive and some of the reactions that the proposal has caused.
Sustainability due diligence
On 23 February 2022, the Commission introduced a proposal for a directive on corporate sustainability due diligence etc. The proposal implies that certain large companies must conduct due diligence within human rights and the environment.
Companies covered by the proposal
The proposal covers European companies employing more than 500 employees and with a yearly net turnover exceeding EUR 150 million.
If a European company employs more than 250 employees and has a net turnover exceeding EUR 40 million, the company will be covered by the proposal if minimum 50 % of the turnover is generated by high impact sectors. In general, these sectors are:
- Textiles, clothes and footwear
- Agriculture, forestry and fishery
- Mineral resources, including crude oil, natural gas, metals, etc.
Companies in third countries with substantial activities in the EU are also covered by the proposal. This applies to companies with a net turnover exceeding EUR 150 million within the EU or a net turnover exceeding EUR 40 million within the EU if 50 % of the turnover is generated in high impact sectors.
According to the due diligence procedures in the proposal, companies are obligated to take appropriate measures to identify, prevent and remedy potential and actual negative impacts on human rights and the environment. If a negative impact cannot be brought to an end or stopped, the company will be obligated to suspend a business relation or - if the impact is serious - to end the relation.
Non-compliance with the due diligence obligations may be enforced in different ways.
The proposal implies that the companies must give certain persons and organisations the possibility to complain to the company if they have legitimate concerns about actual or potential impacts on human right and the environment. According to the proposal, the member states are obligated also to lay down rules on companies’ civil liability for damages arising because the due diligence obligations have not been complied with.
The management’s obligations
The proposal implies that the company’s management - when complying with its obligations to act in the company’s best interest - must also take into consideration which consequences the management’s decision may have on the question concerning sustainability. This applies to human rights as well as climate changes and environmental impacts in a short, medium and long term.
The Commission’s proposal thereby contains a general regulation of the management's liability. The Companies Act does not describe the management’s liability, and the proposed regulation has resulted in reactions from the Danish business community warning against leaving the regulation of the liability of the management of Danish companies to the EU.
In a written presentation of 26 October 2022 to the Danish parliament’s European Affairs Committee, the Danish government also pointed out that the EU should not regulate in detail how Danish companies arrange their internal management. At the same time, the government has stated that it attaches great importance to the fact that the proposal is not to contain a general regulation of corporate governance which extends beyond the obligations directly attached to the due diligence obligation.
In the written presentation, the government has stated that the Council’s negotiations on the proposal are at the final stage, and that the Czech chairmanship is aiming at a general recommendation on 1 December 2022. A general recommendation reflects the Council’s political agreement on the proposal and is applied as a tool in relation to the negotiations with the Parliament.