Green is the new black and is pretty much here to stay (in the EU, at least) 🪴
by Shaznee Seraj
A proposal for a directive on business sustainability due diligence was recently passed by the European Commission. In summary, companies that are caught under the directive must:
Those who are familiar with EU law will probably be aware that the said prospective directive will be revised as part of the EU legislative process and it requires the approval of the EU Parliament which may or may not involve a change in its scope. However, for most enterprises that are caught by the directives, the implementation of mandatory supply chain due diligence will necessitate a considerable change in business practices. The directive also provides a good indication of the activities necessary in preparation for those interested. In terms of the timeline, these duties are expected to apply to relevant enterprises within two years of the directive’s implementation, and smaller companies in high-risk industries* within four years. * See more here
While the impact of this long-awaited piece of legislation will only prevail in a few years (remember Brexit?) as it takes time to properly establish and implement effective human rights and environmental due diligence processes, especially in large international companies and those with lengthy or complex value chains. As a result, it is critical for companies with a presence in the EU to examine whether they are likely to fall within the scope of the regulation and, if so, to begin planning for the steps they will be required to take, particularly UK companies with a significant amount of EU dealings.
The answer to the question is – yes. Although the proposed directive is meant to focus on EU companies, it will nevertheless catch non-EU companies which will certainly include UK companies. This will be determined by the net turnover.
€ More than 150 million in the financial year preceding the last financial year or
€ Between 150 million in the financial year preceding the last financial year or
€ Between 40-150 million in the financial year preceding the last financial year where at least half of its worldwide turnover was generated in one or more of the following high-risk sectors* See more here
See here for the 7 key areas of the directives if you are interested.
So, what must the companies do or (not do) from this point onwards?
✅ Companies must conduct human rights and environmental due diligence across their entire business (including any subsidiaries) and any value chains that are or are expected to be, ‘lasting,’ according to the order. Just like the Companies Act 2006 obligations in the UK, companies will only need to take actions that are proportional to the degree and likelihood of a negative impact and are reasonable for the company to implement. Not bad, right?
However, Ammann and Ellena of Euractiv highlighted the caveat with the directive. While the EU’s due diligence law is aimed at making corporations accountable for human rights violations and environmental harm throughout their value chain (Shell please take note), this directive will only cover 1% of EU companies. Will this be enough or is this a good starting point for ESG law?Arguably, it is not enough as companies have been getting away with poor business practices. No more-dilly dallying, please!
That said, this directive promises more than the UK’s current and prospective due diligence standards. Ashurst’s example demonstrates how the legislation will operate. gives us an insight as to how the legislation will work. The Modern Slavery Act 2015, for example, compels certain commercial organisations to report on due diligence done to guarantee that slavery and human trafficking do not exist in their supply chains. Further, The Environment Act, which prohibits the use of some commodities related to illegal deforestation, is a recent addition to the law that has not yet taken effect. This means that companies must conduct due diligence on their supply chains to identify illegal production of “forest risk commodities” to attain this goal. This directive will actively act as a catch-all ESG legislation in the EU.
Arguably, more stringent obligations could be established in the UK in light of the level playing field agreement emerging from Brexit, as well as the growing ESG pressure on both states and corporationsfollowing the Shell case in the Netherlands. In any case, given the complexity of value chains and multinational corporations’ desire for comparable standards throughout their operations, the EU’s due diligence obligations may effectively become a voluntary standard and practice in the UK. About time now!