On 15 March 2024, the Council of the EU approved the final text of the EU Sustainability Due Diligence Directive (the Directive). The Directive requires EU member states to introduce mandatory obligations for qualifying EU and non-EU companies to integrate environmental and human rights due diligence into their global operations and value chains. The Directive also requires the integration of riskbased due diligence into the activities of all.
Significance of the Directive
The Directive has been under negotiation since 2021 and sets out obligations regarding actual and potential adverse impacts of company, group, and business partners’ operations on the environment and on human rights across their respective global value chains.
The Directive sets out rules on liability for violations of the due diligence obligations in the Directive, and imposes an obligation on affected companies to adopt and put into effect transition plans for climate change mitigation.
These rules and requirements will be effected by EU member states, which are required to adopt national legislation that will give effect to the obligations and requirements set out in the Directive within 2 years of its coming into force.
Impact of the Directive
The Directive has sweeping application to the conduct of EU-domiciled and non-EU domiciled companies that meet certain thresholds, as well as their respective business partners for up-stream and down-stream activities.
The Directive will apply to EU-domiciled companies with more than 1000 employees and net worldwide turnover of EUR 450 million and EU-domiciled parent companies of groups with annual turnover of EUR 450 million on a consolidated basis. Non-EU domiciled companies will also have to comply with the Directive if they generate net turnover of more than EUR 450 million within the EU or are ultimate parent companies of a group that generates more than EUR 450 million in turnover on a consolidated basis.
For both EU and non-EU domiciled actors, companies or parent companies of groups with licensing and franchising agreements in the EU generating royalties of more than EUR 22 million and net worldwide turnover of more than EUR 80 million will also be required to comply with the Directive.
Implications of the Directive on African Business
Africa is a critical partner in EU business value chains. Sixty-five percent of goods exported from African markets into EU member states are primary goods and raw materials. Seventy-two percent of goods imported into Africa from EU markets were manufactured goods and chemicals.
The Directive’s obligations on due diligence riskmapping and mitigation extend across affected companies’ “chain of activities” and will significantly affect African businesses. Consequently, direct business partners, who have commercial arrangements with affected companies, and indirect business partners, whose operations provide support to EU and non-EU domiciled companies will also be required to comply with various obligations under the Directive based on their role in the affected companies’ chain of activities.
The chain of activities covered under the Directive includes activities of upstream business partners covering elements such as extraction, sourcing, manufacture, transport, storage and supply of raw materials, products or parts and development of products or services. Downstream business partner activities covered by the Directive’s obligations include distribution, transport and storage of products either for or on behalf of an affected company.
Affected companies will need to critically evaluate the collaboration and support required to enable compliance with preventive and corrective measures adopted across the value chain. Commercial agreements with upstream business partners will need to incorporate elements of corrective and preventative action plans, and contractual assurances allocating risk and liability. Where appropriate, affected companies will also need to consider financial and non-financial commitments to enable business partners in their value chains to comply with the financial exposure arising from costs of complying with various obligations.
Enhanced Group and Company Compliance and Stakeholder Engagement
The Directive enhances group level risk and compliance obligations for environmental and human rights impacts of business across value chains.
Building on the framework outlined in the OECD DD Guidelines, affected companies are required to undertake various steps to:
- Integrate risk-based due diligence into company policies and risk management systems.
- Identify and assess actual and potential adverse impacts on environment and human rights arising from business operation.
- Prioritise identified actual and potential adverse impact.
- Take measures to prevent actual and potential adverse impacts and bring such impacts to an end
- Develop notification mechanisms and complaints procedures
- Monitor and independently verify effectiveness of appropriate measures to avoid, prevent, or mitigate such adverse effects; and
- Communicate their corrective and preventive action plans in relation to identified actual or potential adverse impacts on their business.
Key Mandatory Obligations
Affected companies will be required to develop due diligence policies and develop a code of conduct to be followed throughout the company and its subsidiaries and their respective business partners.
Due diligence policies and codes of conduct will require regular review and updating. Businesses will face significant compliance obligations as direct and indirect business partners of affected companies.
Direct and indirect business partners may be required to bear the costs of independent monitoring and evaluation of compliance with corrective and preventive action plan measures and contractual assurances regarding prevention or correction of potential or actual adverse impacts.
Notification and complaints procedures under the Directive give persons or organisations with legitimate concerns regarding actual or potential adverse impacts with respect to the operations of a company, its subsidiaries, or its business partners within its chain of activities to submit complaints to national authorities in the relevant Member States. These representatives include human rights defenders and civil society organisations, as well as trade unions and workers representatives representing individuals working int eh chain of activities concerned.
Affected companies are also required to conduct “meaningful stakeholder engagement” during all phases of risk identification, prioritisation, and implementation of corrective or preventive plans. Diverse stakeholder groups are identified in the Directive and include employees, trade unions, local communities, indigenous peoples and other defined stakeholder groups.
Remediation and Civil Liability
Affected companies shall have mandatory obligations to remediate actual adverse impacts, and will face civil liabilities for intentional or negligent failures to comply with their obligations under the Directive. Business partners and affected companies may face joint and several liability where the actual or potential adverse impacts of their activities are jointly caused. The liability threshold provided in the Directive imposes a maximum limit of not less than 5% of worldwide turnover for affected companies.
Timeline for Implementation
The Directive is expected to be approved by the EU Parliament by the end of April 2024.
There is a two-year phase in period for EU Member States to adopt national legislation giving effect to the Directive’s requirements.
EU companies with more than 5000 employees and worldwide turnover of EUR 1.5 billion will be required to comply with the Directive within three years of it coming into force. Non-EU companies with worldwide turnover of EUR 1.5 billion will be required to comply with the directive within a similar period.
EU companies with more than 3000 employees and worldwide turnover of EUR 900 million will be required to comply with the Directive within four years of it coming into force.
Conclusion
The Directive represents an important step in the EU’s journey towards fulfilling the ambitions of the EU Commissions European Green Deal and sustainability objectives. The step will have significant and irreversible impacts on business and operations of African players in global value chains and will accelerate diverse aspects of the mainstreaming of sustainability and climate transition-related objectives into all areas of private sector engagement.
This article was first published by AVCA.