EU Proposes New Directive on Due Diligence for Companies

The European Union (EU) has proposed a new directive aimed at increasing the accountability of companies for violations of human rights and environmental impact related to their activities. The draft directive requires companies to identify and mitigate potential adverse impacts arising from their own operations or those of their subsidiaries, as well as from their established business relationships.

Key Provisions

• Companies will be required to conduct due diligence on their supply chains, including identifying risks of human rights and environmental law violations, taking preventive measures, and documenting and reporting compliance with due diligence obligations.
• The directive introduces civil liability for damages that could have been avoided through appropriate due diligence measures.
• The proposed directive will apply to all EU companies, as well as non-EU companies operating within the EU, including Swiss companies, provided they meet certain thresholds and requirements.

Germany Takes Lead in Supply Chain Due Diligence

Germany has already taken a leading role in supply chain due diligence with its Act on Due Diligence in Supply Chains (Lieferkettengesetz). The law requires companies to identify risks of human rights and environmental law violations within their supply chains, take preventive measures, and document and report compliance. The requirements go beyond those outlined in the proposed EU directive.

Global Developments

The ESG due diligence and reporting landscape is evolving globally. For example:

• A new law is being debated in New York that would require fashion retailers to map suppliers across all tiers of production, publish an impact and due diligence disclosure, and disclose targets for improvement.
• Several bills have been introduced in the U.S. Congress related to ESG due diligence, reporting, and disclosure.

Implications for Companies

The increasing accountability of businesses for violations of human rights or negative environmental impact related to their activities means that senior leadership must consider several key issues:

Recommendations

• Develop an integrated ESG reporting strategy to increase efficiencies and mitigate the risk of inconsistencies.
• Ensure restraint and precision in ESG reporting supported by solid assurance mechanisms to avoid future exposure to liability.
• Engage with financial institutions to anticipate their requirements well ahead of funding needs.
• Adjust the scope of due diligence in M&A transactions to avoid successor liability for ESG compliance across supply chains.
• Review business processes, policies, and control environments to identify opportunities to embed new requirements into existing processes or put in place additional processes, policies, and controls where required.

Staying Up-to-Date

Companies are advised to stay up-to-date on these developments by following our Global Supply Chain Compliance Blog, which offers legal insights from practitioners around the globe.