Proposed EU corporate sustainability due diligence directive: what US companies need to know
On February 24, 2022, the European Commission unveiled its proposal for a directive on corporate sustainability due diligence (the Proposed Directive). The Proposed Directive would impose mandatory environmental and human rights due diligence obligations on companies operating in the European Union (the EU) and, if adopted, could have significant implications not only for EU enterprises but also for US and other non-EU companies conducting business within the EU.
Specifically, the Proposed Directive, which could come into effect as early as 2024, would apply to non-EU companies, including US companies, that generate a net annual turnover of more than EUR150 million in the EU or EUR40 million for companies in certain high-risk sectors – namely textile and footware, agriculture, forestry, fisheries, mineral extraction and trading. Even US companies that are not directly doing business in the EU, or are otherwise exempt, may see increased scrutiny of their own value chains and business practices from customers and others in their global value chains who are subject to the Proposed Directive, and termination of business relationships if actual or potential adverse human rights impacts are not sufficiently prevented or mitigated.
The Proposed Directive would create a due diligence duty that would apply both across companies’ own operations and their “value chains” and would carry with it the potential for both injunctive and financial penalties and a right of private action with potential civil liability in the event of non-compliance. A company’s “value chain” means activities related to the production of goods or the provision of services by a company, including the development of the product or the service and the use and disposal of the product as well as the related activities of upstream and downstream established business relationships (whether direct or indirect) of the company. It also would expand the duty of care for directors of covered companies to include considering the long-term impact to human rights, climate change and the environment when making decisions.
While the Proposed Directive remains just a proposal at this stage and may undergo significant changes throughout the legislative process, it is indicative of the EU’s approach to human rights and of the care that US companies will likely be required to take when conducting business in the EU in the near-term future. If adopted, the Proposed Directive would significantly increase the attention, care and expense that companies must devote to their value chain and governance processes as well as their information-gathering and reporting functions. Companies with robust compliance functions may be able to differentiate themselves in the global marketplace.
For additional information regarding the Proposed Directive, including the scope of the due diligence requirement and how companies would be able to comply, please see our February 24, 2022 client alert.
DLA Piper recently conducted a webinar on the Proposed Directive for subscribers to our publication, “WIN: What In-House Lawyers Need.” The webinar was moderated by Michiel Coenraads, a partner in our Amsterdam office who focuses on business and human rights litigation. Speakers included Jorian Hamster, a leading business and human rights professional; Richard Sterneberg, who heads our Government Affairs practice in Brussels; and Brent Bernell, a Corporate partner in our Austin office. Register for WIN to gain access to toolkits, past event materials and more.
Learn more about the implications of the Proposed Directive by contacting any of the authors or your DLA Piper relationship lawyer. Please visit our Sustainability and Environment, Social and Governance portal for our latest information on SESG developments.