European Commission Proposes Mandatory Corporate Sustainability Due Diligence

On February 23, 2022, the European Commission published the draft Directive on Corporate Sustainability Due Diligence.

Under this Directive, European Union member states would be required to adopt implementing legislation requiring in-scope companies to both identify and (where relevant) prevent, end and/or mitigate adverse impacts of their operations and activities, extending to their subsidiaries and global value chains, on human rights and the environment including with respect to climate change.

The obligations under the Directive are extra-territorial and will apply to certain companies generating significant revenue in the EU even if they do not necessarily have a physical presence within the EU. If approved by the European Parliament and Council, Member States will have two years to transpose the Directive into their national laws.

Below-mentioned companies (Group 1) will be required to comply with the Directive on Corporate Sustainability Due Diligence (as implemented by the relevant Member State) within 2 years of its enactment:
• Large EU companies: All companies formed under the laws of an EU Member State with over 500 employees and an annual net turnover exceeding €150 million worldwide.
• Non-EU companies with significant EU revenues: All companies formed outside the EU with an annual net turnover in the EU exceeding €150 million.

Additional companies (Group 2) will be required to comply with the Directive (as implemented by the relevant Member State) within 4 years of its enactment:
• Mid-cap EU companies in high impact sectors: EU companies with more than 250 employees and a net turnover of €40-150 million worldwide, provided that at least 50% of this turnover was generated in one or more of the following “high impact” sectors:
- Manufacturing of textiles, leather and related products (including footwear) and wholesale trade of textiles, clothing and footwear;
- Agriculture, forestry, fisheries, manufacturing of food products, and the wholesale trade of agricultural raw materials, live animals, wood, food and beverages; and
- Extraction of mineral resources (irrespective of where they are extracted), including crude petroleum, natural gas, coal, lignite, metals and metal ores; manufacturing of certain metal products; and the wholesale trade of mineral resources, basic and intermediate mineral products (including metals and metal ores, construction materials, fuels, chemicals and other intermediate products).
• Non-EU companies with EU revenues from high impact sectors: Non-EU companies that generated annual net turnover of €40-150 million in the EU, of which at least 50% (calculated on a global basis) derives from the high impact sectors noted above.

The Commission estimates that approximately 13,000 EU companies and 4,000 non-EU companies will fall within the scope of the Directive.