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Due diligence and ESG, social and environmental sustainability of companies, the proposed EU directive

On 23.2.22 the European Commission adopted the proposal for a directive on due diligence and ESG (Environment, Social, Governance), to ensure the social and environmental sustainability of large companies operating in the EU. (1)

The responsibility of the suns will thus be defined Corporation for violations of rules protecting human rights and ecosystems, everywhere perpetrated upstream of their supply chains. Especially in the 'high impact' sectors. (2)

1) Due diligence, and ESG. Objectives of the directive

Target of the directive is to encourage the development of the internal market incomplete transition to a sustainable economy'. Theredue diligence'(literal translation of due diligence) aspires to:

- empower economic operators, who will be responsible for analyzing and mitigating the risks of negative impact of their supply chains on human rights (e.g. child labor, exploitation of workers) and the environment (e.g. pollution, loss of biodiversity),

- ensure a harmonized approach, so that large companies operating in the EU can exercise the due diligence and communicate the ESG on an equal and transparent basis, in the shared interest of stakeholders.

2) Field of application

2.1) 'High impact' production sectors

The productive sectors with high impact, regardless of the location of the supply chains and their sectors, are:

- textile, leather and related products (including fabrics, clothing and footwear), in the manufacturing and wholesale stages,

- agriculture and livestock, forestry, fishing and aquaculture, food. Primary production, processing and wholesale of agricultural raw materials, live animals, wood, food and drinks. In apparent overlap with the draft EU regulation on due diligence in the palm, soy, coffee, cocoa and timber supply chains, (2)

- Mineral Resources (including crude oil, natural gas, coal, lignite, metal and metal ores, as well as all other non-metallic minerals and quarry products). Mining and manufacturing of basic metal products, other non-metallic mineral products and metal products (except machinery and equipment), wholesale of mineral resources, basic and intermediate mineral products (including metals and metal ores, building materials , fuels, chemicals and other intermediate products).

2.2) Responsible operators

The European Commission proposes to apply the due diligence ESG to different categories of companies, estimated overall at approximately 2.600:

- limited liability company based in the EU with over 500 employees and a worldwide net turnover exceeding € 150 million in the last financial year,

- limited liability companies operating in high impact production sectors (see upper paragraph) with more than 250 employees and a net turnover worldwide> 40 million euros,

- companies from third countries active in the European Union with a turnover threshold generated in the EU in line with the two previous groups, provided that at least 50% of their net worldwide turnover was generated in one or more of the high impact (v. supra).

2.3) SMEs and unfair commercial practices

SMEs - which represent 99% of European companies - are not subject to the general requirements of due diligence, prescribed only to the large companies mentioned above. Instead, they should receive protection as suppliers of the giants obliged to apply the due diligence.

Unfair commercial practices - so far regulated, at least in theory, only in the agri-food sector (3) - they should therefore be regulated in the wider field of application of the proposed directive in question. Where it is expected that large companies guarantee SMEs:

- contractual clause 'fair, reasonable and non-discriminatory’,

- economic support for compliance with the measures due diligence ESG (Environment, Social, Governance), if they jeopardize their profitability.

3) Requirements

3.1) Responsibility of large companies

Large companies subject to the obligations introduced in the proposed directive (see supra, para. 2.2) will be responsible for integrating the due diligence in all company policies (art. 5). By applying an economic development model that considers and includes ESG factors (Environmental, Social and Governance), through:

a) a description of the company's approach, including in the long term,

b) a code of conduct describing the rules and principles to be followed by the company, its employees and its subsidiaries,

c) a description of the procedures put in place to implement the due diligence, including the measures taken to verify compliance with the code of conduct. These procedures must also be extended to consolidated commercial relationships.

3.2) Specific requirements

The procedures described above must:

- identify the negative effects (real or potential) on human rights and the environment that may occur throughout the entire value chain. To this end, 'where appropriate', consultations will have to be carried out with workers and other social partners concerned, to gather information on actual or merely potential negative effects (Article 6),

- prevent or at least 'minimize'' the potential negative environmental impacts deriving from the own activity and of all the companies that operate along the value chain, through the adoption of adequate measures (Article 7),

- make public their own policies due diligence ESG (Article 11),

- adopt a specific plan to ensure that the model of business and the organization's strategy are compatible with the transition to a sustainable economy and with limiting global warming to 1,5 ° C, in line with theParis Agreement on climate change (art.15),

- appoint the directors responsible for supervising the implementation of the due diligence and its integration through suitable corporate sustainability strategies in the short, medium and long term, taking into due consideration the consequences on human and environmental rights (art.25, 26),

- identify a representative in the EU, for non-EU organizations, in charge of dealing with all the issues necessary for the reception and execution of the directive in question (Article 16).

4) Obligations of the Member States

Member States EU will have to:

- ensure that responsible operators update their policies every year due diligence ESG,

- ensure that each of them takes appropriate measures to identify and prevent actual or potential negative consequences on human and environmental rights deriving from their operations. And if necessary they take all appropriate measures to put an end to and minimize their negative impacts,

- set up and maintain a complaints procedure that can be activated by trade unions, workers and social organizations active in the areas concerned towards the responsible operators. In any case of legitimate concerns regarding negative impacts, even if only potential ones (Article 9),

- check the effectiveness of policies and measures due diligence ESG and assess the level of prevention and minimization of negative impacts (Article 10).

4.1) Supervision and procedures

The adhering countries the European Union must therefore also:

- designate a supervisory and control authority, which guarantees compliance by companies with the due diligence ESG (Article 17). The representatives of the national supervisory authorities will participate in the European Network of Authorities and Supervisors to facilitate and guarantee the coordination and alignment of regulatory, investigative and sanctioning activities and the sharing of information (Article 21),

- guarantee the right of any person, be it a natural or legal person, to contact the authority of the competent Member State, based on their habitual residence, or registered office, or based on the place of work or the alleged violation. If it has reason to believe, given objective circumstances, that a responsible operator is not adequately complying with the provisions of the directive (Article 20),

4.2) Protection of whistleblower and sanctions

whistleblower must be protected, within the terms established by dir. EU 2019/1937 on the protection of persons who report violations of EU law (Article 23).

The penalties they will have to be established by the Member States with an approach based on effectiveness, dissuasion - to be promoted also by means of stop orders and remedy action - and proportionality to the turnover of companies (art. 20).

4.3) Civil liability

Civil liability of the companies subject to the obligations of due diligence ESG will also have to be introduced into national legal systems (art. 22). Companies will incur civil liability, if in the exercise of their business they cause adverse impacts and damage to human rights and the environment, for failing to comply with the obligations of due diligence ESG.

Businesses they could be declared exempt from liability only in cases of adverse impacts deriving from the work of businesses indirect, if they demonstrate that they have implemented all the measures (contracts, audit) aimed at preventing them. Unless these measures are objectively insufficient to 'prevent, mitigate, terminate or minimize the extent of adverse impacts'.

5) Next steps

The regulatory project su due diligence ESG will now be subjected to political scrutiny by the European Parliament and Council for approval. Once adopted, Member States will have two years to transpose the directive into national law and communicate the relevant texts to the Commission.

The room for improvement they are broad, with specific regard to the range of operators involved and the concrete demonstration of commitments and results achieved. The transition from greenwashing the actual value of the shares should pass through incorruptible technologies for recording fundamental data, such as the blockchain public. (4) We will see.

Dario Dongo and Elena Bosani

Cover image from Blagues & Dessins https://pin.it/58IFann


(1) European Commission. Proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937. COM (2022) 71 final. https://bit.ly/3JgLyx3

(2) Dario Dongo. Due diligence, the draft EU directive on socio-environmental responsibilities in the value chain. GIFTS (Great Italian Food Trade). 27.7.21/XNUMX/XNUMX, https://www.greatitalianfoodtrade.it/progresso/due-diligence-il-progetto-di-direttiva-ue-sulle-responsabilità-socio-ambientali-nella-catena-del-valore

(3) Dario Dongo. Unfair commercial practices in the agri-food chain, Legislative Decree 198/2021. The ABC. GIFTS (Great Italian Food Trade). 26.2.22/XNUMX/XNUMX, https://www.greatitalianfoodtrade.it/mercati/pratiche-commerciali-sleali-nella-filiera-agroalimentare-d-lgs-198-2021-l-abc

(4) Dario Dongo. Public blockchain and agri-food chain, sustainability for those who produce and those who consume. GIFTS (Great Italian Food Trade). 28.2.21/XNUMX/XNUMX, https://www.greatitalianfoodtrade.it/progresso/blockchain-pubblica-e-filiera-agroalimentare-sostenibilità-per-chi-produce-e-chi-consuma

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