The Directive also imposes additional obligations and duties on company directors.
When fulfilling their duty to act in the best interest of the company, directors of large EU companies will be required to consider the consequences of their decisions for sustainability matters, including those relating to human rights, climate change and the environment - in the short, medium and long term.
Directors will also be responsible for putting in place and overseeing the due diligence processes outlined in the Directive and due diligence policies, with due consideration for relevant input from stakeholders and civil society organisations. They will also be obliged to report to the board of directors in this regard.
The EC proclaims that effective enforcement of due diligence obligations, by way of a combination of sanctions and civil liability, is key to achieving the objective of corporate sustainable governance.
The Directive sets out proposals for both public and private enforcement as well as an European Network of Supervisory Authorities to help with the implementation of the Directive and facilitate coordination and compliance by companies of their due diligence obligations.
The supervisory authorities will be empowered to:
- Investigate potential breaches of a company’s due diligence obligations.
- Order the cessation of infringements, abstention from any repetition of conduct, remedial action proportionate to the infringement and necessary to bring it to an end.
- Impose pecuniary sanctions and adopt interim measures to avoid the risk of severe and irreparable harm.
Member States are to establish effective sanctions for non-compliance, to be proportionate to company turnover and to be imposed by the relevant supervisory authority.
Companies will also be at risk of civil liability claims for damages where the harm could have been identified, prevented, mitigated, brought to an end or its extent minimised with proper due diligence measures as provided for by the Directive. The risk of civil liability not only arises in relation to a company’s own operations but also those of its subsidiaries and/or direct, established business relationships.
A company will, however, not be liable for damage caused by an adverse impact that arose from the activities of an indirect partner with whom it has an established business relationship if the company had obtained the required contractual assurances from its direct business partner. Unless it was unreasonable in the circumstances for the company to expect that the action taken, including verifying compliance, would be sufficient to prevent, mitigate, end or minimise the extent of the adverse impact.
Victims can also claim compensatory damages under the Directive in respect of claims arising from adverse environmental impacts, notwithstanding that they might overlap with human rights claims.
Any civil liability claims brought against a company are to be governed by the provisions of national law.
The Directive will have far reaching implications for large EU and non-EU companies whose responsibilities and obligations in relation to human rights and environmental impacts will extend to their subsidiaries and other stakeholders in their supply chains. Once implemented, meaningful and robust human rights and environmental due diligence policies should underpin corporate day to day operations and dealings with parties within a company’s value chain.
A unified approach to corporate sustainability throughout the European market will enable companies to better predict the behaviour of others within their value chain, thereby easing the burden of preventing and mitigating adverse environmental and human rights impacts.
If they have not done so already, international companies across all sectors should revisit their existing human rights and environmental due diligence processes and policies as soon as possible and take steps, as necessary, to introduce effective corporate sustainability due diligence procedures in line with the EC’s draft Directive.