Tightening of sustainability obligations for companies through the EU Supply Chain Directive

The European Commission has published a proposal for a Directive on Corporate Sustainability Due Diligence ("Supply Chain Directive") on February 23, 2022. The proposal establishes corporate due diligence duties along the entire supply chain of a company with respect to i) the company’s own operations, ii)  the operations of the company’s subsidiaries and iii) the value chain operations carried out by entities with whom the company has an established business relationship. The proposed obligations will go beyond national legislation and already existing sectorial due diligence duties.

Scope of Application

The proposed Supply Chain Directive will apply to the following companies:

• Companies established within the EU with more than 500 employees and net worldwide turnover of more than EUR 150 million in the last financial year. ("Threshold 1")
• Companies with more than 250 employees and net worldwide turnover of more than EUR 40 million in the last financial year, provided that at least 50% of this net turnover was generated in specific high-risk sectors (e.g. textile, agriculture or extraction of mineral resources industries). ("Threshold 2")
• Companies established outside the EU active in the EU with turnover threshold aligned with thresholds 1 and 2, generated in the EU.

SMEs however will not directly be targeted by the Supply Chain Directive.

New Corporate Due Diligence Duties

The proposal of the Supply Chain Directive lays down specific measures to identify, prevent, mitigate and account for external harm resulting from adverse human rights and environmental impacts along the companies supply chain. Companies will therefore inter alia need to conduct a due diligence policy containing:  i) a description of due diligence approach ii) a code of conduct describing rules and principles to be followed by the company’s employees and subsidiaries, iii) a description of process in place to implement due diligence and iv) annual updates of due diligence policy. According to the current proposal of the Supply Chain Directive the management will directly be obliged to ensure monitoring and implementation.

Additionally, companies falling within Threshold 1 will need to provide for a plan to ensure that their business model and strategy are compatible with the limiting of global warming to 1.5 °C in line with the Paris Agreement

Importantly, the scope of the proposed directive does not only apply to companies' own operations, but also to their subsidiaries and their entire value chains, their direct and indirect established business relationships.

Sanctions

The Supply Chain Directive proposal will provide for civil liability in addition to administrative fines by Member States. Fines will be turnover-related and every Member State will have to decide on the fines regime in their implementing legislation. The proposal suggests that sanctions will be published.

Further, Member States shall ensure that compa-nies are liable for damages if they fail to comply with their due diligence responsibilities within the supply chain.

Outlook

The proposal for the Supply Chain Directive still stands at the beginning of a likely intensely debat-ed legislative procedure.

For companies, this means that there is still time to get involved in the legislative process, but also to prepare for necessary measures to provide for compliance early on. Once adopted, Member States will have two years to transpose the Supply Chain Directive into national law. The obligations for companies falling within Threshold 2 will enter into force four years after the adoption of the Supply Chain Directive.

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Please find here the presentation for download.