European Network | Corporate due diligence duties within the EU framework on sustainable corporate

Legal Joint Paper to provide an overview of the potential status of legislation and case law in France, Germany, Italy and Spain

European Network | Corporate due diligence duties within the EU framework on sustainable corporate
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February 4, 2022

2011 OECD Guidelines for Multinational Enterprises refer to corporate due diligence as the process through which enterprises can identify, prevent, mitigate and account for how they address their actual and potential adverse impacts as an integral part of business decision-making and risk management systems.

Although there are many international benchmarks that companies can refer to in relation to the principles and practicalities of conducting corporate due diligence, there is currently no common legislation at EU level identifying general due diligence obligations, also in relation to the value chain. Indeed, the Non-Financial Reporting Directive (Directive 2014/95/EU - “NFRD”, amending Directive 2013/34/EU) requires “public-interest entities” (“PIE”) exceeding, individually and/or at group level, certain dimensional criteria, to include in the non-financial statement information on the due diligence processes implemented, “to the extent necessary for an understanding of the undertaking’s development”. However, the NFRD does not detail the reporting requirements of due diligence procedures, nor does it set out how they should be conducted.

In the light of the above, although a study highlighted that close to 45% of all surveyed companies within the scope of NFRD have implemented new due diligence processes on environmental or human rights matters as a consequence of the reporting obligations set forth in NFRD, several demands for review and [amendment/expansion] of the European framework on corporate due diligence have emerged.

On 11 December 2019, within its communication on the European Green Deal, the European Commission announced its intention to review the NFRD as part of the strategy to strengthen the foundations for sustainable investment. A public consultation, launched between February and June 2020, identified several shortcomings in the implementation of the NFRD, also relating to the content of corporate due diligence reporting requirements: the proposed review of the Directive (which will then be referred to as the Corporate Sustainability Reporting Directive – “CSRD”) will therefore require in-depth description of the due diligence process implemented, the adverse impacts connected with the company’s value chain, any actions taken and the result of such actions.

The CSRD proposal is also closely coordinated with other Commission initiatives, including in particular the “Sustainable corporate governance initiative”, aiming at embedding sustainability in the corporate governance framework and fostering behavioral change in companies by addressing issues such as due diligence for environmental and human rights impacts. With the aim of influencing such initiative, on 10 March 2021 the European Parliament adopted a legislative own initiative resolution recommending to the Commission to initiate a legislative proposal on corporate due diligence and corporate accountability. Such resolution notes that, whereas the Union has already adopted due diligence legislation for specific sectors – such as the Conflict Minerals Regulation, the Timber Regulation, the Forest Law Enforcement, Governance and Trade (FLEGT) Regulation and the Anti-Torture Regulation – the lack of a joint Union-wide approach may lead to less legal certainty when it comes to business prerogatives and to imbalances in fair competition, which would in turn disadvantage undertakings that are proactive regarding social and environmental matters.

In the annex to the resolution, the European Parliament proposed a draft directive which, inter alia: (i) provides for the obligation of Member States to establish rules requiring large companies and publicly listed and high-risk companies to conduct effective due diligence regarding potential or actual adverse impacts of their operations, value chains and business relationships on human rights, the environment, and good corporate governance; (ii) requires companies to publicly disclose their due diligence strategy, engage with stakeholders and implement an adequate grievance mechanism that stakeholders can use to voice their concerns, and provide means of remediation for harm done; (iii) requires Member States to establish an adequate supervision system and provide for proportionate sanctions, within the ordinary civil liability regime.

Considering the above, the purpose of this joint paper is to provide, in the light of the evolving European regulatory scenario, an overview of the current and potential status of legislation and case law in France, Germany, Italy and Spain.

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February 4, 2022