Explanatory Memorandum to COM(2022)71 - Corporate Sustainability Due Diligence - Main contents
Please note
This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2022)71 - Corporate Sustainability Due Diligence. |
|---|---|
| source | COM(2022)71  |
| date | 23-02-2022 |
1. CONTEXT OF THE PROPOSAL
Reasons for and objectives of the proposal
The behaviour of companies across all sectors of the economy is key to succeed in the Union’s transition to a climate-neutral and green economy 1 in line with the European Green Deal 2 and in delivering on the UN Sustainable Development Goals, including on its human rights- and environment-related objectives. This requires implementing comprehensive mitigation processes for adverse human rights and environmental impacts in their value chains, integrating sustainability into corporate governance and management systems, and framing business decisions in terms of human rights, climate and environmental impact, as well as in terms of the company’s resilience in the longer term.
EU companies operate in complex surroundings and, especially large ones, rely on global value chains. Given the significant number of their suppliers in the Union and in third countries and the overall complexity of value chains, EU companies, including the large ones, may encounter difficulties to identify and mitigate risks in their value chains linked to respect of human rights or environmental impacts. Identifying these adverse impacts in value chains will become easier if more companies exercise due diligence and thus more data is available on human rights and environmental adverse impacts.
The connection of the EU economy to millions of workers around the world through global value chains comes with a responsibility to address adverse impacts on the rights of these workers. A clear request by Union citizens, in particular in the framework of the Conference on the Future of Europe, for the EU economy to contribute to address these and other adverse impacts is reflected in the existing or upcoming national legislation on human rights and environmental due diligence 3 , in the debates ongoing at national level and in the call for action from the European Parliament and the Council. Both of these institutions have called on the Commission to propose Union rules for a cross-sector corporate due diligence obligation. 4 In their Joint Declaration on EU Legislative Priorities for 2022 5 , the European Parliament, the Council of the European Union and the European Commission have committed to deliver on an economy that works for people, including to improve the regulatory framework on sustainable corporate governance.
Using the existing international voluntary standards on responsible business conduct, 6 an increasing number of EU companies are using value chain due diligence as a tool to identify risks in their value chain and build resilience to sudden changes in the value chains, but companies may also face difficulties when considering to use the value chain due diligence for their activities. Such difficulties can be for instance due to lack of legal clarity regarding corporate due diligence obligations, complexity of value chains, market pressure, information deficiencies, and costs. As a consequence, the benefits of due diligence are not widespread among European companies and across economic sectors.
Mostly large companies have been increasingly deploying due diligence processes as it can provide them with a competitive advantage. 7 This also responds to the increasing market pressure on companies to act sustainably as it helps them avoid unwanted reputational risks vis-à-vis consumers and investors that are becoming increasingly aware of sustainability aspects. However, these processes are based on voluntary standards and do not result in legal certainty for neither companies nor victims in case harm occurs.
Voluntary action does not appear to have resulted in large scale improvement across sectors and, as a consequence, negative externalities from EU production and consumption are being observed both inside and outside the Union. Certain EU companies have been associated with adverse human rights and environmental impacts, including in their value chains. 8 Adverse impacts include, in particular, human rights issues such as forced labour, child labour, inadequate workplace health and safety, exploitation of workers, and environmental impacts such as greenhouse gas emissions, pollution, or biodiversity loss and ecosystem degradation.
In the last years, emerging legal frameworks on corporate due diligence in Member States 9 reflect the increasing desire to support companies in their endeavour to perform due diligence in their value chains and foster business conduct that respects human rights, children’s rights and the environment. On the other hand, they also bring fragmentation and risk undermining legal certainty and a level playing field for companies in the single market.
Union legislation on corporate due diligence would advance respect for human rights and environmental protection, create a level playing field for companies within the Union and avoid fragmentation resulting from Member States acting on their own. It would also include third-country companies operating in the Union market, based on a similar turnover criterion.
Against this background, this Directive will set out a horizontal framework to foster the contribution of businesses operating in the single market to the respect of the human rights and environment in their own operations and through their value chains, by identifying, preventing, mitigating and accounting for their adverse human rights, and environmental impacts, and having adequate governance, management systems and measures in place to this end.
Contents
improve corporate governance practices to better integrate risk management and mitigation processes of human rights and environmental risks and impacts, including those stemming from value chains, into corporate strategies;
avoid fragmentation of due diligence requirements in the single market and create legal certainty for businesses and stakeholders as regards expected behaviour and liability;
increase corporate accountability for adverse impacts, and ensure coherence for companies regarding obligations under existing and proposed EU initiatives on responsible business conduct;
improve access to remedies for those affected by adverse human rights and environmental impacts of corporate behaviour;
being a horizontal instrument focussing on business processes, applying also to the value chain, this Directive will complement other measures in force or proposed, which directly address some specific sustainability challenges or apply in some specific sectors, mostly within the Union.
Consistency with existing policy provisions in the policy area
At EU level, sustainable corporate governance has been mainly fostered indirectly by imposing reporting requirements in the Non-Financial Reporting Directive (NFRD ) 10 on approximately 12 000 companies 11 concerning environmental, social and human rights related risks, impacts, measures (including due diligence) and policies. 12 The NFRD had some positive impact on improvement of responsible business operation, but has not resulted in the majority of companies taking sufficient account of their adverse impacts in their value chains. 13
The Commission’s recent proposal for a Corporate Sustainability Reporting Directive (CSRD), revising the NFRD 14 , would extend the scope of the companies covered to all large and all listed companies 15 , require the audit (assurance) of reported information and strengthen the standardisation of reported information by empowering the Commission to adopt sustainability reporting standards. 16 This Directive will complement the current NFRD and its proposed amendments (proposal for CSRD) by adding a substantive corporate duty for some companies to perform due diligence to identify, prevent, mitigate and account for external harm resulting from adverse human rights and environmental impacts in the company’s own operations, its subsidiaries and in the value chain. Of particular relevance of the proposal on CSRD is that it mandates disclosure of plans of an undertaking to ensure that its business model and strategy are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C in line with the Paris Agreement. The two initiatives are closely interrelated and will lead to synergies. First, a proper information collection for reporting purposes under the proposed CSRD requires setting up processes, which is closely related to identifying adverse impacts in accordance with the due diligence duty set up by this Directive. Second, the CSRD will cover the last step of the due diligence duty, namely the reporting stage, for companies that are also covered by the CSRD. Third, this Directive will set obligations for companies to have in place the plan ensuring that the business model and strategy are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C in line with the Paris Agreement on which the CSRD requires to report. Thus, this Directive will lead to companies’ reporting being more complete and effective. Therefore, complementarity will increase effectiveness of both measures and drive corporate behavioural change for those companies.
This Directive will also underpin the Sustainable Finance Disclosure Regulation 17 (SFDR) that has recently entered into force and applies to financial market participants (such as investment fund and portfolio managers, insurance undertakings selling insurance-based investment products and undertakings providing various pension products) and financial advisers. Under the SFDR, these undertakings are required to publish, among others, a statement on their due diligence policies with respect to principal adverse impacts of their investment decisions on sustainability factors on a comply or explain basis. At the same time, for companies with more than 500 employees the publication of such a statement is mandatory, and the Commission is empowered to adopt regulatory technical standards on the sustainability indicators in relation to the various types of adverse impacts. 18
Similarly, this Directive will complement the recent Taxonomy Regulation 19 , a transparency tool that facilitates decisions on investment and helps tackle greenwashing by providing a categorisation of environmentally sustainable investments in economic activities that also meet a minimum social safeguard. 20 The reporting covers also minimum safeguards established in Article 18 of the Taxonomy Regulation that refer to procedures companies should implement to ensure the alignment with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights, including the principles and rights set out in the eight fundamental conventions identified in the Declaration of the International Labour Organization on Fundamental Principles and Rights at Work and the International Bill of Human Rights when carrying out an economic activity categorized as “sustainable”. Like NFRD and the proposal for CSRD, the Taxonomy Regulation does not impose substantive duties on companies other than public reporting requirements, and investors can use such information when allocating capital to companies. By requiring companies to identify their adverse risks in all their operations and value chains, this Directive may help in providing more detailed information to the investors. It therefore complements the Taxonomy Regulation as it has the potential to further help investors to allocate capital to responsible and sustainable companies. Moreover, the Taxonomy Regulation (as providing a common language for sustainable economic activities for investment purposes) can serve as a guiding tool for companies to attract sustainable financing for their corrective action plans and roadmaps.
This Directive will complement Directive 2011/36/EU on preventing and combating trafficking in human beings and protecting its victims 21 , which constitutes a comprehensive legal framework to effectively fight all forms of exploitation in the Union by natural and legal persons, in particular forced labour, sexual exploitation, as well as begging, slavery or practices similar to slavery, servitude, or the exploitation of criminal activities, or the removal of organs. It also establishes the liability of legal persons for the offences referred to in that Directive committed for their benefit by any person who has a leading position within the legal person or the commission of the offence was possible due to the lack of supervision or control. Directive 2011/36/EU also provides for sanctions on the legal person held liable.
Furthermore, this Directive will complement the Employers’ Sanctions Directive 22 , which prohibits the employment of irregularly staying third-country nationals, including victims of trafficking in human beings. The Employers’ Sanctions Directive lays down minimum standards on sanctions and other measures to be applied in the Member States against employers who infringe upon the Directive.
This Directive will also complement existing or planned sectoral and product-related value chain due diligence instruments at EU level due to its cross-sectoral scope and broad range of sustainability impacts covered:
The so-called Conflict Minerals Regulation 23 applies to four specific minerals and metals. It requires EU companies in the supply chain to ensure they import tin, tungsten, tantalum and gold from responsible and conflict-free sources only and put in place more specific mechanisms for conducting due diligence, e.g. an independent third-party audit of supply chain due diligence. The due diligence provisions of this Directive address also environmental adverse impacts and will apply to value chains of additional minerals that are not covered in the Conflict Minerals Regulation but produce human rights, climate and environmental adverse impacts.
The Commission’s proposal for a Regulation on deforestation-free supply chains 24 focuses on certain commodities and product supply chains. It has a very specific objective, namely to reduce the impact of EU consumption and production on deforestation and forest degradation worldwide. Its requirements will, in some areas, be more prescriptive compared to the general due diligence duties under this Directive. It also includes a prohibition of placing on the market certain commodities and derived products if the requirement of “legal” and “deforestation free” cannot be ascertained through due diligence. This prohibition will apply to all operators placing the relevant products on the Union market, including EU and non-EU companies, irrespective of their legal form and size. Therefore, while the overall objectives of the two initiatives are mutually supportive, their specific objectives are different. This Directive will complement the Regulation on deforestation-free products by introducing a value chain due diligence related to activities that are not covered by the Regulation on deforestation-free products but might be directly or indirectly leading to deforestation.
The Commission’s proposal for a new Batteries Regulation 25 has the specific objectives of reducing environmental, climate and social impacts throughout all stages of the battery life cycle, strengthening the functioning of the internal market, and ensuring a level playing field through a common set of rules. It requires economic operators placing industrial or electric vehicle batteries (including incorporated in vehicles) larger than 2 kWh on the Union market to establish supply chain due diligence policies. It focusses on those raw materials of which a significant amount of the global production goes into battery manufacturing and that may pose social or environmental adverse impacts (cobalt, natural graphite, lithium, and nickel). The economic operators must submit compliance documentation for third-party verification by notified bodies and are subject to checks by the national market surveillance authorities. This Directive will complement the Batteries Regulation by introducing a value chain due diligence related to raw materials that are not covered in that Regulation but without requiring certification for placing the products on the EU market.
The future Sustainable Products Initiative (SPI) aims to revise the current Ecodesign Directive 26 and concerns more broadly the sustainability of products placed on the EU market and the transparency of related information.
This proposal will play an essential role in tackling the use of forced labour the global value chains. As announced in the Communication on decent work worldwide 27 the Commission is preparing a new legislative proposal that will effectively prohibit the placing on the Union market of products made by forced labour, including forced child labour. The new initiative will cover both domestic and imported products and combine a ban with a robust, risk-based enforcement framework. The new instrument will build on international standards and complement horizontal and sectoral initiatives, in particular the due diligence obligations as laid down in this proposal.
This Directive is without prejudice to the application of other requirements in the areas of human rights, protection of the environment and climate change under other Union legislative acts. If the provisions of this Directive conflict with a provision of another Union legislative act pursuing the same objectives and providing for more extensive or more specific obligations, the provisions of the other Union legislative act should prevail to the extent of the conflict and should apply to those specific obligations
Consistency with other Union policies
This Directive is important to fulfil objectives of various existing and planned Union measures in the field of the human rights, including labour rights, and environment.
As part of the European Green Deal, the Commission has listed an initiative on sustainable corporate governance among the deliverables of the Action Plan on a Circular Economy , the Biodiversity strategy, the Farm to Fork strategy, the Chemicals strategy , Updating the 2020 New Industrial Strategy: Building a stronger Single Market for Europe’s recovery, and the Strategy for Financing the Transition to a Sustainable Economy .
EU environmental law introduces various environmental requirements for companies, Member States, or defines goals for the Union 28 . However, it generally does not apply to value chains outside the Union where up to 80-90% of the environmental harm of EU production may occur 29 . The Environmental Liability Directive 30 establishes a framework for environmental liability with regard to prevention and remedying environmental damage based on the “polluter pays” principle for companies’ own operations. It does not cover companies’ value chains. The civil liability related to adverse environmental impacts of this Directive will be complementary to the Environmental Liability Directive.
This Directive will complement EU climate legislation, including the European Climate Law, setting in stone the Union’s climate ambition, with the intermediate target of reducing net greenhouse gas emissions by at least 55% by 2030, to set Europe on a responsible path to becoming climate-neutral by 2050. Most specifically, this Directive will complement the “Fit for 55” Package 31 and its various key actions, such as setting more ambitious energy efficiency and renewable energy targets for Member States by 2030 or the upgrading of the EU Emissions Trading System 32 , which needs to be underpinned by a wider transformation of production processes to achieve climate neutrality by 2050 across the economy and throughout value chains. The “Fit for 55” Package will only indirectly apply to some non-EU value chains of EU companies through the Carbon Border Adjustment Mechanism (CBAM) 33 which aims at preventing “carbon leakage” 34 by imposing a carbon adjustment price for selected imported products not subject to the carbon price deriving from the EU Emission Trading System.
Existing EU health and safety, and fundamental rights legislation targets very specific adverse impacts (such as violations of the right to privacy and data protection, discrimination, specific health aspects related to dangerous substances, threats to health and safety of workers, violations of rights of the child, etc.) within the Union 35 but does not apply in all cases to companies’ value chains outside the Union.
The initiative is in line with the EU Action Plan on Human Rights and Democracy 2020-2024 36 , which includes a commitment for the Union and Member States to strengthen their engagement to actively promote the implementation of international standards on responsible business conduct such as the UN Guiding Principles on Business and Human Rights and the OECD Guidelines on Multinational Enterprises and Due Diligence. It is consistent with the EU Strategy on the Rights of the Child 37 which commits the Union to a zero tolerance approach against child labour and to ensure that supply chains of EU companies are free of child labour. In the EU Strategy on Combatting Trafficking in Human Beings 2021- 2025 38 the Commission committed to put forward a legislative proposal on sustainable corporate governance to foster long-term sustainable and responsible corporate behaviour. The initiative also contributes to the goals of the Commission’s Communication on decent work worldwide 39 , which is adopted together with this proposal.
This Directive will contribute to the European Pillar of Social Rights as both promote rights such as fair working conditions 40 . It will – beyond its external angle – deal with the violation of international labour standards when they occur in the Union (e.g. forced labour cases in agriculture). Therefore, internally it would also reinforce the protection of workers in the Union alongside the existing social acquis and contribute to preventing and tackling abuses within and across Member States.
Thus, this Directive will complement the EU’s regulatory environment that currently does not include an Union-wide transparent and predictable framework that helps EU companies in all sectors of the economy to assess and manage sustainability risks and impacts with respect to the core human rights and environmental risks, including across their value chains.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
Legal basis
The proposal is based on Article 50 and Article 114 of the Treaty on the Functioning of the European Union (TFEU).
Article 50(1) TFEU and in particular Article 50(2)(g) TFEU provide for the EU competence to act in order to attain freedom of establishment as regards a particular activity, in particular “by coordinating to the necessary extent the safeguards which, for the protection of the interests of members and others, are required by Member States of companies or forms within the meaning of the second paragraph of Article 54 TFEU with a view to making such safeguards equivalent throughout the Union”. An example of this can be coordination measures concerning the protection of interests of companies’ shareholders and other stakeholders with a view to making such protection equivalent throughout the Union, where disparities between national rules are such as to obstruct freedom of establishment 41 . Recourse to this provision is possible if the aim is to prevent the emergence of current or future obstacles to the freedom of establishment resulting from the divergent development of national laws. The emergence of such obstacles must be likely and the measure in question must be designed to prevent them. 42
This proposal regulates sustainability due diligence obligations of companies and at the same time covers – to the extent linked to that due diligence – corporate directors’ duties and corporate management systems to implement due diligence. Thus, the proposal concerns processes and measures for the protection of the interests of members and stakeholders of the companies. Several Member States have recently introduced legislation on sustainability due diligence, 43 while others are in the process of legislating or considering action 44 . Also, an increasing number of Member States have recently been regulating the matter by requiring directors to take into account the company’s external impacts 45 , prioritize the interests of stakeholders in their decisions 46 , or adopt a policy statement on the company’s human rights strategy 47 . New and emerging laws on due diligence are considerably different in the Union despite the intention of all the Member States to build on existing international standards (UN Guiding Principles on Business and Human Rights OECD Responsible Business Conduct standards) and thus lead to diverging requirements. Certain Member States have adopted, or are likely to adopt, legislation that is limited to specific sustainability concerns in value chains. 48 Personal scope, substantive due diligence requirements, enforcement regimes and related directors’ duties diverge and may do so even more in the future. 49 Other Member States can be expected to decide not to legislate in this field. Significantly different requirements among Member States thus create fragmentation of the internal market. This fragmentation is likely to increase over time.
This fragmentation also risks leading to an uneven playing field for companies within the internal market. First, companies and their directors – in particular of those which have cross-border value chains – are already subject to differing requirements and will likely be subject to even more differing requirements depending on where their registered seat is located. This creates distortions of competition. Besides, depending on how they structure their operations in the internal market, some companies may simultaneously fall within the scope of two or more different national legal frameworks dealing with sustainable corporate governance. 50 This could lead to duplication of requirements, difficulties in complying, lack of legal certainty for companies, and even mutually incompatible parallel legal requirements. Inversely, some companies may not fall within the scope of any national framework for the mere reason that they do not have links relevant under national law with the jurisdiction of a Member State that has due diligence rules in place and thereby gaining an advantage over their competitors.
The proposed act is designed to prevent and remove such obstacles to free movement and distortions of competition by harmonising the requirements for companies to carry out due diligence in their own operation, subsidiaries and value chains and related directors’ duties. They will lead to a level playing field where companies of similar size and their directors are subject to the same requirements for integrating sustainable corporate governance and corporate due diligence measures in their internal management systems and thereby protecting the interests of the company’s stakeholders in a similar way. Harmonised conditions would be beneficial for cross-border establishment including company operations and also investments, since it would facilitate comparison of corporate sustainability requirements and make engagement easier and thus less costly.
Article 50 TFEU is lex specialis for measures adopted in order to attain freedom of establishment. Among the proposed measures, those concerning companies’ corporate governance fall under this legal basis, in particular integrating due diligence into companies’ policies, measures on companies’ plan to ensure that the business model and strategy are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C in line with the Paris Agreement, and related remuneration measures, as well as provisions on directors’ duty of care, and directors’ duties concerning setting up and overseeing due diligence.
In order to address the described internal market barriers comprehensively, Article 50 TFEU is here combined with the general provision of Article 114 TFEU. Article 114 TFEU provides for the adoption of measures for the approximation of the provisions laid down by law, regulation or administrative action in Member States which have as their object the establishment and functioning of the internal market. The Union legislature may have recourse to Article 114 TFEU in particular where disparities between national rules are such as to obstruct the fundamental freedoms or create distortions of competition and thus have a direct effect on the functioning of the internal market.
As set out above, the differences between national rules on sustainable corporate governance and due diligence obligations have a direct impact on the functioning of the internal market, and that impact is likely to increase in the future. Beyond the matters regulated in Article 50 TFEU, this act concerns other areas of the establishment and functioning of the internal market. Notably, in the absence of action by the Union legislator, the production and movement of goods and services would be skewed to the benefit of jurisdictions with no due diligence regimes or with less demanding regimes, or companies established in such jurisdictions, substantially impacting the flow of goods and services. Moreover, companies supplying goods or services, in particular SMEs, will be confronted with diverging rules and expectations from customers located in different Member States. For instance, whilst one Member State law may require the supplier to carry out third-party audits, another Member State may require the same supplier to participate in a recognised industry schemes and multi-stakeholder initiatives. One Member State may require the company to carry out due diligence in relation to established business relationships whilst the other Member State may cover the direct suppliers only. This would lead to a multiplication of different partially incompatible requirements distorting the free flow of goods and services in the Union.
It is foreseeable that these distortions and impacts would become more serious with time as more and more Member States will adopt diverging national laws or may even lead to a race to the bottom in forthcoming due diligence legislations.
Distortions are also relevant for civil liability in case of harm caused in a company’s value chain. Some national legal frameworks on due diligence include an express civil liability regime linked to the failure to execute due diligence, while others expressly exclude a specific civil liability regime. 51 A number of companies have been brought before courts for causing or failing to prevent adverse impacts at the level of their subsidiaries or value chains. Such cases are decided based on differing rules today. In the absence of common rules, divergent national liability regimes may lead to different outcomes depending on whether there is ownership control (as regards subsidiaries) or factual control (either through direct contracts or where control could be exercised by the company through contractual cascading or other leverage in indirect business relationships). This fragmentation would lead to distortions of competition in the internal market as a company located in one Member State would be subject to damages claims due to harm caused in its value chain whilst a company with the same value chain would be exempt from this financial and reputational risk because of diverging national rules.
The proposed civil liability regime would clarify which rules apply in case harm occurs in a company’s own operation, at the level of its subsidiaries and at the level of direct and indirect business relations in the value chain. In addition, the proposed provision on applicable law serves the purpose of ensuring application of the harmonised rules, including on civil liability, also in cases where otherwise the law applicable to such claim is not the law of a Member State. It will therefore be essential to ensure the necessary level-playing field.
Subsidiarity
First, Member States’ legislation alone in the area is unlikely to be sufficient and efficient. As regards specific transboundary problems, such as pollution, climate change, biodiversity etc. individual action is hampered in case of inaction by other Member States. The achievement of international commitments such as the goals of the UNFCCC 52 ’s Paris Agreement on climate change, the Convention on Biological Diversity, as well as other multilateral environmental agreements by individual Member State action alone is unlikely. Furthermore, risks resulting from adverse human rights and environment impacts present in companies’ value chains have often cross-border effects (e.g. pollution, transnational supply and value chains).
Second, many companies are operating EU-wide or globally; value chains expand to other Union Member States and increasingly to third countries. Institutional investors which invest across the borders own a large part (38% 53 ) of the total market capitalisation of large European listed companies, therefore many companies have cross-border ownership and their operations are influenced by regulations in some countries or lack of action in others. This is one of the reasons why frontrunner companies arguably are reluctant to do a further steps in addressing sustainability issues including those in the value chains today 54 and ask for a cross-border level playing field.
Third, companies operating across the internal market and beyond need legal certainty and a level-playing field for their sustainable growth. Some Member States have recently introduced legislation on due diligence 55 , while others are in the process of legislating or considering action 56 . Existing Member State rules and those under preparation already have, and would further lead to diverging requirements, which risks being inefficient and leading to an uneven playing field. There are considerable indirect effects of diverging due diligence laws on the suppliers that supply to different companies falling under different laws, as the obligations are in practice translated into contractual clauses. If due diligence requirements are significantly different among Member States, this creates legal uncertainty, fragmentation of the Single market, additional costs and complexity for companies and their investors operating across borders as well as other stakeholders. EU action can avoid this and therefore has added value.
Finally, compared to individual action by Member States, EU intervention can ensure a strong European voice in policy developments at the global level 57 .
Proportionality
The burden on companies stemming from compliance costs, has been adapted to the size, resources available, and the risk profile. Companies will only have to take appropriate measures that are commensurate with the degree of severity and the likelihood of the adverse impact, and reasonably available to the company, taking into account the circumstances of the specific case, including characteristics of the economic sector and of the specific business relationship and the company’s influence thereof, and the need to ensure prioritisation of action. For that purpose the material and personal scope, and the enforcement provisions were restricted as further explained below.
As regards the “personal scope” of the due diligence obligations (i.e. which business categories are covered), small and medium sized enterprises (SMEs) that include micro companies and overall account for around 99 % of all companies in the Union, are excluded from the due diligence duty. For this category of companies, the financial and administrative burden of setting up and implementing a due diligence process would be relatively high. For the most part, they do not have pre-existing due diligence mechanisms in place, they have no know-how, specialised personnel, and the cost of carrying out due diligence would impact them disproportionately. They will, however, be exposed to some of the costs and burden through business relationships with companies in scope as large companies are expected to pass on demands to their suppliers. Hence, supporting measures will be necessary to help SMEs build operational and financial capacity. Companies whose business partner is an SME, are also required to support them in fulfilling the due diligence requirements, in case such requirements would jeopardize the viability of the SME. Moreover, the value chain of the financial sector does not cover SMEs that are receiving loan, credit, financing, insurance or reinsurance. At the same time, exposure of an individual SME to adverse sustainability impacts will as a general rule be lower than the exposure of larger companies. Therefore, very large companies 58 will be within the scope of the full due diligence obligation, also because many of them already have certain processes in place e.g. because of reporting obligations. In particular, the selected turnover criteria will filter those having the largest impact on the Union economy. Moreover, this Directive lays down measures to limit the passing on of the burden from those large companies to the smaller suppliers in the value chain and to use fair, reasonable, non-discriminatory and proportionate requirements vis-a-vis SMEs.
As far as companies with lower turnover and less employees 59 are concerned, the due diligence obligation is limited to those companies active in particularly high-impact sectors that are at the same time covered by existing sectoral OECD guidance 60 . Moreover, despite the fact that OECD guidance covers the financial sector, it is not included in the high- impact sectors due to its specificities. This limitation aims to create a balance between the interest in achieving the goals of the Directive and the interest in minimising the financial and administrative burden on companies. The due diligence obligation for these companies will be simplified as they would only focus on severe adverse impacts that are relevant for their sector. Moreover, the due diligence obligation will apply to them only 2 years after the end of the transposition period for this Directive allowing to establish the necessary processes and procedures and benefit from industry cooperation, technological developments, standards, etc. that are likely to be prompted by the earlier implementation date for larger companies.
To the extent that this Directive also covers third-country companies, the criteria used for defining the scope of EU and non-EU companies covered are not the same, but ensure that third country companies are not more likely to fall within the scope. For them, a net turnover threshold is used (EUR 150 million for group 1 and EUR 40 million for group 2), but all of this turnover needs to be generated in the Union. EU companies, in turn, have to have a net turnover of EUR 150 million generated worldwide and have to fulfil an employee criterion as well (above 500 employees in group 1 and above 250 employees in group 2). Such difference in the criteria used is justified for the following reasons:
–The EU turnover criterion for third-country companies creates a link to the EU. Including only turnover generated in the Union is justified since such a threshold, appropriately calibrated, creates a territorial connection between the third-country companies and the Union by the effects that the activities of these companies may have on the EU internal market, which is sufficient for the Union law to apply to third-country companies.
–Also, the Country-by-Country Reporting Directive – an amendment to the Accounting Directive – has already established the methods for calculating net turnover for non-EU companies, while such methodology does not exist for calculating the number of employees of third-country companies. The experience with the French law regulating due diligence shows that, in the absence of a common definition of an employee 61 , the number of employees (worldwide) is difficult to calculate, which hinders the identification of which third-country companies are covered by the scope, preventing effective enforcement of the rules.
–Using both employee and turnover criteria for EU companies would ensure better alignment with the proposal for a Corporate Sustainability reporting Directive which should be used for the reporting of due diligence measures and policy for EU companies.
–While the Directive will cover about 13 000 EU companies 62 , based on the estimations of the Commission, it will only cover about 4 000 third-country companies 63 . The fact that EU companies will only be covered if they also reach the minimum limit on the number of employees is very unlikely to change the conditions of competition in the EU internal market: the two size criteria applicable to EU companies, even if cumulative, will result in still covering relatively smaller companies compared to non-EU companies due to the fact that, in their case, the entire worldwide net turnover of the company is to be taken into account.
Finally, large third-country companies having a high turnover in the Union have the capacity to implement due diligence and will benefit from the advantages coming with due diligence also in their operations elsewhere. In all other aspects, third-country companies are covered by the due diligence rules the same way as their EU counterparts (for example as regards the regime applicable to companies operating in high-impact sectors and identical phase in period for those companies). The harmonisation of the duties of directors is limited to EU companies only, thus third-country companies will have more restricted obligations.
The “material scope” is focused and structured mainly upon the corporate due diligence obligation and covers human rights and those environmental adverse impacts that can be clearly defined in selected international conventions. Directors’ duties proposed ensure a close link with the due diligence obligations and are thus necessary for the due diligence to be effective. Directors’ duties also include the clarification of how directors are expected to comply with the duty of care to act in the best interest of the company.
Effective enforcement of the due diligence duty is key to achieving the objectives of the initiative. This Directive will provide for a combination of sanctions and civil liability.
As regards private enforcement through civil liability, a different approach is used regarding the company`s own operations and its subsidiaries on the one hand and regarding business relations on the other hand. In particular, civil liability concerns only established business relationships with which a company expects to have a lasting relationship, in view of its intensity or duration and which does not represent a negligible or merely ancillary part of the company`s value chain. The company should not be liable for failing to prevent or cease harm at the level of indirect business relationships if it used contractual cascading and assurance and put in place measures to verify compliance with it, unless it was unreasonable, in the circumstances of the case, to expect that the action actually taken, including as regards verifying compliance, would be adequate to prevent, mitigate, bring to an end or minimise the extent of the adverse impact. In addition, in the assessment of the existence and extent of liability, due account is to be taken of the company’s efforts, insofar as they relate directly to the damage in question, to comply with any remedial action required of them by a supervisory authority, any investments made and any targeted support provided as well as any collaboration with other entities to address adverse impacts in its value chains.
This approach to civil liability will also limit the risk of excessive litigation.
The measures related to public enforcement of the due diligence duty do not go beyond what is necessary. This Directive clarifies that any sanction imposed due to non-compliance with the due diligence obligations has to be proportionate. If the public authorities that investigate the company’s compliance with this Directive identify a failure to comply they should first grant the company an appropriate period of time to take remedial action. The Directive outlines a limited number of sanctions that should apply in all Member States but leaves it to the Member States to ensure a proportionate enforcement process, in line with their national law. When pecuniary sanctions are imposed, they shall be based on the company’s turnover to ensure their proportionate level.
Furthermore, this Directive does not entail unnecessary costs for the Union, national governments, regional or local authorities. The Directive will leave it up to the Member States how to organise enforcement. Supervision can be carried out by existing authorities. To reduce the costs (for instance when supervising third-country companies active in various Member States) and improve the supervision, coordination, investigation and exchange of information the Commission will set up a European Network of Supervisory Authorities.
This Directive allows for company cooperation, use of industrial schemes and multi-stakeholder initiatives to reduce the cost of compliance for the companies with this Directive.
Choice of the instrument
The proposed instrument is a Directive, since Article 50 TFEU is the legal basis for company law legislation regarding the protection of the interests of companies’ members and others with a view to making such protection equivalent throughout the Union. Article 50 TFEU requires the European Parliament and the Council to act by means of directives.
The Commission shall adopt delegated acts laying down the criteria for the reporting by third country companies on due diligence.
In order to provide support to companies and to Member State authorities on how companies should fulfil their due diligence obligations, the Commission, where necessary in consultation with relevant European bodies, international bodies having expertise in due diligence implementation, and others, may issue guidelines. Guidelines may also be used to outline non-binding model contractual clauses that companies can use when cascading the obligation in their value chain.
In addition, the Commission may put in place other supporting measures building on existing EU actions and tools to support due diligence implementation within the Union and in third countries, including facilitation of joint stakeholder initiatives to help companies fulfil their obligations and support SMEs impacted by this Directive in other ways. This may be further complemented by EU development cooperation instruments to support third country governments and upstream economic operators in third countries addressing adverse human rights and environmental impacts of their operations and upstream business relationships.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
Stakeholder consultations
–The inception impact assessment (roadmap), which received 114 feedbacks;
–The open public consultation 64 , which received 473 461 responses and 122.785 citizen signatures, the vast majority of which were submitted through campaigns using pre-filled questionnaires, and 149 position papers;
–A dedicated consultation of social partners;
–A number of stakeholder workshops and meetings, e.g. meeting of the Informal Company Law Expert Group, mainly composed of company law legal academics (ICLEG), meeting with Member State representatives in the Company Law Expert Group (CLEG); and
–Conferences and meetings with business associations, individual businesses, including Small and Medium-sized Enterprises (SMEs) representatives, civil society, including non-governmental and not-for-profit organisations, as well as international organisations, such as OECD.
Overall, the consultation activities showed that there is generally a wide acknowledgement among stakeholders of the need for an EU legal framework for due diligence. 65 In particular, large companies across the board asked for greater harmonisation in the area of due diligence to improve legal certainty and create a level playing field. Citizens and civil society associations perceived the current regulatory framework as ineffective to ensure corporate accountability for negative impacts on the human rights and environment.
A vast majority of respondents to the open public consultation, including most participating Member States, were in favour of a horizontal approach to due diligence over a sector-specific or thematic approach 66 . Companies indicated that they feared the risk of competitive disadvantages vis-à-vis third-country companies that do not have the same duties. Accordingly, most respondents agreed that due diligence rules should also apply to third-country companies which are not established in the EU but carry out activities of a certain scale in the EU 67 .
Regarding an enforcement mechanism accompanying a mandatory due diligence duty, all stakeholder groups responding to the open public consultation indicated by a majority that supervision by competent national authorities with a mechanism of EU cooperation/coordination is the most suited option. 68
A majority of respondents in all stakeholder groups considered binding rules with targets to be the option entailing the most costs, but also the most benefits overall. Although most respondents saw the positive impact on third countries, a subset of respondents fear a potential negative impact of due diligence rules on third countries if companies investing in third countries with weak human rights, including social and labour, and environmental protection, would have to withdraw from these countries.
Detailed information on the consultation strategy and conclusions of the stakeholder consultations can be found in Annex 2 of the impact assessment report.
Collection and use of expertise
To support the analysis of the different options, the Commission awarded support contracts to external experts for a study on due diligence requirements through the supply chain 69 and for a study on directors’ duties and sustainable corporate governance 70 . These experts worked in close cooperation with the Commission throughout the different phases of the study.
Besides these support studies, additional expertise was identified through literature research and through the stakeholder consultation responses.
Alongside the above-mentioned support studies, expert group meetings, and stakeholder consultations, the Commission also paid close attention to the relevant European Parliament resolution and to the Council Conclusions. The European Parliament resolution of 10 March 2021 provided recommendations to the Commission on corporate due diligence and corporate accountability, calling upon the Commission to propose EU rules for a comprehensive corporate due diligence obligation. The Council Conclusions on Human Rights and Decent Work in Global Supply Chains of 1 December 2020 called upon the Commission to table a proposal for an EU legal framework on sustainable corporate governance, including cross-sector corporate due diligence obligations along global value chains.
Impact assessment
The analysis in the impact assessment addressed in a broad sense the problem arising from the need to reinforce sustainability in corporate governance and management systems, with two dimensions: (1) stakeholder interests and stakeholder-related (sustainability) risks to companies are not sufficiently taken into account in corporate risk management systems and decisions; (2) companies do not sufficiently mitigate their adverse human rights and environmental impacts, do not have adequate governance, management systems and measures to mitigate their harmful impacts.
After consideration of different policy options mainly in the areas of corporate due diligence duty and directors’ duties, the impact assessment proposed a preferred package of policy options across three elements: corporate due diligence, directors’ duties and remuneration, which complement each other.
The draft impact assessment was submitted to the Commission’s Regulatory Scrutiny Board on 9 April 2021. Following the negative opinion by the Board, a revised impact assessment was submitted to the Board for a second opinion on 8 November 2021. While noting the significant revision of the report in response to the Board`s first opinion, the Board nevertheless issued a second negative opinion on 26 November 2021 71 , which underlined the need for political guidance on whether, and under which conditions, the sustainable corporate governance initiative could proceed further. The Board maintained its negative opinion because it considered that the impact assessment report did not sufficiently (1) address the problem description and provide convincing evidence that EU businesses, in particular SMEs, do not already sufficiently reflect sustainability aspects or do not have sufficient incentives to do so; (2) present a scope of policy options and identify or fully assess key policy choices; (3) assess the impacts in a complete, balanced and neutral way and reflect uncertainty related to the realisation of benefits, and i demonstrate the proportionality of the preferred option.
Therefore, in order to address the comments of the Board’s second negative opinion, the impact assessment is complemented by a staff working document on the follow-up of the Board’s opinion that provides additional clarifications and evidence on the areas where the Board had provided specific suggestions of improvements.
According to the Commission’s Better Regulation rules a positive opinion from the Regulatory Scrutiny board is required for a file to proceed to the adoption stage. However, the Vice President for Inter-Institutional Relations and Foresight can allow for the continuation of the preparations for an initiative that has been subject to a second negative opinion by the Regulatory Scrutiny Board. It is important to flag that the opinions of the Regulatory scrutiny Board are an assessment of the quality of the impact assessment and not an assessment of the related legislative proposal.
The Commission, also in the light of the agreement by the Vice-President for Inter-Institutional Relations and Foresight, has considered it opportune to proceed with the initiative for the following reasons:
–the political importance of this initiative for the Commission’s political priority of “An economy that works for people”, including within the context of the Sustainable Finance package and the European Green Deal and
–the urgency of action in the field of value chain due diligence as contribution to the sustainability transition, and to address the risk of the increasing Single market fragmentation, as well as the view that
–the additional clarification and evidence provided satisfactorily addressed the shortcomings of the impact assessment identified by the Regulatory Scrutiny Board and were considered in the adapted legal proposal.
With regard to its importance and urgency, the Commission also took note that the initiative was included in the Joint Political Priorities for 2022 by the European Parliament, the Council and the Commission.
After careful analysis of the Board’s findings and considering the reflections on the additional clarifications and evidence provided, the Commission considers that the proposal, which has been significantly revised as compared to the package of policy options put forward by the impact assessment, allows still to decisively move forward towards the overall objective to better exploit the potential of the single market to contribute to the transition to a sustainable economy and to foster long-term sustainable and responsible corporate behaviour. The Directive is more focused and targeted compared to the preferred option outlined in the draft impact assessment. The core of it is the due diligence obligation, while significantly reducing directors’ duties by linking them closely to the due diligence obligation. In addition, the scope of due diligence is adapted. A detailed description of the adaptations made to the preferred option package of the impact assessment can be found in the accompanying Staff Working Document that presents the follow-up to the opinion of the Regulatory Scrutiny Board and additional information.
In short, the “personal scope” i.e. which business categories are covered has been significantly reduced following reflections triggered by the Board’s comments on the problem description, in particular with regard to SMEs, and on the proportionality of the preferred option. Concretely, SMEs have been completely excluded, from the scope, and the coverage of high-impact sectors has been shifted only to companies having more than 250 employees and more than EUR 40 million worldwide net turnover (while large companies which simultaneously exceed both the 500 employee and the EUR 150 million worldwide net turnover limits are covered by the scope irrespective of their sectors of economic activities. The high-impact sectors are directly defined in the text, thus also reflecting on the Board’s comments as regards legislative technique. The definition of high-impact sectors has been limited to sectors with high risk of adverse impacts and for which OECD guidance exists. For midcap companies in high-impact sectors, the rules will start to apply after a transition period of two years to allow for a longer adaptation period. In addition, the due diligence obligations of these companies are limited only to severe impacts relevant for their sector.
To reach the objectives of the initiative effectively, the scope of this proposal extends to companies from third countries. Only such non-EU companies are covered which have a direct link to the Union market, and which meet the similar turnover threshold as EU companies but within Union market. Furthermore, they will face the same obligations regarding due diligence as the respective EU companies.
The Directive also indicates that accessible and practical support is necessary for companies, in particular SMEs in the value chain, to prepare for the obligations (or the consequent demands the may be passed on to them indirectly). This could include practical guidance and supporting tools such as hotlines, databases or training, as well as the setup of an observatory to help companies with the implementation of the Directive. Moreover, the review clause makes explicit reference to the personal scope of the Directive (i.e. coverage of business categories), which should be reviewed in light of the practical experiences with the application of the legislation. Other mitigation measures to reduce indirect impact on the SMEs are part of the obligations of companies in the scope of this Directive.
As regards the material scope (i.e. what is covered), a cross-cutting instrument covering human rights and environmental impacts has been retained. This reflects the strong consensus amongst stakeholder groups that a horizontal framework is necessary to address the identified problems.
Furthermore, the Board commented that the impact assessment is not sufficiently clear about the need to regulate directors’ duties on top of due diligence requirements. The Commission therefore decided to address this issue by deviating from the preferred options’ package in the impact assessment and focussing on the directors’ duties element, in light also of the existing international standards 72 , on due diligence and duty of care. This encompasses directors’ duties relating to the setting up and overseeing the implementation of corporate due diligence processes and measures, establishing code of conduct for this purpose as well as integrating due diligence into the corporate strategy. In order to fully reflect the role of directors in light of the corporate due diligence obligations, the directors’ general duty of care for the company, which is present in the company law of all Member States, is also being clarified providing that when fulfilling their duty to act in the best interest of the company, directors should take into account the sustainability matters of the proposal for a corporate sustainability reporting Directive, including, where applicable, human rights, climate change and environmental consequences, including in the short, medium and long term horizons. Further reaching specific directors’ duties that had been put forward in the impact assessment are not retained. This will ensure that the proposal delivers on its objective while remaining proportionate.
With regard to comments of the Board, this Explanatory Memorandum as well as the recitals of the legislative proposal contain comprehensive explanations of the policy choices made. While the impact assessment submitted to the Board and the Board’s opinion have been published unchanged, a separate accompanying Staff Working Document has been prepared to provide additional evidence and clarifications that follows up on the Board’s remarks including as regards evidence. This document addresses in particular the following:
–the scale and evolution of the environmental and sustainability problems directly linked to the apparent absence or insufficient use of corporate sustainability management practices by EU companies to be tackled by this Directive and the added value of the Directive in relation to the comprehensive package of measures to promote sustainability under the Green Deal;
–why the market and competitive dynamics together with the further evolution of companies’ corporate strategies and risk management systems are considered insufficient and as regards the assumed causal link between using corporate sustainability tools and their practical effect in tackling the problems;
–issues related to third countries, integrating observations (i) on expected developments in third countries (including taking into account EU and international trade and development support measures), (ii) on impacts on third countries and on suppliers in third countries;
–the enforcement mechanism, further expanding on the added value of a two-pillar enforcement system that builds on administrative enforcement and civil liability;
–impacts on competition and competitiveness.
Regulatory fitness and simplification
Small and medium-sized enterprises, including micro enterprises are not included in the scope and indirect effects on them will be mitigated through supporting measures and guidelines at Union and Member State level as well in business to business relations with the use of model contractual clauses and by proportionality requirements for the larger business partner.
Fundamental rights
As explained in the impact assessment and based on existing evidence, mandatory due diligence requirements can have significant benefits for the protection and promotion of fundamental rights.
4. BUDGETARY IMPLICATIONS
There are no direct implications to the Union budget.
5. OTHER ELEMENTS
Implementation plans and monitoring, evaluation and reporting arrangements
The Commission will set up a European Network of Supervisory Authorities to help with the implementation of this Directive. Such Network will be composed by the representatives of the supervisory authorities designated by the Member States and where necessary joined by other Union agencies with relevant expertise in the areas covered by this Directive, to ensure compliance by the companies of their due diligence obligations, in order to facilitate and ensure the coordination and convergence of regulatory, investigative, sanctioning and supervisory practices, and the sharing of information among these supervisory authorities.
After seven years following the end of the transposition period, the Commission shall report on the implementation of this Directive, including, among other aspects, its effectiveness. The report shall be accompanied, if appropriate, by a legislative proposal.
In order to provide clarity and support to companies and Member States with the implementation of the directive, the Commission will issue guidance, where necessary.
Explanatory documents
To ensure the proper implementation of this Directive, the explanatory document, e.g. in the form of correlation tables would be necessary.
Detailed explanation of the specific provisions of the proposal
Article 1 sets out the subject matter of the Directive, i.e. laying down rules on obligations of due diligence by companies regarding actual and potential human rights and environmental adverse impacts, with respect to their own operations, the operations of their subsidiaries, and the value chain operations carried out by established business relationships; the provision also specifies that this Directive establishes rules on liability for violations of the due diligence obligation.
Article 2 establishes the personal scope of application of the Directive and sets out the criteria based on which a Member State is competent to regulate matters covered in this Directive.
Article 3 contains definitions for the purpose of this Directive.
Article 4 requires Member States to ensure that companies conduct human rights and environmental due diligence by complying with the specific requirements listed in Articles 5 to 11 of the Directive.
Article 5 requires Member States to ensure that companies integrate due diligence into all corporate policies and have in place a due diligence policy that is updated annually. The provision specifies that this policy should include a description of the company’s approach to due diligence, of a code of conduct to be followed by the company’s employees and subsidiaries, of the processes put in place to implement due diligence.
Article 6 establishes the obligation for Member States to ensure that companies take appropriate measures to identify actual or potential adverse human rights and environmental impacts in their own operations, in their subsidiaries and at the level of their established direct or indirect business relationships in their value chain.
Article 7 sets out the requirement for Member States to ensure that companies take appropriate measures to prevent potential adverse impacts identified pursuant to Article 6, or to adequately mitigate those impacts, where prevention is not possible or requires gradual implementation.
Article 8 establishes the obligation for Member States to ensure that companies take appropriate measures to bring to an end actual adverse human rights and environmental impacts that they had or could have identified pursuant to Article 6. Where an adverse impact that has occurred at the level of established direct or indirect established business relationships cannot be brought to an end, Member States should ensure that companies minimise the extent of the impact.
Article 9 sets out the obligation for Member States to ensure that companies provide for the possibility to submit complaints to the company in case of legitimate concerns regarding those potential or actual adverse impacts, including in the company’s value chain. Companies are required to grant this possibility to persons who are affected or have reasonable grounds to believe that they might be affected by an adverse impact, to trade unions and other workers’ representatives representing individuals working in the value chain concerned, and to civil society organisations active in the area concerned.
Article 10 introduces the obligation for Member States to require companies to periodically assess the implementation of their due diligence measures in order to verify that adverse impacts are properly identified and that preventive or corrective measures are implemented, and to determine the extent to which adverse impacts have been prevented or brought to an end or their extent minimised.
Article 11 establishes the obligation for Member States to ensure that companies that are not subject to reporting requirements under Directive 2013/34/EU report on the matters covered by this Directive and publish an annual statement on their website.
Article 12 sets out the obligation for the Commission to adopt guidance about non-binding model contract clauses to help companies comply with Article 7(2), point (b), and Article 8(3) point (c).
Article 13 sets out the possibility for the Commission, in order to provide support to companies or to Member State authorities on how companies should fulfil their due diligence obligations, to issue guidelines, for specific sectors or specific adverse impacts, in consultation with the European Union Agency for Fundamental Rights, the European Environment Agency, and where appropriate with international bodies having expertise in due diligence.
Article 14 requires the Member States and Commission to provide accompanying measures to companies in the scope of this Directive actors and to actors along global value chains that are indirectly impacted by the obligations of the Directive. Such support can range from the operation of dedicated websites, portals or platforms to financial support to SMEs, and facilitation of joint stakeholder initiatives. This provision further clarifies that companies may rely on industry schemes and multi-stakeholder initiatives to support the implementation of due diligence and that the Commission, in collaboration with Member States, may issue guidance for assessing the fitness of such schemes.
Article 15 requires the Member States ensure that certain companies adopt a plan to ensure that the business model and strategy of the company are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C in line with the Paris Agreement.
Article 16 introduces the requirement for companies formed in accordance with the legislation of a third country and falling within the scope of application of the present Directive pursuant to Article 2(2), to designate a sufficiently mandated authorised representative in the Union to be addressed by Member States’ competent authorities, on all issues necessary for the receipt of, compliance with and enforcement of legal acts issued in relation to this Directive.
Article 17 sets out the requirement for Member States to designate one or more national supervisory authorities in order to ensure compliance by companies with their due diligence obligations and their obligation under Article 15(1) and (2) and to exercise the powers of enforcement of those obligations in accordance with Article 18.
Article 18 sets out the appropriate powers and resources of the supervisory authorities designated by the Member States to carry out their tasks of supervision and enforcement.
Article 19 establishes the requirement for Member States to ensure that any natural or legal person that has reasons to believe, on the basis of objective circumstances, that a company does not appropriately comply with the provisions of this Directive, is entitled to submit substantiated concerns, in particular in the Member State of his or her habitual residence, registered office, place of work or place of the alleged infringement, to the supervisory authorities.
Article 20 sets out that Member States shall lay down rules on sanctions applicable to infringements of the national provisions adopted pursuant to this Directive, and shall take all measures necessary to ensure that they are implemented. The sanctions shall be effective, dissuasive and proportionate. Member States shall ensure that decision of the supervisory authorities containing sanctions related to the breach of the provisions of this directive should be published.
Article 21 introduces a European Network of Supervisory Authorities composed by the representatives of the supervisory national authorities referred to in Article 16, with the aim to facilitate and ensure the coordination and alignment of regulatory, investigative, sanctioning and supervisory practices, and the sharing of information among these supervisory authorities.
Article 22 sets out the requirement for Member States to lay down rules governing the civil liability of the company for damages arising due to its failure to comply with the due diligence obligations under specific conditions. It also introduces the obligation for Member States to ensure that the liability provided for in paragraphs 1 to 3 of this Article is not denied on the sole ground that the law applicable to such claims is not the law of a Member State.
Article 23 establishes the application of Directive (EU) 2019/1937 of the European Parliament and of the Council of 23 October 2019 on the protection of persons who report breaches of Union law, to the reporting of all breaches of this Directive and the protection of persons reporting such breaches.
Article 23 clarifies conditions of public support for companies.
Article 25 clarifies directors’ duty of care.
Article 26 lays down the duty for directors of EU companies to set up and oversee the implementation of corporate sustainability due diligence processes and measures and to adapt the corporate strategy to due diligence.
Article 27 amends the Annex of Directive (EU) No 2019/1937.
Article 28 sets out the rules concerning delegated acts.
Article 29 contains a provision on the review of this Directive.
Article 30 contains provisions on the transposition of the Directive.
Article 31 sets the date of when this Directive enters into force.
Article 32 sets out the addressees of this Directive.
The lists contained in the Annex specify the adverse environmental impacts and adverse human rights impacts relevant for this Directive, to cover the violation of rights and prohibitions including the international human rights agreements (Part I Section 1), human rights and fundamental freedoms conventions (Part I Section 2), and the violation of internationally recognised objectives and prohibitions included in the environmental conventions (Part II).