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Corporates face fines under EU due diligence law

Author: ICAEW Insights

Published: 08 Jan 2024

Provisional agreement on corporate sustainability directive’s scope hailed as “historic breakthrough” – but campaigners signal disappointment with financial sector’s exemption.
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Large companies working in the EU will be liable for fines equal to 5% of their global net turnover for breaching the Corporate Sustainability Due Diligence Directive (CSDDD), following an agreement between the European Council and Parliament.

The punitive measure was announced on 14 December in separate statements from the legislative bodies, confirming that they had reached a provisional deal on the scope of the directive – published in draft form in last spring.

Seeking assurances

The directive requires corporates to mitigate their negative impacts on key areas of environmental concern, including pollution, deforestation, excessive water consumption and ecosystem damage, as well as human rights issues such as child labour, slavery and workforce exploitation.

Companies will be obliged to identify, assess, prevent, cease and remedy not just their own negative impacts, but those of their upstream and downstream partners, across the full range of business activities – from design, production and transport to storage and distribution, according to a European Parliament statement

That includes demonstrating that they have made relevant investments, sought contractual assurances from procurers and suppliers, improved their business plans and/or provided support to their SME partners.

Corporates will also be required to integrate due diligence into their policies and risk-management systems, including descriptions of their approach, processes and code of conduct. They must also adopt plans ensuring that their business model complies with a Paris-aligned global warming limit of 1.5°C.

Name and shame

Companies will have to “meaningfully engage” with those affected by their environmental and labour-related actions, introduce a public-facing complaints mechanism, communicate on their due diligence policy and regularly monitor its effectiveness.

At the same time, EU governments will be required to create online portals dedicated to companies’ due diligence obligations, providing details on content and criteria, and designate a national regulator to monitor whether companies are acting in compliance. 

As well as being able to investigate suspected cases of wrongdoing, the regulators will have the power to name and shame proven non-compliers – and to levy steep fines. Those bodies will cooperate via the European network of Supervisory Authorities to exchange ideas on best practice.

Communities that believe they have been negatively impacted by sanctioned corporate activities will have five years to bring cases to court and courts will be able to press companies to disclose further evidence if such cases are well-founded.

The CSDDD will apply primarily to EU-based companies with more than 500 employees and a net annual turnover of at least €150m – plus, three years after the directive takes effect, non-EU firms that generate at least €300m of their net annual turnover within the bloc.

The directive will also apply to firms with more than 250 staff and a turnover of more than €40m, if at least €20m of that stems from work in sensitive industries such as apparel and footwear, textiles, agriculture, food production, minerals or construction.

However, in a move that has sparked controversy, banks and insurers are for now exempt from having to ensure that the funding they provide is not linked to human rights abuses. While a ‘review clause’ could pave the way for the financial sector’s future inclusion, pending an impact study, key stakeholders have scorned its current exclusion.

Calculus of risk

Dutch Labour MEP and key negotiator Lara Wolters described the law as a “historic breakthrough” that makes companies directly responsible for potential abuses in their value chains – a decade on from the Rana Plaza tragedy in Bangladesh, which killed more than 1,100 people.

“Let this deal be a tribute to the victims of that disaster,” she said, “and a starting point for shaping the economy of the future – one that puts the wellbeing of people and the planet before profits and short-termism. I am very grateful to those who joined me in the fight for this law. It ensures honest businesses do not have to participate in the race against cowboy companies.”

In a statement, the Business & Human Rights Resource Centre (BHRRC) said that, with rigorous enforcement, the directive should “fundamentally shift the calculus of risk” within the boardrooms of irresponsible companies, to “end their toleration of human rights and environmental abuse in opaque and complex supply chains”.

However, the BHRRC said it was “disappointing” to see that financial activities are exempt from the directive’s scope, “when investors and banks play such a central role in defining the behaviour of companies in human rights and environment”.

ICAEW Director, Corporate Governance and Stewardship, Peter van Veen says: “This a groundbreaking package of measures that sets the tone for future legislation in this area around the world. It will affect not just EU-headquartered companies, but those based anywhere in the world that have significant EU operations. In addition, it will impact any non-EU company that supplies those within the remit of this directive.

“It is important for companies that are, or may be, affected by this legislation to start preparing now. Mapping out their supply chains and relevant risks is a good first step. Those who demur may lose out to competitors who are in a position to comply on Day One of the directive going into effect.” 

Following the deal, the directive awaits formal approval and adoption by both the Council and Parliament. Once it is published in the Official Journal, it will enter into force 20 days later. Member States will then have two years to transpose the CSDDD into national law.

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