Does your company fall under scope of the due diligence directive?

  • Radia Guira

The due diligence directive lays down rules on obligations for large companies regarding actual and potential adverse impacts on human rights and the environment, with respect to their own operations, those of their subsidiaries, and those carried out by their business partners. It also lays down rules on penalties and civil liability for violating those obligations. Lastly, it lays down obligations for companies to adopt a plan ensuring their business model and strategy are compatible with the Paris Agreement.
The directive will help the EU to transition towards a more climate-neutral and green economy as described in the European Green Deal and the UN Sustainable Development Goals.This directive will enhance the protection of the environment and human rights in the EU and beyond.
The rules of the due diligence directive apply to large EU companies and to non-EU companies active in the EU.
For EU companies, the criteria that determine whether a company falls within the scope of the directive are based on the number of employees and the company’s net worldwide turnover, whereas in the case of non-EU companies the criterion is related to the net turnover generated in the EU.
If a non-EU company fulfils the criterion regarding net turnover generated in the EU, it will fall under the scope of the due diligence directive, irrespective of whether it has a branch or a subsidiary in the EU.
The possible answers are:
– Yes
– No
If the answer is ‘Yes’, please provide details in the comments section.

This question seeks to ascertain whether or not your enterprise is included in the purview of the due diligence directive. The due diligence directive is a regulatory framework that mandates companies to identify, prevent, mitigate, and account for negative impacts in their supply chains on human rights, including social, trade union and environmental rights.

The first part of the question demands whether your company falls within the scope. This refers to whether the activities, operations, and practices of your business are subject to the regulations set out by this directive. If your company operates in sectors where there is a higher likelihood of a negative impact on human rights and the environment, you may fall within this regulation.

In the second part, it requires you to know if the directive is applicable to your company. This means that you need to be aware of the specific requirements of the directive and be certain that these requirements pertain to the activities, locations, and nature of your business operations.

A response to this question might be as follows, according to the boolean data type, (example: Yes, our company falls under the scope of the due diligence directive as we operate in the mining sector which is known to have considerable environmental and human rights impact in certain geographies). The answer can also be in negative boolean form if the company doesn’t fall under the directive (example: No, our company does not fall under the scope of the due diligence directive because we operate in sectors and regions where the risk to human rights and the environment is minimal).

Understanding the EU Due Diligence Directive

In an effort to promote sustainable and responsible corporate behavior, the European Union has been working on the Corporate Sustainability Due Diligence Directive (CSDDD). This directive is part of a larger movement to integrate Environmental, Social, and Governance (ESG) criteria into the core strategy of companies. The EU Due Diligence Directive aims to ensure that companies operating within the EU conduct their business in a manner that respects human rights and the environment.

For companies wishing to assess whether they fall under the scope of this directive, understanding the criteria is essential. The directive is expected to apply to a wide range of companies, including large companies that are either EU-based or that operate in the EU market, regardless of where they are headquartered.

Criteria for Inclusion in the Due Diligence Directive

The criterion for inclusion under the scope of the EU’s Due Diligence Directive is multifaceted. To begin with, it targets large companies with more than 500 employees and a net worldwide turnover of more than EUR 150 million. However, even smaller companies with fewer employees and lower turnover could fall under the directive if they are engaged in activities that are considered high-risk in terms of impacts on human rights or the environment.

Beyond size and sector-specific risk considerations, the directive also looks into the value chain relationships of companies. This means that even if your company is not directly engaged in high-risk activities, it may still be impacted if your suppliers or subcontractors are. Thus, it’s imperative for companies to conduct thorough assessments of their entire value chain to accurately determine their ESG score.

Further details on who needs to comply can be found through DLA Piper’s insightful publication, « EU’s proposed directive on corporate sustainability due diligence: What US companies need to know. »

Preparing for Compliance with the Due Diligence Directive

Once it’s established that your company falls under the scope of the directive, the next step is to prepare for compliance. This entails a thorough understanding of the criteria and implementing processes to ensure that your operations are aligned with ESG standards. Companies will need to conduct due diligence regularly, identify and assess the actual and potential impacts on human rights and the environment, and take appropriate actions to mitigate those risks.

Preparing for compliance can be daunting, but starting with a self-assessment using a questionnaire can be a constructive first step. For a comprehensive understanding of what is expected and how to gear up for the upcoming regulations, consider studying « The future of EU sustainability regulation II: The corporate sustainability due diligence directive (CSDDD). »

In conclusion, understanding whether your company falls under the scope of the EU Due Diligence Directive is crucial in this evolving regulatory landscape. By familiarizing yourself with the criteria and preparing for compliance, your company can not only avoid potential sanctions but also benefit from the increasing value consumers and investors place on sustainably managed companies. The time to act is now – assess your company’s ESG score, ensure due diligence processes are in place, and stay informed about the latest developments in EU sustainability regulations.