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31 Mai 2022

Martijn Scheltema & Robert McCorquodale, NOVA Business, Human Rights & the Environment

Supervisory Mechanisms and Directors Duties: Innovations in the Proposed EU Directive on Corporate Sustainability Due Diligence

There has been considerable discussion of the European Commission’s proposed Corporate Sustainability Due Diligence Directive (CSDDD) since its release in February 2022. For many commentators it has been both ground-breaking in its existence, being a statement that there should be mandatory EU-wide regulation on these issues, and disappointing in its limited scope and application.

There are, though, two important, and potentially innovative, aspects of the CSDDD which have received less attention: the creation of a structure of supervisory mechanisms across the EU to monitor the CSDDD; and the introduction of some personal duties for directors of companies in this area.  This paper will focus on these two areas, and offer an additional reflection on one other aspect: the inclusion of reference to climate change impacts.

Articles 17 and 18(1) of the CSDDD proposal hold that member states should designate one or more national independent supervisory authorities of a public nature with appropriate powers and financing... [I]t is important that the supervisor does not only focus on business activities to address environmental and human rights risks, but especially also on the outcomes of those activities. Otherwise, legislation and ensuing public supervision may result in administrative burdens and ‘tick box’ exercises without actual progress for impacted stakeholders... The public supervisor should regularly consult stakeholders, and especially also (representatives of) affected stakeholders...

Public supervisors should, pursuant to Article 18(2), be entitled to carry out investigations on their own initiative or based on complaints or substantiated concerns mentioned in Article 19... Public supervisors are able to develop policies building on best practices (see below) much faster than case law also based on these substantiated concerns, and can deploy and enforce these in markets...

The public supervisor should, in our opinion, implement a risk-oriented approach, for example, by initially focusing on sectors or issues with the most severe human rights risks or where a delayed response could make them irremediable and bearing in mind companies may be unable to address all actual or potential human rights risks simultaneously. It may also require enhanced HREDD in high-risk areas as mentioned in Article 2 (1)(b). However, this is not clarified in the CSDDD or its recitals. On the contrary, Article 6 (2) seems to suggest a more limited type of HREDD in these situations, which is probably not what is intended but is still unclear...

We feel it should be clear that sanctions imposed by public supervisors should have consequences for public procurement, access to export credit, or EU or Member State’s subsidies, and may support civil enforcement if observations of the public prosecutor are made public...

The CSDDD sets out two provisions on directors’ duties , being Articles 25 and 26...

In our opinion, changes are needed to the CSDD to turns the directors’ duties to act in the best interest of the company from simple reporting with no effective consequences, into requiring them to ensure that appropriate human rights and environmental due diligence processes are in place, and that the directors provide full oversight and advice to the management of the company about them. These all contain some objective elements and are not based purely on the directors’ subjective views, and so are able to be examined by the supervisory bodies to see if they have taken this action, so are not solely a subjective judgement. This could increase the accountability of both the senior management and the directors of the companies covered by the CSDDD...

Above all, the inclusion of directors’ duties in the CSDDD is an acknowledgement that, for there to be effective changes in corporate practices and governance behaviour in relation to the human rights, environmental and climate change impacts of their activities, there needs to be reform of company law. While the changes shown by the CSDDD (for which some companies may lobby to reduce and other companies will be pleased about) are important, some deeper requirements in terms of corporate sustainability governance would be valuable...

The CSDDD also has an additional innovation [...], which is to include climate change impacts in its provisions...

The application of due diligence to identify and address corporate climate change impacts has been widely recognised. However, the CSDDD excludes climate change impacts from the due diligence provisions and – as confirmed by Article 29 – instead, only requires companies to put in place a climate transition plan, as set out in Article 15. In contrast to companies’ due diligence policies, which need to be updated annually under the CSDDD, the CSDDD does not seem to require companies to implement or update their climate change transition plan, thus making it look like a “ tick-box” exercise...

In our opinion, there is sufficient evidence to justify including climate change as part of the due diligence requirements on companies.

It is also unclear how companies are expected to deal with climate change impacts that are linked to human rights and environmental impacts covered by the due diligence provisions in Articles 4-14 of the CSDDD. Are they within the due diligence requirements of Articles 4-14 or under the requirement to establish a climate change transition plan under Article 15? Further, as noted above, while specific civil liability provisions apply for breach of the due diligence provisions, the level of accountability of directors in regard to climate impacts seems very limited...

We are pleased that the European Commission has included some new and important elements of business and human rights within the CSDDD, including on supervisory mechanisms, directors’ duties and climate change. However, we consider that there are certain aspects of the draft which require revision in relation to these areas.

Our recommendations, based on our analysis above, are:

  • Article 2(4) should be amended so that the relevant company link to a Member State is domicile and not registered office.
  • Article 6 (2) should be clearer that enhanced due diligence is required in high-risk areas.
  • Articles 4-14 should include on climate change as part of human rights and environmental due diligence.
  • Article 15 (1) should be amended to require a transition plan in addition to including climate change in due diligence, and include an obligation to prevent, mitigate or remediate actual or potential adverse impacts, and minimising their extent as part of the transition plan, with clear targets, regular updates and annual reporting.
  • Article 15(2) should replace “risk” with “impact”.
  • Article 17(3) should be amended so as not to allow companies which are not based in the EU to change their allocated supervisory authority.
  • Articles 18(5) and 20(1) should include interim measures and also be clearer on enforcement in relation to companies domiciled outside the EU in connection with which seizure of non-compliant goods brought on the European Markets should be considered.
  • Article 18 should have an additional section indicating that sanctions imposed by public supervisors should have consequences for public procurement, access to export credit, EU or Member State’s subsidies, etc., and these may be included in civil enforcement if observations of the public prosecutor are made public.
  • Article 18 should be amended to provide additional powers to a supervisory authority to be able to determine best practices within a sector, issue or area.
  • Article 21 should be amended to allow an option to grant the EU supervisory entity the power to instruct national supervisors in connection with companies which have their domicile in multiple European states or regarding a specific human rights issue of interest to the EU as a whole.
  • Article 25 should be amended to require directors to take clear steps, such as undertaking human rights and environmental due diligence, and not merely take into account the consequences of their decisions on human rights, climate change and the environment. This would also require directors to be responsible for the approval of the management strategies to respond to human rights, environmental and climate change matters.
  • Article 26 (1) should be amended to make effective consultation (and not just “input”) from stakeholders and civil society organisations – and expressly include trade unions – a mandatory part of directors’ duties. In addition, directors should take into account relevant benchmarks and industry standards.
  • Article 29(d) should be deleted.
  • Recital 53 should make a clear preference to having one public supervisor in connection with human rights and environmental due diligence or, if not feasible, a national collaborative body in which relevant public supervisors participate and which has powers granted by law to exchange information on supervised entities.