June 2023 marks a pivotal moment in the evolution of corporate governance within the European Union (EU). In response to rising global concerns about environmental degradation and human rights abuses, the EU has adopted a groundbreaking directive that lays down comprehensive rules for corporate sustainability due diligence.
Drawing inspiration and principles from two innovative French laws – the duty of care law (loi sur le devoir de vigilance) and the anti-corruption law Sapin II (enacted respectively in 2017 and 2016) – this new directive heralds a significant shift towards heightened corporate accountability. It sets forth a regulatory framework that is poised to redefine corporate responsibilities, signaling a paradigm shift in the relationship between business practices, environmental sustainability, and human rights.
But what does this mean for businesses operating within the EU and beyond? What are the key elements of this new directive, and how can companies adapt to meet these evolving expectations? In this post, we’ll explore the implications of the EU directive, the lessons that can be gleaned from the French corporate sustainability legislation, and the road ahead for companies in this new era of corporate sustainability and accountability.
The EU Directive in a Nutshell
Upon a vote in the EU Parliament with 366 votes in favor, 225 against, and 38 abstentions, the EU Corporate Sustainability Due Diligence Directive is set to reshape the corporate governance landscape with its expansive and comprehensive reach. The directive applies to:
All EU-based companies with more than 250 employees and a worldwide turnover exceeding €40 million ($43 million), encompassing all sectors, including financial services.
Parent companies employing over 500 individuals and a global turnover surpassing €150 million ($161 million).
Non-EU companies boasting a turnover higher than €150 million, given that at least €40 million of that turnover is generated within the EU.
This regulatory framework outlines explicit due diligence requirements concerning both human rights and environmental impact. The directive targets a multitude of grave concerns, spanning from labor exploitation and child labor to environmental degradation, pollution, and loss of biodiversity. Notably, these rules apply not just to the companies themselves, but also extend to their value chain partners, including suppliers, distribution, transport, storage, and waste management entities.
In the pursuit of mitigating global warming, the directive mandates companies to formulate and comply with a transition plan aimed at curbing global warming to 1.5°. For larger corporations with a workforce exceeding 1,000, the achievement of the objectives outlined in this plan will have a direct impact on a director’s variable remuneration, such as bonuses. Besides, the text adopted an amendment 32 with respect to the Recitals of the directive, that recognizes that corruption and bribery can contribute to or exacerbate adverse impacts on human rights and the environment, and highlights the importance of addressing these issues together to ensure comprehensive due diligence and responsible business practices.
Further, non-compliance with these rules invites substantial sanctions, which will be enforceable by national supervisory authorities. Such penalties can include fines amounting to a minimum of 5 percent of the company’s net worldwide turnover, and, in certain circumstances, a ban on public procurement within the EU.
As corporations across the EU begin to grapple with these new rules, they can derive valuable insights from the French corporate landscape, where similar principles have been in effect since 2017. As we usher in this new era of sustainable corporate governance, it is imperative that businesses rise to the occasion, ensuring they are well-prepared and compliant with the evolving regulations.
Pioneering a Path to Corporate Responsibility: France’s Groundbreaking Legislation
France’s progressive journey into corporate sustainability and anti-corruption legislation began in earnest in 2016 with the introduction of two notable laws: the duty of care law and the Sapin II law. These pieces of legislation transformed corporate governance in France and have since served as a blueprint for the EU and other regions worldwide.
Understanding the Duty of Care Law and its Implications. This 2017 law, one of the most comprehensive of its kind, placed stringent responsibilities on French corporations. It required companies with over 5,000 employees domestically, or more than 10,000 employees globally, to draft and implement a “vigilance plan.” The plan necessitated robust strategies to identify and mitigate risks associated with human rights, basic freedoms, human health and safety, and the environment.
The ambit of the law also extended to the company’s subsidiaries, supply chain, and subcontractors, both within and beyond French borders. Companies grappled with this significant undertaking, investing substantially in risk assessment procedures, due diligence processes, and monitoring systems. In addition, they faced the challenge of making their vigilance plans public, thus enhancing corporate transparency and accountability. Failure to adhere to this law brought about legal injunctions and the prospect of liability for preventable damage.
Unpacking the Sapin II Law and its Consequences. In parallel, the Sapin II law aimed to combat corruption, applying to French companies with a workforce of at least 500 and a turnover surpassing €100 million. This law necessitated the implementation of a comprehensive anti-corruption program with a range of components, from a code of conduct and risk mapping to an internal whistleblowing mechanism and frequent client, provider, and intermediary assessments.
Implementing this law was not without its hurdles. Companies needed to invest in internal control systems and anti-corruption measures, fostering a culture of transparency and accountability that required a significant shift in business practices.
The Crucial Role of the French Anti-Corruption Agency. The Sapin II law also led to the inception of the French Anti-Corruption Agency (AFA). Armed with the authority to inspect and sanction non-compliant companies, the AFA played a pivotal role in upholding the law’s requirements. The AFA’s regular inspections and the prospect of heavy sanctions – up to €1 million for companies and €200,000 for individuals – in case of non-compliance, further underlined the seriousness of these regulations. Importantly, the entire process is transparent, as hearings before the sanctions committee and their decisions are public, adding reputational risk to the mix of potential penalties.
The AFA’s experience in inspecting and overseeing companies offers invaluable insights for other authorities from EU member states. As they prepare to enforce the new EU directive, sharing best practices, methodologies, and lessons learned from the AFA’s experiences could enhance their effectiveness. This sharing becomes more critical considering the steep sanctions under the new directive, which can reach up to 5% of the company’s net worldwide turnover.
Incorporating Lessons for the Future. The French experience offers several crucial lessons as the EU and other regions embark on enhancing corporate sustainability due diligence. First, companies need to start early, be prepared, and invest in risk assessment and due diligence processes. Second, the role of regulatory authorities, such as the AFA, is critical in ensuring compliance. Their work helps companies improve and adjust their practices, fostering a culture of transparency and accountability. Furthermore, their experience is a valuable resource that can and should be shared with other EU member states, helping to create a harmonized, effective approach to enforcing the new directive.
As the EU steps into this new era of corporate sustainability governance, the lessons learned from France’s pioneering laws
Charting a New Path: Learning from French Legislative Success
The EU directive on corporate sustainability due diligence is set to transform corporate governance practices across the EU. With the adoption of the directive by the European Parliament, the next steps in the legislative process are as follows:
Council Adoption: The Council of the European Union, comprising government ministers from each member state, must formally adopt the directive. The Council’s legal service will scrutinize the text, potentially engaging in discussions or negotiations to address any concerns.
Publication: Once adopted by the Council, the directive will be signed by the Presidents of the European Parliament and the Council. The signed text will then be published in the Official Journal of the European Union. The directive will enter into force 20 days after publication.
Transposition: The directive will require transposition into national law by each member state. National governments will have a two-year deadline from the directive’s entry into force to pass their own laws, regulations, or administrative provisions that align with the directive’s requirements while considering national circumstances.
Compliance and Enforcement: Once transposed into national law, the provisions of the directive become enforceable. National authorities will oversee compliance and apply sanctions for breaches according to the national provisions implementing the directive. The European Commission will also monitor the correct transposition and application of the directive across all member states.
The EU has the opportunity to learn from France’s pioneering efforts and leverage its experience to create an effective and harmonized approach to corporate sustainability due diligence. By incorporating lessons on the importance of enforcement agencies, clear communication channels, and partnerships between the public and private sectors, the EU can lay the groundwork for more responsible and sustainable business practices.
The EU directive, if implemented effectively, can serve as a powerful catalyst for improving corporate conduct, advancing sustainability goals, and inspiring similar regulations worldwide. As the EU progresses on this path, it has the potential to set a global example for corporate sustainability and accountability in the years to come.