Proposed EU Directive on Corporate Sustainability Due Diligence: Why Non-EU Businesses Should Respond to the Consultation

This post looks at some practical issues non-EU companies will face if the proposed Directive on Corporate Sustainability Due Diligence is adopted: the difficulties of meeting different requests to follow codes of conduct and prevention action plans and the alternative of allowing companies to follow guidelines which would have to be accepted, potential difficulties linked to a change of supervisory authority and the legal risk to which member states may expose companies if they do not circumscribe the companies for which they legislate. It notes the opportunity to respond to the consultation on the proposed Directive.

The European Commission is inviting feedback until 23 May 2022 on its proposed directive on corporate sustainability due diligence. As previous contributions to the Oxford Business Law Blog have identified, there are many ways in which the proposed directive can be improved. If the draft is not improved it will cause uncertainty and risk not achieving the Commission’s ambitions. As Matteo Gatti and Luca Enriques have already pointed out, the proposed directive not only catches EU companies but also non-EU companies that either meet the relevant thresholds for EU business, are part of the value chain of an affected EU business or are a parent company of an EU subsidiary subject to the proposed directive. The opportunity for such non-EU companies to provide feedback to the Commission is likely to be the best way for companies not from a member state to influence the approach and make their concerns known. It should be remembered that the definition of ‘company’ in the proposed directive is an extended one, that includes partnerships, limited partnerships and unlimited companies.

A non-EU ‘company’ that has an ‘established business relationship’ with an affected EU company will be affected by the directive. ‘Established business relationship’ is defined as a business relationship, whether direct or indirect, which is, or is expected to be, lasting, in view of its intensity or duration and which does not represent a negligible or merely ancillary part of the value chain. In practice it will be the EU company that will decide if it has an established business relationship with a non-EU company. If it does, it will be required, by Article 7.2, to seek contractual assurances from a business partner with whom it has a direct business relationship to follow the EU company’s code of conduct and its prevention action plan. EU affected companies may also seek to enter into contracts with  indirect business partners if the steps taken to prevent potential adverse impacts cannot be prevented or adequately mitigated by steps taken with direct business partners.

Each EU affected company will be required to have its own code of conduct and prevention action plan. Where contractual assurances are obtained from business partners, they must be accompanied by measures to verify compliance. This means that a non-EU business dealing with several EU affected businesses will receive a request from each of them to meet their particular code of conduct and prevention action plan, each of which is likely to be different. Although the directive says that if the business partner is an SME the terms used must be fair, reasonable and non-discriminatory, that still means the business will face differing requests from the companies it deals with. The directive does not contemplate that the business partner could agree to follow international standards or industry or sector specific guidelines and, if it does so, that the EU affected business should accept that instead of imposing its own bespoke approach. The directive does allow the Commission to adopt guidance about voluntary model contract clauses, but there is no requirement for any business to adopt or accept these. This could leave smaller businesses dealing with many EU affected businesses in a difficult position.

Another area of uncertainty relates to the law that will apply to affected companies. The directive merely says that member states must ensure that companies conduct human rights and environmental due diligence as laid down in Article 5 to 11. Each member state must also designate a supervisory authority (or more than one) to supervise compliance with its national provisions. For an EU company, its competent supervisory authority will be the one where the company has its registered office. For non-EU companies, the competent supervisory authority will depend on whether the non-EU company has a branch or not. If it has one EU branch, the competent supervisory authority will be in the member state where its branch is located. If it does not have an EU branch or has branches in more than one member state, the supervisory authority will be where the company generated most of its EU net turnover in the financial year before the last financial year before the date for transposing the directive. Companies will be able to ask to change their supervisory authority if they later generate most of their EU turnover in a different member state.  However, there is nothing to say whether a supervisory authority should agree such a request or not, or to require supervisory authorities to co-operate where a request is granted and supervision transfers.

It is to be hoped that each member state will confine the laws it passes to implement the directive to companies registered in its member state and those non-EU companies for which it is the supervisory authority. However, there is nothing in the directive that stops a member state going further and, for example, extending its laws to a non-EU company that does business in the member state, even if its supervisory authority is not the competent authority for that non-EU business. It would be better if the directive expressly prevented member states from doing this, so as to avoid companies being subject to more than one set of laws implementing the directive, which may well be different and possibly incompatible.

Guido Ferrarini has identified the difficulties the proposed directive poses by defining the obligations by reference to international treaties and conventions. It is important that, in addition to identifying and addressing these significant and fundamental problems, the Commission also considers the practical problems that companies will face if the proposal is not amended.

Vanessa Knapp is a Visiting Professor at Queen Mary University of London.

This post is published as part of the OBLB series on ‘The Corporate Sustainability Due Diligence Directive Proposal’.