"LEAK: EU due diligence law to apply only to 1% of European companies", 22 February 2022

After several delays, the European Commission is expected to present the new rules on Wednesday (23 February), to ensure human rights and environmental compliance of EU businesses operating abroad.

The soon to be proposed ‘Directive on Corporate Sustainability Due Diligence’ will oblige member states to adopt or adapt their own corporate due diligence laws...

However, most of these due diligence requirements will only apply to “established business relationships” of EU companies, which the Commission defines as a relationship, which is expected to be lasting and does not represent a negligible part of the value chain.

Only for the big players

Moreover, according to the draft, the directive will only apply to around 13,000 EU companies.

“Small and medium sized enterprises that include micro companies and overall account for around 99% of all companies in the Union are excluded from the due diligence duty,” the draft states.

More specifically, only companies with more than 500 employees and a net worldwide turnover of €150 million will be subject to the directive.

Additionally, the rules will also apply to companies with more than 250 employees and a net turnover of more than €40 million, if at least half of their turnover comes from a high risk sector, such as the textile industry, mining or agriculture.

This will come as a blow for human rights NGOs and companies, which had argued in favour of a wider scope for the regulation...

The power of the Regulatory Scrutiny Board (RSB)

In the leaked draft, the Commission explains that the reduced scope of the law is due to “reflections triggered by the [Regulatory Scrutiny] Board’s comments on the problem description,” a reference to the internal Commission body, which delayed the proposal with two negative opinions last year.

In its opinions, the Regulatory Scrutiny Board (RSB) raised concerns regarding SMEs in particular, which have now been excluded from the draft proposal.

After the RSB twice delayed the EU’s due diligence law, lawmakers and scholars criticised the EU’s internal scrutiny body for its lack of transparency and democratic accountability.

Enforcement

The due diligence law proposed by the Commission also includes public and private enforcement provisions, namely sanctions and a civil liability regime.

The civil liability regime would allow people negatively affected by an EU company’s operation to take the company to court in an EU member state if the company did not sufficiently act to prevent, minimise, end, and mitigate the adverse impacts of its business activity.

The introduction of a civil liability regime has been a key demand of NGOs campaigning for more corporate accountability.

However, the civil liability regime is limited in scope. If EU companies have secured contractual assurances from their business partners that they complied with the company’s code of conduct, EU companies can be safe from civil liability claims.

After the proposal is tabled on Wednesday, the directive will be discussed and possibly amended by the European Parliament and EU member state governments. After adoption, member states will have two years to transpose the directive into national legislation.