EU Directive on Corporate Sustainability Due Diligence: A New Era of Accountability

June 2023 marks a turning point for corporate governance within the European Union (EU). In a decisive move, the EU adopted a new directive that lays down comprehensive rules for corporate sustainability due diligence. This directive, drawing heavily from the principles of two pioneering French laws - the duty of care law (loi sur le devoir de vigilance) and the anti-corruption law Sapin II (both enacted in 2016) - heralds a new era of corporate accountability.

Who Does the Directive Apply To?

Following an EU Parliament vote that saw 366 votes in favor, 225 against, and 38 abstentions, the directive's reach is set to be broad and all-encompassing. It applies to:

1. ??All EU-based companies with more than 250 employees and a worldwide turnover exceeding €40 million, spanning all sectors, including financial services.
2. Parent companies boasting over 500 employees and a global turnover surpassing €150 million.
3. Non-EU companies with a turnover higher than €150 million, as long as at least €40 million of that turnover is generated within the EU.

The directive sets forth clear rules on due diligence that cover both human rights and the environment. These rules are aimed at addressing a range of concerns, including child labor, slavery, labor exploitation, pollution, environmental degradation, and biodiversity loss. The rules also extend to a company's value chain partners, encompassing suppliers, distribution, transport, storage, and waste-management entities.

In a bid to curb global warming, companies are required to create and adhere to a transition plan aimed at limiting global warming to 1.5°. For larger companies with over 1000 employees, meeting the targets set in this plan will have a direct impact on a director's variable remuneration, such as bonuses.

Finally, failure to comply with these new rules carries significant sanctions, enforceable by national supervisory authorities. These sanctions can include fines amounting to at least 5% of the company's net worldwide turnover, and, in certain cases, a ban on public procurement within the EU.

As corporations grapple with these new rules, they can draw valuable lessons from the French corporate landscape, where similar principles have been in operation since 2016. As the EU steps into a new era of sustainable corporate governance, companies must rise to the challenge, ensuring they are prepared for, and compliant with, the new rules and regulations.

French Corporate Sustainability Legislation: Lessons from a Pioneer

France has been at the forefront of corporate sustainability and anti-corruption legislation since 2016, when it introduced two groundbreaking laws: the duty of care law (loi sur le devoir de vigilance) and the Sapin II law.

Duty of Care Law

The duty of care law, enacted in 2017, is one of the world's most comprehensive and rigorous laws addressing corporate social responsibility. It requires French companies with more than 5,000 employees in France, or more than 10,000 employees worldwide, to develop and implement a "vigilance plan" (plan de vigilance).

The vigilance plan should include measures to identify and mitigate serious risks related to human rights, fundamental freedoms, human health and safety, and the environment. The law also extends the company’s duty of care to its subsidiaries, supply chain, and subcontractors, both in France and abroad.

Companies have had to invest significantly in risk assessment procedures, due diligence processes, and monitoring systems to identify and prevent these risks. They are also required to make their vigilance plans public, increasing transparency and accountability.

If companies fail to comply with the duty of care law, they can face legal injunctions to fulfill their obligations and can be held liable for any damage that could have been prevented by the vigilance plan. These measures have led to a significant shift in corporate practices in France and have set a high benchmark for corporate sustainability worldwide.

Sapin II Law

Meanwhile, the Sapin II law was enacted in 2016 to combat corruption, making France one of the leading countries in anti-corruption efforts. The law applies to French companies with at least 500 employees and a turnover of more than €100 million.

Sapin II required these companies to implement comprehensive anti-corruption programs, including a code of conduct, a risk mapping, an internal whistleblowing mechanism, a regular assessment of clients, providers and intermediaries, training programs for managers and employees exposed to corruption risks, and internal or external auditing procedures to ensure the effective implementation of the program.

This law also led to the establishment of the French Anti-Corruption Agency (AFA), an administrative authority with the power to inspect and sanction non-compliant companies. The AFA conducts regular inspections and has the power to sanction companies up to €1 million, and individuals up to €200,000, for failing to implement the compliance program. This is on top of the reputational damage, since hearings before the sanctions committee, and the decisions of such committee, are public.

The Sapin II law has had far-reaching effects on French corporations, prompting them to invest in robust internal control systems and anti-corruption measures, and fostering a culture of transparency and accountability.

Learning from the French Experience

French companies have had to significantly adapt their practices since the introduction of these two laws in 2016. The experience has shown that early preparation, comprehensive risk assessment procedures, strong due diligence processes, and clear communication channels are crucial for companies to meet these stringent requirements.

The duty of care and Sapin II laws have undoubtedly had a profound impact on corporate governance in France, shaping the practices of French companies towards greater sustainability, integrity, and accountability. As the new EU directive on corporate sustainability due diligence takes effect, companies across the EU, and indeed globally, will benefit from studying and learning from the French experience.

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Next Steps for the EU Directive on Corporate Sustainability Due Diligence

After the adoption of the directive by the European Parliament, the legislative process is not yet complete. Several steps remain before it becomes enforceable for companies.

1. Council Adoption: The Council of the European Union, consisting of government ministers from each EU member state, needs to formally adopt the directive. The Council's legal service will scrutinize the text, and potential discussions or negotiations might take place to address any concerns before the adoption.
2. 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, and it will enter into force 20 days after publication.
3. Transposition: A key feature of EU directives is that they are not directly applicable. Rather, they require transposition into national law by each member state. The EU sets a deadline for this process, usually two years from the directive's entry into force. During this period, national governments will pass their own laws, regulations or administrative provisions to give effect to the directive's requirements. The new national laws must achieve the objectives set out in the directive but can adapt to national circumstances.
4. Compliance and Enforcement: Once transposed into national law, the directive's provisions 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.

Given this timeline, companies should start preparing for the implementation of the new directive, even if it is not yet directly enforceable. The French experience under the duty of care law and Sapin II law provides valuable lessons for effective preparation, and the time to act is now.