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ESG update: EU adopts proposal for a Corporate Sustainability Due Diligence Directive

On 23 February, the European Commission formally adopted its much anticipated proposal for a Corporate Sustainability Due Diligence Directive.

It follows an EU public consultation in 2020, which proposed a new corporate due diligence duty on companies with respect to human rights, health and environmental impacts, which would go significantly beyond what is currently required by the Non-financial Reporting Directive.

The proposal is that the new Directive would apply to large EU companies and non-EU companies with significant business activities in the EU. Those companies will be required integrate human rights and environmental impacts due diligence into all of their corporate policies, take appropriate measures to identify and prevent those impacts in their own operations and in their value chain, and publicly report on those matters in their annual statement on their website.

Certain companies within scope will also be required put in place a plan to ensure that their business model and strategy are compatible with the Paris Agreement, specifically the goal to limit global warming to 1.5 degrees Celsius.

The Commission has also proposed new duties on directors to set up and oversee the required due diligence processes and to consider human rights, climate and environmental consequences in their decisions, as part of their duty to act in the best interests of the company, paving the way for a much more stakeholder-led corporate model.

The proposal will now go before the European Parliament and Council for debate and approval. It seems likely that they will have plenty to say on it.

The core elements of this duty are identifying, bringing to an end, preventing, mitigating and accounting for negative human rights and environmental impacts in the company’s own operations, their subsidiaries and their value chains. In addition, certain large companies need to have a plan to ensure that their business strategy is compatible with limiting global warming to 1.5 °C in line with the Paris Agreement.

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