Alex Cotoia, Regulatory Compliance Manager, at The Volkov Law Group, rejoins us for a posting on ESG due diligence requirements. Alex can be reached at [email protected].

On March 10, 2021—by an overwhelming majority—the European Parliament passed a resolution that directs the European Commission to move forward with a formal directive (“Directive”) mandating Environmental, Social and Governance (“ESG”) due diligence by companies throughout their value chains. Under the Directive, certain companies operating in EU member states would be required to assess all potential “adverse impacts on human rights, the environment and good governance in their operations and business relationships.”

As part of that assessment, companies that determine their operations cause, contribute to, or are directly linked to actual or potential adverse impacts would be required to: (i) map the entirety of their value chains; (ii) adopt “proportionate and commensurate” policies and measures to cease, prevent and mitigate potential or actual adverse impacts; and (iv) prioritize for prevention, mitigation or remediation—in accordance with Principle 17 of the UN Guiding Principles on Business and Human Rights—general areas where the risk of adverse human rights impacts is the most significant. The Directive would require companies to make their due diligence strategies publicly available and “accessible free of charge, especially on the [company’s] website[].” Notably, the Directive would also require companies to communicate their due diligence strategy to their worker’s representatives, trade unions, business relationships and competent national authorities. Standardized due diligence reporting would be mandated via a European centralized platform.

Under the Directive, member states would be empowered to sanction companies for non-compliance with their ESG obligations in a manner that is “effective, proportionate and dissuasive,” accounting for both the severity and frequency of the infringement. Companies would also be exposed to civil liability for any harm arising out of potential or actual adverse impacts on human rights, the environment or good governance, to the extent that they have caused or contributed to such harms by their acts or omissions.

The Directive would apply broadly to all large companies operating in the EU, including private or state-owned companies operating under the law of a member state, companies established in the EU, and companies operating in the internal market. Publicly listed small and medium-sized companies, as well as those operating in “high-risk” sectors would also be obliged to observe the Directive, as would companies in the financial services sector.

Because the Resolution was adopted in the form of a directive and not a regulation, it would ultimately require transposition into the national law of independent member states to have binding legal effect. All indications are, however, that member states—most notably, France and Germany—are increasingly concerned with the broader impact of business practices on perpetuating human rights abuses. Given this focus, it is all but certain that the EU will move to align human rights due diligence across jurisdictions, making it imperative that impacted organizations move swiftly to evaluate their current processes and align them to the Directive’s requirements.