The Directive will require large companies that are based in member states or have a considerable turnover in the EU to take appropriate due diligence measures to identify, prevent, and mitigate human rights and environmental violations throughout their value chains. Smaller companies in high-risk sectors, such as textiles and agriculture, will also be expected to comply. The scope of the regulation extends from the company’s own operations to its subsidiaries and their supply chains.
If a company has a risk for adverse human rights and environmental impacts in its value chain, it must implement a comprehensive mitigation process for this. The proposal states that an ‘adverse human rights impact’ is an adverse impact on protected persons resulting from the violation of one of the human rights and an ‘adverse environmental impact’ is an adverse impact on the environment resulting from the violation of one of the prohibitions and obligations pursuant to one of twelve environmental conventions. The conventions address topics such as biological diversity, mercury, and hazardous waste.
The EU Parliament will negotiate the proposal, which may tighten up the requirements for the companies involved. Once the Directive has been adopted, EU Member States would have two years to put the Directive into national law, which would be legally binding on companies. Most companies would be required to annually report on the subjects covered in the Directive.
All companies can prepare for the Directive, whether under the scope of the Directive or not, in order to work towards best practice in supply chain due diligence. Companies can prepare by conducting a gap analysis to see how far away from complying they are, and then work towards complying fully. The finalised Directive is yet to be drawn up, but companies should start having these conversations sooner rather than later.
Many companies already carry out supply chain due diligence and have processes in place to make sure suppliers fulfil certain ESG criteria, and do not violate human rights or environmental malpractice. When developing new procedures and policies, they should be designed to be flexible enough to fulfil the requirements of the Directive.
At Luminous, we can support you with disclosure and ESG strategies to make sure your supply chain is ethical and sustainable.
To get in touch, please contact Anokhi.Kalayil@Luminous.co.uk.
You can read the full proposal here.