On February 23, 2022, the European Commission released its long-awaited draft regulation on human rights and environmental due diligence. This is a critical component of its sustainable corporate governance initiative. The draft regulation requires large EU companies, and some non-European companies doing significant business in Europe, to assess their actual and potential human rights and environmental impacts throughout their operations and down their supply chains. They must take action to prevent, mitigate, and remedy identified human rights and environmental harms.
Companies that fail to conduct effective due diligence or to implement preventative or remediation measures face both administrative penalties and civil liability. The proposed EU directive builds on earlier efforts by the European Union to make business practices in this area more transparent, including the EU Non-Financial Reporting Directive and the Conflict Minerals Directive.
If the European Parliament and European Council approve this directive—a process expected to take a year or more—EU member states will have two years to transpose the directive into national law and begin enforcement.
This new legislation will have implications for banks, insurers, and other financial institutions. They will have to undertake further due diligence on clients and their subsidiaries to whom they extend loans, credit, and other financial services in light of the obligations set out therein.
The outline of the due diligence obligations in the Draft Directive gives a good indication of the scope and likely expectations of the design and implementation of a human rights and environmental due diligence program. Companies should map, align, and leverage their existing policies and procedures to the requirements in the Draft Directive (particularly those set out in Articles 5-11) to ensure compliance.