The European Commission adopted a proposal on requiring EU companies to conduct “due diligence” processes related to their human rights and environmental impacts. Some businesses would also be required to align their business strategies with limiting global warming to 1.5 degrees Celsius. The directive also extends to companies’ subsidiaries and value chains.

Adopted on 23 February 2022, the proposal will be submitted to EU Parliament and the European Council for approval. Once approved, each EU Member State would have two years to adopt a national law incorporating the Directive.

Certain large companies need to have a plan to ensure their business strategy is compatible with limiting global warming to 1.5 °C.

The proposed Directive would cover large EU companies in all sectors, and mid-to-large EU companies in high-impact sectors such as textiles, agriculture, and extractives. Companies would be required to identify, end, prevent, mitigate, and account for negative human rights and environmental impacts in their 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 on climate change.

Other recent or ongoing processes are also imposing mandatory due diligence on companies related to sustainable development. These include: ongoing negotiations under the UN Human Rights Council (HRC) to negotiate a legally binding instrument to regulate the activities of transnational corporations and other business enterprises; work by the Organisation for Economic Co-operation and Development (OECD) on reshaping investment treaties to address current challenges including the SDGs and the climate crisis; and a law that just entered into force in Switzerland setting out new reporting requirements on environment, social responsibility and human rights, as well as specific due diligence and reporting requirements in the areas of child labor as well as minerals and metals from conflict zones (“conflict minerals”).

According to the European Commission, the new rules will ensure that businesses address adverse impacts of their actions both inside and outside Europe. [European Commission press release]