In 2017, following multiple legislative proposals and lengthy negotiations, France became the first EU Member State to adopt a cross-sectoral law on Corporate Sustainability Due Diligence (the “French Law“). At the time the French Law was adopted, it was highly criticized, in part because France appeared to be going “out on a limb” and a broader international response was felt to be necessary.

This February, an important step towards an EU-wide Corporate Sustainability Due Diligence legal framework was taken with the Proposal of the EU Commission for a Directive on Corporate Sustainability Due Diligence (the “EU Proposal“). This follows legislative developments in individual EU Member States mandating human rights and environment due diligence in supply chains – see our previous blog posts on national HREDD movements in Germany and the Netherlands, for example.

The French Government, in a document addressed to the Commission in 2020, had welcomed the intention of the Commission to prepare EU legislation, seeing an opportunity to create a level playing field. It remains to be seen whether France (and other Member States) will determine that the EU’s proposal is adequate and/or acceptable.

As it stands, the EU Proposal is broken down into a list of actions to be carried out by companies. This includes: the determination of a due diligence policy, the identification of actual or potential adverse impacts and their prevention or neutralization/mitigation. Companies will also be compelled to establish and maintain a complaints procedure, monitor the effectiveness of their due diligence policy and publicly communicate their actions.

The EU Proposal, if adopted, will have to be transposed into the national legislation of the Member States. The latter will retain room for manoeuvre in their implementation. For Member States such as France who have already adopted their own equivalent legislations, the question of the interplay between the existing national framework and the EU Proposal will be complex. This is particularly true given the ambitious and broad scope of the EU Proposal.

A broader scale

An initial observation is that the EU Proposal would have implications for a larger number of companies than the French Law currently does.

The French Law targets French companies based on a number of employees (i.e. at least 5,000 employees in France, or 10,000 employees worldwide, either directly or through subsidiaries). Foreign companies are within scope but only to the extent that they own a French subsidiary, which satisfies these thresholds.

By contrast, the EU Proposal covers both EU and non-EU companies. EU companies covered are those with either more than 500 employees and a net worldwide turnover of more than EUR 150 million, or more than 250 employees and a net worldwide turnover of more than EUR 40 million, provided that at least 50% of this net turnover was generated in a “high-impact” sector. Non-EU companies covered are those with either a net turnover of more than EUR 150 million in the EU, or a net turnover of more than EUR 40 million but not more than EUR 150 million, provided that at least 50% of their net worldwide turnover was generated in one “high-impact” sector.

The Commission estimates that 13,000 EU companies and 4,000 third-country companies could be covered by the Directive. It is estimated that between 150 and 250 French companies are directly affected by the French Law.

A substantially more comprehensive framework

The EU Proposal, which follows two years of consultation and feedback from 473,000 stakeholders, is a significant piece of legislation. It provides a very comprehensive and detailed framework when compared to the French Law.

Further, the French Law and the EU Proposal are not designed in the same way: whilst the French law’s cornerstone is the creation, implementation and publication of a “vigilance plan” that must meet certain requirements, the backbone of the EU Proposal stands in its Article 4. This sets out a list of human rights and environmental due diligence that must be carried out. There is quite a bit of overlap between the requirements of the two regimes in this respect:

  EU corporate due diligence French vigilance plan
1. Definition of a due diligence policy No corresponding requirement
2. Identification of actual or potential adverse effects Risk mapping
3. Periodic monitoring of operations and measures of the company and of subsidiaries/other established relationships Methodology for the regular review of the activities of subsidiaries/sub-contractors/suppliers
Setting out a scheme to monitor and evaluate the measures taken
4. Prevent or if not possible, mitigate adverse impacts Taking actions tailored for risk mitigation or prevention of serious breach
5. Establish and maintain a complaints procedure Set-up an alert mechanism
6. Publicly communicate on due diligence activities Plan is made public

The EU Proposal provides a much more comprehensive set of definitions, including setting out what ‘adverse environmental impacts’, ‘adverse human rights impacts’ and ‘severe adverse impacts’ are, in relation to a list of international Conventions set in the Annex. By contrast, the French Law is rather light on definitions. Notably, the notion of ‘serious impact’, that triggers the determination of what preventative measures need to be taken, is not defined.

Moreover, France will have to assess whether the requirements of the French vigilance plan would be sufficient to comply with the requirements of the EU Proposal. The EU Proposal might in fact provide further clarity in respect of the French Law.

In any event, the EU Proposal would require substantial modifications of the French Law in order to make it consistent with the current EU Proposal, including the introduction of the following:

  1. An obligation for certain companies to adopt a plan to ensure that their business model and strategy are compatible with limiting global warming to 1.5 °C, in line with the Paris Agreement;
  2. The obligation for non-EU companies covered by the EU Proposal to designate an authorized representative in the EU (a mechanism which should help enforcement against non-EU companies);
  3. The responsibility of directors to put in place and to oversee due diligence actions; and
  4. The designation of supervisory authorities with adequate powers, and the determination of sanctions for infringement on the provisions (currently the French Law relies on private law remedies).

Finally, in respect of the requirement under the EU Proposal that directors take account of sustainability as part of the duty to act in the company’s best interests, the EU Proposal overlaps with the existing requirement of the French Law of 2019 on business growth and transformation (commonly referred to as “PACTE” law). In other words, the French Law already seems to adequately implement this part of the EU Proposal.

The post Corporate Sustainability Due Diligence: How the EU proposal Could Impact France’s Existing Due Diligence Law appeared first on Eye on ESG.