Last June, Directive (EU) 2024/1760 on due diligence[1] was finally published, a regulation that obliges large companies to take responsibility for the adverse effects they generate throughout their chain of activities.
Although at first glance it looks like a great success, the long process of developing the standard[2] has reduced both the scope of the companies affected and the obligations they will have to comply with. In addition, a progressive compliance schedule has been established, starting in July 2027 and ending in July 2029. This means that, in the best case scenario, full implementation is still 3 years away.
Nevertheless, the Directive introduces some new features that will undoubtedly make the most optimistic smile and force large companies to operate more responsibly in the market.
Here are some of the most important elements of the European Directive.
Which companies should implement a due diligence system?
Those with more than 1,000 employees and a turnover of more than 450 million euros.
In Spain, this would include companies such as Repsol, Mercadona, Endesa, Naturgy, Iberdrola, Inditex, Banco Santander, CaixaBank, El Corte Inglés, Carrefour, Telefónica, Lidl, Stellantis, Renault, Seat, Ford, Mercedes-Benz, Iberia and Alcampo.
What should they do?
These companies must prevent, detect and mitigate adverse effects on human rights or the environment throughout their chain of activities.
They must also ensure that their business model is compatible with the objectives of the Paris Agreement, i.e. limiting global warming to 1.5°C and achieving climate neutrality by 2050 through a transition plan to mitigate climate change.
What concrete steps should they take?
Among others, companies must:
- Detect and assess potential and actual adverse effects arising from its entire chain of activity (including own operations, subsidiaries and business partners).
- Create plans to prevent and mitigate these adverse effects, with the possibility, as a last resort, to cease commercial relations with partners that violate human or environmental rights.
- In relation to the damages caused, the offending companies will have civil liability for these damages, provided that they are the result of a breach of their obligations. This implies that they must offer full reparation to the injured parties.
- Provide a notification and grievance mechanism for affected people, trade unions and civil society organizations to file complaints. When one of these complaints is founded, the adverse effects will be considered detected and the process of prevention, correction and remediation will be initiated.
- Publish an annual statement on its website, providing detailed information on due diligence, adverse effects detected and actions taken.
Will this standard get large companies to operate responsibly?
Undoubtedly, the regulation offers greater legal protection to those whose rights and environmental regulations are violated due to the activity of a large company.
However, it also leaves room for ambiguous interpretations and legal loopholes, which we hope can be filled during the transposition into Spanish law. Here are some examples:
- Prevention and correction of adverse effects: the Directive uses undefined terms such as adopting “appropriate measures”, implementing measures “where relevant” or “where appropriate”, leaving much of the responsibility for compliance with these measures in the hands of companies.
- If the measures put in place by the entity are insufficient, and as a last resort, the company is obliged to cease business relations with the responsible partner, the company “shall assess whether the adverse effects of such actions can reasonably be expected to be more serious than those already produced”, which could exempt it from this obligation.
- Reparation of damages: if the damage is caused solely by a business partner, the company may repair it “voluntarily” or “use its ability to influence” that partner to repair it. Thus, remediation is left to the company’s will or influence.
In fact, in obvious cases, a company will not be liable if the damage has been caused exclusively by its business partners in its chain of activities.
Thus, we can anticipate that many companies, although aware of irregularities in their value chain, will avoid liability if the non-compliances pertain to an external business partner. The adverse effects, therefore, could remain unresolved.
This new standard is an important step towards corporate responsibility, but it also presents challenges and areas for improvement that must be closely monitored during its implementation. We will see how large companies are adapting to these new requirements and how they affect consumer rights and the environment.
[1] Directive (EU) 2024/1760 of the European Parliament and of the Council of 13 June 2024 on corporate sustainability due diligence and amending Directive (EU) 2019/1937 and Regulation (EU) 2023/2859 (CSDDD).
[2] The Commission’s proposal was adopted on 24/02/2022.
