South African businesses that fall within the supply chain of large companies in the European Union should gear up for Human Rights and Environmental Due Diligences in 2024, when the Corporate Sustainability Due Diligence Directive is expected to be adopted.
In a previous alert, we reported that the European Commission (Commission) adopted a proposal for a Corporate Sustainability Due Diligence Directive in February 2022 (CSDDD). The CSDDD is a legislative framework designed to enhance corporate accountability by imposing legal requirements on business enterprises operating in the European Union (EU) to conduct human rights and environmental due diligences and report on their ESG impacts. The CSDDD will require entities within its scope to undertake due diligence on their own activities and that of companies across their value chains, and to identify and prevent, end or mitigate any adverse impacts of their activities on human rights and on the environment.
The CSDDD requires Member States to mandate the following activities by companies:
- making a policy commitment to human rights and the transition to a climate-neutral and green economy in order to restrict global warming to 1.5°C in accordance with the Paris Agreement, by having a due diligence policy that includes a code of conduct for the company’s employees and subsidiaries;
- conducting risk-based human rights and environmental due diligences;
- identifying actual or potential adverse impacts arising from their own activities or those of their business partners throughout their global value chains;
- preventing and mitigating potential adverse impacts, bringing actual adverse impacts to an end and minimising the extent of the harm;
- monitoring and verifying the effectiveness of their due diligence policy;
- publicly communicating on their due diligence process, the adverse impacts that have been identified and the actions taken in response to those adverse impacts; and
- consulting and engaging with affected stakeholders in a meaningful way.
Companies that fail to comply with these requirements may face sanctions which will be imposed based on a company's turnover.
The law-making process in the EU requires that the European Parliament and Council of the EU (the Council) agree with the Commission's proposal. To this end, the European Parliament and the Council each tabled proposed amendments to the text. Each of the three institutions' proposals are compared and an attempt at resolving the differences between them will occur through a process of negotiations known as "trilogue" discussions between their representatives.
The Council published its proposed amendments in December 2022. On 25 April 2023, the European Parliament’s committee on legal affairs (known as the JURI) adopted the JURI Report, containing its proposed amendments to the CSDDD. The European Parliament plenary session voted to adopt the amendments put forward by the JURI on 1 June 2023. The next step is for the three versions to be debated during the trilogue negotiations with a view to settling on a final version of the text. It is expected that the EU will formally adopt the CSDDD by the end of 2024, and thereafter, Member States of the EU will have two years to implement the requirements of the CSDDD into their own national legislation.
Based on the deviating positions of the European Parliament and the Council in respect of the Proposed Directive by the Commission, the following points are likely to be negotiation issues:
- The applicability of the CSDDD to the financial sector (i.e., whether the financial sector should be substantially excluded from the CSDDD);
- the conditions for civil liability under the CSDDD; and
- the introduction of a directors’ duty of care and the consequences of such duty.
Notably, the Parliament's proposals decrease the turnover threshold and employee count for companies to fall within the scope of the CSDDD and remove the references to high-risk sectors. High-risk sectors include, amongst others, the manufacture and wholesale trade of textiles and clothing, agriculture, forestry and fisheries, the manufacture and wholesale trade of food products, the extraction and wholesale trade of mineral resources, and the manufacture and wholesale trade of certain metal products.
If the Parliaments proposals are adopted, a greater number of South African companies will fall within the scope of the CSDDD if such companies (i) generated a net worldwide turnover of more than EUR 150 million, provided that at least EUR 40 million was generated in the EU in the financial year preceding the last financial year, including turnover generated by third party for royalties, or (ii) are the ultimate parent company of a group that had 500 employees and a net worldwide turnover of more than EUR 150 million and at least EUR 40 million was generated in the EU in the last financial year for which annual financial statements have been prepared, including turnover generated by third party for royalties.
Aside from those South African companies which directly fall within the scope of the CSDDD, some smaller South African companies may feel the effects of the CSDDD because it requires in-scope companies to evaluate their value chains and operations for adverse human rights and environmental impacts and conduct the respective due diligence into their entire value chain. As a result, in-scope companies may be required to mitigate any adverse impacts caused by any entities in the value chain by providing support to small and medium-sized entities (SMEs) or contractually seeking assurances from suppliers.
As soon as a South African company does business with an in-scope company, the in-scope company will have to analyse the companies that the South African company is in turn doing business with if it is relevant to the in-scope company's supply chain, regardless of where in the world those suppliers operate. For example, where an in-scope grocery chain in Europe imports fresh produce from South Africa, the grocery chain will have to conduct a human rights and an environmental due diligence into both the South African supplier and any company from which the South African supplier purchases fertiliser to grow the fresh produce.
South African companies will have to provide more information on their own ESG performance to in-scope companies than was previously the case, which invariably requires human rights and environmental due diligence to be conducted whether subject to the above proposed legal obligations or not. South African companies may see these requirements attract obligations and liabilities through other avenues too, such as being asked to provide contractual assurances that they will comply with the in-scope company's human rights code of conduct and environmental policies or have conducted human rights and environmental due diligence themselves. If it emerges that a South African company has contravened the CSDDD and has taken no measures to remedy or mitigate its actions, in-scope companies might terminate the business relationship for fear of the penalties and sanctions imposed by the CSDDD. The legal avenues to liability would expand depending on the severity of human rights and environmental impacts or violations that have occurred.