Yesterday the EU Commission released its much anticipated proposed Directive on Corporate Sustainability Due Diligence (Directive). The Directive requires large organisations operating in the EU to undertake mandatory human rights and environmental due diligence (mHREDD). If the Directive is adopted, member states will be required to incorporate the requirements of the Directive into national laws and there are likely to be significant implications for Australian businesses.
The Directive’s due diligence obligations are consistent with the standards enshrined in the UN Guiding Principles on Business and Human Rights and the OECD Due Diligence Guidelines for Responsible Business Conduct.
If implemented, the Directive will raise the standard of responsible business conduct by requiring entities subject to the Directive to conduct robust due diligence to identify, assess and mitigate the impact of their own operations, their subsidiaries’ operations and the operations of those in their value chain with whom they have a direct or indirect business relationship, on people and the planet.
With the EU representing Australia’s seventh largest export destination and second largest source of foreign investment, the Directive may have significant implications for Australian businesses who:
- are one of the 4,000 non-registered EU entities estimated to be caught by the Directive’s employee and financial thresholds;
- are subsidiaries of either a non-EU entity or one of the 13,000 EU entities caught by the Directive’s employee and financial thresholds; or
- have an established direct or indirect business relationship with any of the EU entities or non-EU entities caught by the Directive’s employee and financial thresholds, and form part of that entity’s value chain, including upstream and downstream activities related to the production and provision of goods and services.
What are the key components of the Directive?
The key components of the Directive include the following:
- The imposition of due diligence obligations, including integrating due diligence into corporate policies, identification and prevention of adverse human rights and environmental impacts, establishing a complaints procedure, monitoring due diligence implementation and annual reporting.
- The issuing of guidance on model contract clauses for use in business relationships.
- Adopting a plan to ensure business model and strategy is compatible with transitioning to a sustainable economy and limiting global warming to 1.5C, including:
- the extent to which climate change is a risk for or an impact of the entity’s operations;
- objectives for emissions reductions; and
- linking director remuneration to a director’s contribution to the business’ emissions reductions and sustainability.
- Directors must, when fulfilling their duty to act in the best interests of the company, take into account the consequences of their decisions for sustainability matters including human rights, climate change and environmental consequences over the short, medium and long-term.
- Member states will be required to ensure regulatory oversight, including:
- compliance and enforcement powers;
- the ability to issue stop orders, financial penalties and order the business to take remedial action; and
- the ability to enable third party claims for damages arising from a failure to conduct adequate due diligence.
How does this fit with obligations of Australian businesses under Australian law?
While the due diligence standards in the UN Guiding Principles on Business and Human Rights and the OECD Due Diligence Guidelines for Responsible Business Conduct are likely to be familiar standards to many Australian businesses – particularly for businesses reporting under the Modern Slavery Act 2018 (Cth) or required to comply with the Illegal Logging Prohibition Act 2012 (Cth) – they have not been widely adopted and implemented by Australian businesses.
ASIC’s continued surveillance of Australian companies’ climate change-related disclosures and governance highlights the importance of robust due diligence processes that provide confidence to company directors in respect of their disclosure obligations.
The reach of the measures proposed by the Directive will be significant. Australian organisations currently in the value chains of, or in business relationships with, large EU organisations that are within the scope of the Directive should immediately begin preparing to meet the mHREDD standards required by the Directive.
How can Australian businesses prepare for mHREDD?
Australian businesses likely to be affected by the Directive can prepare now by undertaking the following actions:
- Investing in rigorous ESG risk assessment bringing together cross-disciplinary expertise throughout the business.
- Formulating an ESG strategy informed by considered principles, and international standards of human rights and environmental due diligence.
- Establishing an ESG framework to guide risk management, decision-making, and disclosure.
- Mainstreaming ESG considerations into decision-making, and ensuring effective stakeholder engagement as well as grievance mechanisms are in place.
Just two weeks ago, over 100 European businesses called on the EU to adopt mHREDD. Yesterday the proposed Directive was published. This is not a time to ‘wait and see’ whether the Directive will be implemented, but rather to take the opportunity to get ahead of mandatory obligations by voluntarily adopting global standards and best practice in responsible business.
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This article is part of our insight collection Frontier Sustainability: Navigating environment and climate-related risks and opportunities. Read more here.
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