On 23 February, 2022, the European Commission published its corporate sustainability Draft Directive.
The Draft Directive sets out a proposed EU standard for human rights and environmental due diligence (HREDD) which, importantly, would apply to any global company and its subsidiaries if those group companies have aggregate annual net turnover in the EU of:
- more than EUR 150 million (Group 1); or
- more than EUR 40 million with at least 50% of net worldwide turnover generated in a “high-risk” sector which includes textiles, clothing and footwear, agriculture, forestry, fisheries, food & extractives (Group 2).
Notably, the HREDD applies even if the non-EU-based companies and their subsidiaries do not have a physical presence in the EU, if the above net turnover threshold is met.
The Draft Directive requires both Group 1 and Group 2 companies to take appropriate measures to identify, and mitigate, actual and potential adverse human rights and environmental impacts arising from their own operations anywhere in the world (not just in the EU) and, where related to their value chains, from their “established business relationships”.
The Draft Directive would require Group 1 and Group 2 companies to implement HREDD measures that cover their entire value chains, looking beyond Tier 1 suppliers to include “established business relationships” throughout the value chain. This includes vendors, sub-vendors, contractors, subcontractors and other entities in the supply chain, wherever they may be. This will impact small to mid-sized companies located in non-EU countries, including the U.S., Canada, et cetera.