EUROPEAN COMMISSION Brussels, 23.2.2022 COM(2022) 71 final 2022/0051(COD) Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937 (Text with EEA relevance) {SEC(2022) 95 final} - {SWD(2022) 38 final} - {SWD(2022) 39 final} - {SWD(2022) 42 final} - {SWD(2022) 43 final}



EXPLANATORY MEMORANDUM 1.CONTEXT OF THE PROPOSAL Reasons for and objectives of the proposal The behaviour of companies across all sectors of the economy is key to succeed in the Union’s transition to a climate-neutral and green economy in line with the European Green Deal and in delivering on the UN Sustainable Development Goals, including on its human rights- and environment-related objectives. This requires implementing comprehensive mitigation processes for adverse human rights and environmental impacts in their value chains, integrating sustainability into corporate governance and management systems, and framing business decisions in terms of human rights, climate and environmental impact, as well as in terms of the company’s resilience in the longer term. EU companies operate in complex surroundings and, especially large ones, rely on global value chains. Given the significant number of their suppliers in the Union and in third countries and the overall complexity of value chains, EU companies, including the large ones, may encounter difficulties to identify and mitigate risks in their value chains linked to respect of human rights or environmental impacts. Identifying these adverse impacts in value chains will become easier if more companies exercise due diligence and thus more data is available on human rights and environmental adverse impacts. The connection of the EU economy to millions of workers around the world through global value chains comes with a responsibility to address adverse impacts on the rights of these workers. A clear request by Union citizens, in particular in the framework of the Conference on the Future of Europe, for the EU economy to contribute to address these and other adverse impacts is reflected in the existing or upcoming national legislation on human rights and environmental due diligence, in the debates ongoing at national level and in the call for action from the European Parliament and the Council. Both of these institutions have called on the Commission to propose Union rules for a cross-sector corporate due diligence obligation. In their Joint Declaration on EU Legislative Priorities for 2022, the European Parliament, the Council of the European Union and the European Commission have committed to deliver on an economy that works for people, including to improve the regulatory framework on sustainable corporate governance. Using the existing international voluntary standards on responsible business conduct, an increasing number of EU companies are using value chain due diligence as a tool to identify risks in their value chain and build resilience to sudden changes in the value chains, but companies may also face difficulties when considering to use the value chain due diligence for their activities. Such difficulties can be for instance due to lack of legal clarity regarding corporate due diligence obligations, complexity of value chains, market pressure, information deficiencies, and costs. As a consequence, the benefits of due diligence are not widespread among European companies and across economic sectors. Mostly large companies have been increasingly deploying due diligence processes as it can provide them with a competitive advantage. This also responds to the increasing market pressure on companies to act sustainably as it helps them avoid unwanted reputational risks vis-à-vis consumers and investors that are becoming increasingly aware of sustainability aspects. However, these processes are based on voluntary standards and do not result in legal certainty for neither companies nor victims in case harm occurs. Voluntary action does not appear to have resulted in large scale improvement across sectors and, as a consequence, negative externalities from EU production and consumption are being observed both inside and outside the Union. Certain EU companies have been associated with adverse human rights and environmental impacts, including in their value chains. Adverse impacts include, in particular, human rights issues such as forced labour, child labour, inadequate workplace health and safety, exploitation of workers, and environmental impacts such as greenhouse gas emissions, pollution, or biodiversity loss and ecosystem degradation. In the last years, emerging legal frameworks on corporate due diligence in Member States reflect the increasing desire to support companies in their endeavour to perform due diligence in their value chains and foster business conduct that respects human rights, children’s rights and the environment. On the other hand, they also bring fragmentation and risk undermining legal certainty and a level playing field for companies in the single market. Union legislation on corporate due diligence would advance respect for human rights and environmental protection, create a level playing field for companies within the Union and avoid fragmentation resulting from Member States acting on their own. It would also include third-country companies operating in the Union market, based on a similar turnover criterion. Against this background, this Directive will set out a horizontal framework to foster the contribution of businesses operating in the single market to the respect of the human rights and environment in their own operations and through their value chains, by identifying, preventing, mitigating and accounting for their adverse human rights, and environmental impacts, and having adequate governance, management systems and measures in place to this end. In particular, this Directive will: (1)improve corporate governance practices to better integrate risk management and mitigation processes of human rights and environmental risks and impacts, including those stemming from value chains, into corporate strategies; (2)avoid fragmentation of due diligence requirements in the single market and create legal certainty for businesses and stakeholders as regards expected behaviour and liability; (3)increase corporate accountability for adverse impacts, and ensure coherence for companies regarding obligations under existing and proposed EU initiatives on responsible business conduct; (4)improve access to remedies for those affected by adverse human rights and environmental impacts of corporate behaviour; (5)being a horizontal instrument focussing on business processes, applying also to the value chain, this Directive will complement other measures in force or proposed, which directly address some specific sustainability challenges or apply in some specific sectors, mostly within the Union. Consistency with existing policy provisions in the policy area

This Directive will contribute to the European Pillar of Social Rights as both promote rights such as fair working conditions. It will – beyond its external angle – deal with the violation of international labour standards when they occur in the Union (e.g. forced labour cases in agriculture). Therefore, internally it would also reinforce the protection of workers in the Union alongside the existing social acquis and contribute to preventing and tackling abuses within and across Member States. Thus, this Directive will complement the EU’s regulatory environment that currently does not include an Union-wide transparent and predictable framework that helps EU companies in all sectors of the economy to assess and manage sustainability risks and impacts with respect to the core human rights and environmental risks, including across their value chains. 2.LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY Legal basis The proposal is based on Article 50 and Article 114 of the Treaty on the Functioning of the European Union (TFEU). Article 50(1) TFEU and in particular Article 50(2)(g) TFEU provide for the EU competence to act in order to attain freedom of establishment as regards a particular activity, in particular “by coordinating to the necessary extent the safeguards which, for the protection of the interests of members and others, are required by Member States of companies or forms within the meaning of the second paragraph of Article 54 TFEU with a view to making such safeguards equivalent throughout the Union”. An example of this can be coordination measures concerning the protection of interests of companies’ shareholders and other stakeholders with a view to making such protection equivalent throughout the Union, where disparities between national rules are such as to obstruct freedom of establishment. Recourse to this provision is possible if the aim is to prevent the emergence of current or future obstacles to the freedom of establishment resulting from the divergent development of national laws. The emergence of such obstacles must be likely and the measure in question must be designed to prevent them. This proposal regulates sustainability due diligence obligations of companies and at the same time covers – to the extent linked to that due diligence – corporate directors’ duties and corporate management systems to implement due diligence. Thus, the proposal concerns processes and measures for the protection of the interests of members and stakeholders of the companies. Several Member States have recently introduced legislation on sustainability due diligence, while others are in the process of legislating or considering action. Also, an increasing number of Member States have recently been regulating the matter by requiring directors to take into account the company’s external impacts, prioritize the interests of stakeholders in their decisions, or adopt a policy statement on the company’s human rights strategy. New and emerging laws on due diligence are considerably different in the Union despite the intention of all the Member States to build on existing international standards (UN Guiding Principles on Business and Human Rights OECD Responsible Business Conduct standards) and thus lead to diverging requirements. Certain Member States have adopted, or are likely to adopt, legislation that is limited to specific sustainability concerns in value chains. Personal scope, substantive due diligence requirements, enforcement regimes and related directors’ duties diverge and may do so even more in the future. Other Member States can be expected to decide not to legislate in this field. Significantly different requirements among Member States thus create fragmentation of the internal market. This fragmentation is likely to increase over time. This fragmentation also risks leading to an uneven playing field for companies within the internal market. First, companies and their directors – in particular of those which have cross-border value chains – are already subject to differing requirements and will likely be subject to even more differing requirements depending on where their registered seat is located. This creates distortions of competition. Besides, depending on how they structure their operations in the internal market, some companies may simultaneously fall within the scope of two or more different national legal frameworks dealing with sustainable corporate governance. This could lead to duplication of requirements, difficulties in complying, lack of legal certainty for companies, and even mutually incompatible parallel legal requirements. Inversely, some companies may not fall within the scope of any national framework for the mere reason that they do not have links relevant under national law with the jurisdiction of a Member State that has due diligence rules in place and thereby gaining an advantage over their competitors. The proposed act is designed to prevent and remove such obstacles to free movement and distortions of competition by harmonising the requirements for companies to carry out due diligence in their own operation, subsidiaries and value chains and related directors’ duties. They will lead to a level playing field where companies of similar size and their directors are subject to the same requirements for integrating sustainable corporate governance and corporate due diligence measures in their internal management systems and thereby protecting the interests of the company’s stakeholders in a similar way. Harmonised conditions would be beneficial for cross-border establishment including company operations and also investments, since it would facilitate comparison of corporate sustainability requirements and make engagement easier and thus less costly. Article 50 TFEU is lex specialis for measures adopted in order to attain freedom of establishment. Among the proposed measures, those concerning companies’ corporate governance fall under this legal basis, in particular integrating due diligence into companies’ policies, measures on companies’ plan to ensure that the business model and strategy are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C in line with the Paris Agreement, and related remuneration measures, as well as provisions on directors’ duty of care, and directors’ duties concerning setting up and overseeing due diligence. In order to address the described internal market barriers comprehensively, Article 50 TFEU is here combined with the general provision of Article 114 TFEU. Article 114 TFEU provides for the adoption of measures for the approximation of the provisions laid down by law, regulation or administrative action in Member States which have as their object the establishment and functioning of the internal market. The Union legislature may have recourse to Article 114 TFEU in particular where disparities between national rules are such as to obstruct the fundamental freedoms or create distortions of competition and thus have a direct effect on the functioning of the internal market. As set out above, the differences between national rules on sustainable corporate governance and due diligence obligations have a direct impact on the functioning of the internal market, and that impact is likely to increase in the future. Beyond the matters regulated in Article 50 TFEU, this act concerns other areas of the establishment and functioning of the internal market. Notably, in the absence of action by the Union legislator, the production and movement of goods and services would be skewed to the benefit of jurisdictions with no due diligence regimes or with less demanding regimes, or companies established in such jurisdictions, substantially impacting the flow of goods and services. Moreover, companies supplying goods or services, in particular SMEs, will be confronted with diverging rules and expectations from customers located in different Member States. For instance, whilst one Member State law may require the supplier to carry out third-party audits, another Member State may require the same supplier to participate in a recognised industry schemes and multi-stakeholder initiatives. One Member State may require the company to carry out due diligence in relation to established business relationships whilst the other Member State may cover the direct suppliers only. This would lead to a multiplication of different partially incompatible requirements distorting the free flow of goods and services in the Union. It is foreseeable that these distortions and impacts would become more serious with time as more and more Member States will adopt diverging national laws or may even lead to a race to the bottom in forthcoming due diligence legislations. Distortions are also relevant for civil liability in case of harm caused in a company’s value chain. Some national legal frameworks on due diligence include an express civil liability regime linked to the failure to execute due diligence, while others expressly exclude a specific civil liability regime. A number of companies have been brought before courts for causing or failing to prevent adverse impacts at the level of their subsidiaries or value chains. Such cases are decided based on differing rules today. In the absence of common rules, divergent national liability regimes may lead to different outcomes depending on whether there is ownership control (as regards subsidiaries) or factual control (either through direct contracts or where control could be exercised by the company through contractual cascading or other leverage in indirect business relationships). This fragmentation would lead to distortions of competition in the internal market as a company located in one Member State would be subject to damages claims due to harm caused in its value chain whilst a company with the same value chain would be exempt from this financial and reputational risk because of diverging national rules. The proposed civil liability regime would clarify which rules apply in case harm occurs in a company’s own operation, at the level of its subsidiaries and at the level of direct and indirect business relations in the value chain. In addition, the proposed provision on applicable law serves the purpose of ensuring application of the harmonised rules, including on civil liability, also in cases where otherwise the law applicable to such claim is not the law of a Member State. It will therefore be essential to ensure the necessary level-playing field. Subsidiarity First, Member States’ legislation alone in the area is unlikely to be sufficient and efficient. As regards specific transboundary problems, such as pollution, climate change, biodiversity etc. individual action is hampered in case of inaction by other Member States. The achievement of international commitments such as the goals of the UNFCCC’s Paris Agreement on climate change, the Convention on Biological Diversity, as well as other multilateral environmental agreements by individual Member State action alone is unlikely. Furthermore, risks resulting from adverse human rights and environment impacts present in companies’ value chains have often cross-border effects (e.g. pollution, transnational supply and value chains). Second, many companies are operating EU-wide or globally; value chains expand to other Union Member States and increasingly to third countries. Institutional investors which invest across the borders own a large part (38%) of the total market capitalisation of large European listed companies, therefore many companies have cross-border ownership and their operations are influenced by regulations in some countries or lack of action in others. This is one of the reasons why frontrunner companies arguably are reluctant to do a further steps in addressing sustainability issues including those in the value chains today and ask for a cross-border level playing field. Third, companies operating across the internal market and beyond need legal certainty and a level-playing field for their sustainable growth. Some Member States have recently introduced legislation on due diligence, while others are in the process of legislating or considering action. Existing Member State rules and those under preparation already have, and would further lead to diverging requirements, which risks being inefficient and leading to an uneven playing field. There are considerable indirect effects of diverging due diligence laws on the suppliers that supply to different companies falling under different laws, as the obligations are in practice translated into contractual clauses. If due diligence requirements are significantly different among Member States, this creates legal uncertainty, fragmentation of the Single market, additional costs and complexity for companies and their investors operating across borders as well as other stakeholders. EU action can avoid this and therefore has added value. Finally, compared to individual action by Member States, EU intervention can ensure a strong European voice in policy developments at the global level.

Proportionality The burden on companies stemming from compliance costs, has been adapted to the size, resources available, and the risk profile. Companies will only have to take appropriate measures that are commensurate with the degree of severity and the likelihood of the adverse impact, and reasonably available to the company, taking into account the circumstances of the specific case, including characteristics of the economic sector and of the specific business relationship and the company’s influence thereof, and the need to ensure prioritisation of action. For that purpose the material and personal scope, and the enforcement provisions were restricted as further explained below. As regards the “personal scope” of the due diligence obligations (i.e. which business categories are covered), small and medium sized enterprises (SMEs) that include micro companies and overall account for around 99 % of all companies in the Union, are excluded from the due diligence duty. For this category of companies, the financial and administrative burden of setting up and implementing a due diligence process would be relatively high. For the most part, they do not have pre-existing due diligence mechanisms in place, they have no know-how, specialised personnel, and the cost of carrying out due diligence would impact them disproportionately. They will, however, be exposed to some of the costs and burden through business relationships with companies in scope as large companies are expected to pass on demands to their suppliers. Hence, supporting measures will be necessary to help SMEs build operational and financial capacity. Companies whose business partner is an SME, are also required to support them in fulfilling the due diligence requirements, in case such requirements would jeopardize the viability of the SME. Moreover, the value chain of the financial sector does not cover SMEs that are receiving loan, credit, financing, insurance or reinsurance. At the same time, exposure of an individual SME to adverse sustainability impacts will as a general rule be lower than the exposure of larger companies. Therefore, very large companies will be within the scope of the full due diligence obligation, also because many of them already have certain processes in place e.g. because of reporting obligations. In particular, the selected turnover criteria will filter those having the largest impact on the Union economy. Moreover, this Directive lays down measures to limit the passing on of the burden from those large companies to the smaller suppliers in the value chain and to use fair, reasonable, non-discriminatory and proportionate requirements vis-a-vis SMEs. As far as companies with lower turnover and less employees are concerned, the due diligence obligation is limited to those companies active in particularly high-impact sectors that are at the same time covered by existing sectoral OECD guidance. Moreover, despite the fact that OECD guidance covers the financial sector, it is not included in the high- impact sectors due to its specificities. This limitation aims to create a balance between the interest in achieving the goals of the Directive and the interest in minimising the financial and administrative burden on companies. The due diligence obligation for these companies will be simplified as they would only focus on severe adverse impacts that are relevant for their sector. Moreover, the due diligence obligation will apply to them only 2 years after the end of the transposition period for this Directive allowing to establish the necessary processes and procedures and benefit from industry cooperation, technological developments, standards, etc. that are likely to be prompted by the earlier implementation date for larger companies. To the extent that this Directive also covers third-country companies, the criteria used for defining the scope of EU and non-EU companies covered are not the same, but ensure that third country companies are not more likely to fall within the scope. For them, a net turnover threshold is used (EUR 150 million for group 1 and EUR 40 million for group 2), but all of this turnover needs to be generated in the Union. EU companies, in turn, have to have a net turnover of EUR 150 million generated worldwide and have to fulfil an employee criterion as well (above 500 employees in group 1 and above 250 employees in group 2). Such difference in the criteria used is justified for the following reasons: –The EU turnover criterion for third-country companies creates a link to the EU. Including only turnover generated in the Union is justified since such a threshold, appropriately calibrated, creates a territorial connection between the third-country companies and the Union by the effects that the activities of these companies may have on the EU internal market, which is sufficient for the Union law to apply to third-country companies. –Also, the Country-by-Country Reporting Directive – an amendment to the Accounting Directive – has already established the methods for calculating net turnover for non-EU companies, while such methodology does not exist for calculating the number of employees of third-country companies. The experience with the French law regulating due diligence shows that, in the absence of a common definition of an employee, the number of employees (worldwide) is difficult to calculate, which hinders the identification of which third-country companies are covered by the scope, preventing effective enforcement of the rules. –Using both employee and turnover criteria for EU companies would ensure better alignment with the proposal for a Corporate Sustainability reporting Directive which should be used for the reporting of due diligence measures and policy for EU companies. –While the Directive will cover about 13 000 EU companies, based on the estimations of the Commission, it will only cover about 4 000 third-country companies. The fact that EU companies will only be covered if they also reach the minimum limit on the number of employees is very unlikely to change the conditions of competition in the EU internal market: the two size criteria applicable to EU companies, even if cumulative, will result in still covering relatively smaller companies compared to non-EU companies due to the fact that, in their case, the entire worldwide net turnover of the company is to be taken into account. Finally, large third-country companies having a high turnover in the Union have the capacity to implement due diligence and will benefit from the advantages coming with due diligence also in their operations elsewhere. In all other aspects, third-country companies are covered by the due diligence rules the same way as their EU counterparts (for example as regards the regime applicable to companies operating in high-impact sectors and identical phase in period for those companies). The harmonisation of the duties of directors is limited to EU companies only, thus third-country companies will have more restricted obligations. The “material scope” is focused and structured mainly upon the corporate due diligence obligation and covers human rights and those environmental adverse impacts that can be clearly defined in selected international conventions. Directors’ duties proposed ensure a close link with the due diligence obligations and are thus necessary for the due diligence to be effective. Directors’ duties also include the clarification of how directors are expected to comply with the duty of care to act in the best interest of the company. Effective enforcement of the due diligence duty is key to achieving the objectives of the initiative. This Directive will provide for a combination of sanctions and civil liability. As regards private enforcement through civil liability, a different approach is used regarding the company`s own operations and its subsidiaries on the one hand and regarding business relations on the other hand. In particular, civil liability concerns only established business relationships with which a company expects to have a lasting relationship, in view of its intensity or duration and which does not represent a negligible or merely ancillary part of the company`s value chain. The company should not be liable for failing to prevent or cease harm at the level of indirect business relationships if it used contractual cascading and assurance and put in place measures to verify compliance with it, unless it was unreasonable, in the circumstances of the case, to expect that the action actually taken, including as regards verifying compliance, would be adequate to prevent, mitigate, bring to an end or minimise the extent of the adverse impact. In addition, in the assessment of the existence and extent of liability, due account is to be taken of the company’s efforts, insofar as they relate directly to the damage in question, to comply with any remedial action required of them by a supervisory authority, any investments made and any targeted support provided as well as any collaboration with other entities to address adverse impacts in its value chains. This approach to civil liability will also limit the risk of excessive litigation. The measures related to public enforcement of the due diligence duty do not go beyond what is necessary. This Directive clarifies that any sanction imposed due to non-compliance with the due diligence obligations has to be proportionate. If the public authorities that investigate the company’s compliance with this Directive identify a failure to comply they should first grant the company an appropriate period of time to take remedial action. The Directive outlines a limited number of sanctions that should apply in all Member States but leaves it to the Member States to ensure a proportionate enforcement process, in line with their national law. When pecuniary sanctions are imposed, they shall be based on the company’s turnover to ensure their proportionate level. Furthermore, this Directive does not entail unnecessary costs for the Union, national governments, regional or local authorities. The Directive will leave it up to the Member States how to organise enforcement. Supervision can be carried out by existing authorities. To reduce the costs (for instance when supervising third-country companies active in various Member States) and improve the supervision, coordination, investigation and exchange of information the Commission will set up a European Network of Supervisory Authorities. This Directive allows for company cooperation, use of industrial schemes and multi-stakeholder initiatives to reduce the cost of compliance for the companies with this Directive. Choice of the instrument The proposed instrument is a Directive, since Article 50 TFEU is the legal basis for company law legislation regarding the protection of the interests of companies’ members and others with a view to making such protection equivalent throughout the Union. Article 50 TFEU requires the European Parliament and the Council to act by means of directives. The Commission shall adopt delegated acts laying down the criteria for the reporting by third country companies on due diligence.

In order to provide support to companies and to Member State authorities on how companies should fulfil their due diligence obligations, the Commission, where necessary in consultation with relevant European bodies, international bodies having expertise in due diligence implementation, and others, may issue guidelines. Guidelines may also be used to outline non-binding model contractual clauses that companies can use when cascading the obligation in their value chain. In addition, the Commission may put in place other supporting measures building on existing EU actions and tools to support due diligence implementation within the Union and in third countries, including facilitation of joint stakeholder initiatives to help companies fulfil their obligations and support SMEs impacted by this Directive in other ways. This may be further complemented by EU development cooperation instruments to support third country governments and upstream economic operators in third countries addressing adverse human rights and environmental impacts of their operations and upstream business relationships. 3.RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS Stakeholder consultations In line with the better regulation guidelines, several consultation activities have taken place: –The inception impact assessment (roadmap), which received 114 feedbacks; –The open public consultation, which received 473 461 responses and 122.785 citizen signatures, the vast majority of which were submitted through campaigns using pre-filled questionnaires, and 149 position papers; –A dedicated consultation of social partners; –A number of stakeholder workshops and meetings, e.g. meeting of the Informal Company Law Expert Group, mainly composed of company law legal academics (ICLEG), meeting with Member State representatives in the Company Law Expert Group (CLEG); and –Conferences and meetings with business associations, individual businesses, including Small and Medium-sized Enterprises (SMEs) representatives, civil society, including non-governmental and not-for-profit organisations, as well as international organisations, such as OECD. Overall, the consultation activities showed that there is generally a wide acknowledgement among stakeholders of the need for an EU legal framework for due diligence. In particular, large companies across the board asked for greater harmonisation in the area of due diligence to improve legal certainty and create a level playing field. Citizens and civil society associations perceived the current regulatory framework as ineffective to ensure corporate accountability for negative impacts on the human rights and environment. A vast majority of respondents to the open public consultation, including most participating Member States, were in favour of a horizontal approach to due diligence over a sector-specific or thematic approach. Companies indicated that they feared the risk of competitive disadvantages vis-à-vis third-country companies that do not have the same duties. Accordingly, most respondents agreed that due diligence rules should also apply to third-country companies which are not established in the EU but carry out activities of a certain scale in the EU. Regarding an enforcement mechanism accompanying a mandatory due diligence duty, all stakeholder groups responding to the open public consultation indicated by a majority that supervision by competent national authorities with a mechanism of EU cooperation/coordination is the most suited option. A majority of respondents in all stakeholder groups considered binding rules with targets to be the option entailing the most costs, but also the most benefits overall. Although most respondents saw the positive impact on third countries, a subset of respondents fear a potential negative impact of due diligence rules on third countries if companies investing in third countries with weak human rights, including social and labour, and environmental protection, would have to withdraw from these countries. Detailed information on the consultation strategy and conclusions of the stakeholder consultations can be found in Annex 2 of the impact assessment report. Collection and use of expertise To support the analysis of the different options, the Commission awarded support contracts to external experts for a study on due diligence requirements through the supply chain and for a study on directors’ duties and sustainable corporate governance. These experts worked in close cooperation with the Commission throughout the different phases of the study. Besides these support studies, additional expertise was identified through literature research and through the stakeholder consultation responses. Alongside the above-mentioned support studies, expert group meetings, and stakeholder consultations, the Commission also paid close attention to the relevant European Parliament resolution and to the Council Conclusions. The European Parliament resolution of 10 March 2021 provided recommendations to the Commission on corporate due diligence and corporate accountability, calling upon the Commission to propose EU rules for a comprehensive corporate due diligence obligation. The Council Conclusions on Human Rights and Decent Work in Global Supply Chains of 1 December 2020 called upon the Commission to table a proposal for an EU legal framework on sustainable corporate governance, including cross-sector corporate due diligence obligations along global value chains. Impact assessment

The analysis in the impact assessment addressed in a broad sense the problem arising from the need to reinforce sustainability in corporate governance and management systems, with two dimensions: (1) stakeholder interests and stakeholder-related (sustainability) risks to companies are not sufficiently taken into account in corporate risk management systems and decisions; (2) companies do not sufficiently mitigate their adverse human rights and environmental impacts, do not have adequate governance, management systems and measures to mitigate their harmful impacts. After consideration of different policy options mainly in the areas of corporate due diligence duty and directors’ duties, the impact assessment proposed a preferred package of policy options across three elements: corporate due diligence, directors’ duties and remuneration, which complement each other. The draft impact assessment was submitted to the Commission’s Regulatory Scrutiny Board on 9 April 2021. Following the negative opinion by the Board, a revised impact assessment was submitted to the Board for a second opinion on 8 November 2021. While noting the significant revision of the report in response to the Board`s first opinion, the Board nevertheless issued a second negative opinion on 26 November 2021, which underlined the need for political guidance on whether, and under which conditions, the sustainable corporate governance initiative could proceed further. The Board maintained its negative opinion because it considered that the impact assessment report did not sufficiently (1) address the problem description and provide convincing evidence that EU businesses, in particular SMEs, do not already sufficiently reflect sustainability aspects or do not have sufficient incentives to do so; (2) present a scope of policy options and identify or fully assess key policy choices; (3) assess the impacts in a complete, balanced and neutral way and reflect uncertainty related to the realisation of benefits, and (4) demonstrate the proportionality of the preferred option. Therefore, in order to address the comments of the Board’s second negative opinion, the impact assessment is complemented by a staff working document on the follow-up of the Board’s opinion that provides additional clarifications and evidence on the areas where the Board had provided specific suggestions of improvements. According to the Commission’s Better Regulation rules a positive opinion from the Regulatory Scrutiny board is required for a file to proceed to the adoption stage. However, the Vice President for Inter-Institutional Relations and Foresight can allow for the continuation of the preparations for an initiative that has been subject to a second negative opinion by the Regulatory Scrutiny Board. It is important to flag that the opinions of the Regulatory scrutiny Board are an assessment of the quality of the impact assessment and not an assessment of the related legislative proposal. The Commission, also in the light of the agreement by the Vice-President for Inter-Institutional Relations and Foresight, has considered it opportune to proceed with the initiative for the following reasons: –the political importance of this initiative for the Commission’s political priority of “An economy that works for people”, including within the context of the Sustainable Finance package and the European Green Deal and –the urgencyof action in the field of value chain due diligence as contribution to the sustainability transition, and to address the risk of the increasing Single market fragmentation, as well as the view that –the additional clarification and evidence provided satisfactorily addressed the shortcomings of the impact assessment identified by the Regulatory Scrutiny Board and were considered in the adapted legal proposal. With regard to its importance and urgency, the Commission also took note that the initiative was included in the Joint Political Priorities for 2022 by the European Parliament, the Council and the Commission. After careful analysis of the Board’s findings and considering the reflections on the additional clarifications and evidence provided, the Commission considers that the proposal, which has been significantly revised as compared to the package of policy options put forward by the impact assessment, allows still to decisively move forward towards the overall objective to better exploit the potential of the single market to contribute to the transition to a sustainable economy and to foster long-term sustainable and responsible corporate behaviour. The Directive is more focused and targeted compared to the preferred option outlined in the draft impact assessment. The core of it is the due diligence obligation, while significantly reducing directors’ duties by linking them closely to the due diligence obligation. In addition, the scope of due diligence is adapted. A detailed description of the adaptations made to the preferred option package of the impact assessment can be found in the accompanying Staff Working Document that presents the follow-up to the opinion of the Regulatory Scrutiny Board and additional information. In short, the “personal scope” i.e. which business categories are covered has been significantly reduced following reflections triggered by the Board’s comments on the problem description, in particular with regard to SMEs, and on the proportionality of the preferred option. Concretely, SMEs have been completely excluded, from the scope, and the coverage of high-impact sectors has been shifted only to companies having more than 250 employees and more than EUR 40 million worldwide net turnover (while large companies which simultaneously exceed both the 500 employee and the EUR 150 million worldwide net turnover limits are covered by the scope irrespective of their sectors of economic activities. The high-impact sectors are directly defined in the text, thus also reflecting on the Board’s comments as regards legislative technique. The definition of high-impact sectors has been limited to sectors with high risk of adverse impacts and for which OECD guidance exists. For midcap companies in high-impact sectors, the rules will start to apply after a transition period of two years to allow for a longer adaptation period. In addition, the due diligence obligations of these companies are limited only to severe impacts relevant for their sector. To reach the objectives of the initiative effectively, the scope of this proposal extends to companies from third countries. Only such non-EU companies are covered which have a direct link to the Union market, and which meet the similar turnover threshold as EU companies but within Union market. Furthermore, they will face the same obligations regarding due diligence as the respective EU companies. The Directive also indicates that accessible and practical support is necessary for companies, in particular SMEs in the value chain, to prepare for the obligations (or the consequent demands the may be passed on to them indirectly). This could include practical guidance and supporting tools such as hotlines, databases or training, as well as the setup of an observatory to help companies with the implementation of the Directive. Moreover, the review clause makes explicit reference to the personal scope of the Directive (i.e. coverage of business categories), which should be reviewed in light of the practical experiences with the application of the legislation. Other mitigation measures to reduce indirect impact on the SMEs are part of the obligations of companies in the scope of this Directive. As regards the material scope (i.e. what is covered), a cross-cutting instrument covering human rights and environmental impacts has been retained. This reflects the strong consensus amongst stakeholder groups that a horizontal framework is necessary to address the identified problems. Furthermore, the Board commented that the impact assessment is not sufficiently clear about the need to regulate directors’ duties on top of due diligence requirements. The Commission therefore decided to address this issue by deviating from the preferred options’ package in the impact assessment and focussing on the directors’ duties element, in light also of the existing international standards, on due diligence and duty of care. This encompasses directors’ duties relating to the setting up and overseeing the implementation of corporate due diligence processes and measures, establishing code of conduct for this purpose as well as integrating due diligence into the corporate strategy. In order to fully reflect the role of directors in light of the corporate due diligence obligations, the directors’ general duty of care for the company, which is present in the company law of all Member States, is also being clarified providing that when fulfilling their duty to act in the best interest of the company, directors should take into account the sustainability matters of the proposal for a corporate sustainability reporting Directive, including, where applicable, human rights, climate change and environmental consequences, including in the short, medium and long term horizons. Further reaching specific directors’ duties that had been put forward in the impact assessment are not retained. This will ensure that the proposal delivers on its objective while remaining proportionate. With regard to comments of the Board, this Explanatory Memorandum as well as the recitals of the legislative proposal contain comprehensive explanations of the policy choices made. While the impact assessment submitted to the Board and the Board’s opinion have been published unchanged, a separate accompanying Staff Working Document has been prepared to provide additional evidence and clarifications that follows up on the Board’s remarks including as regards evidence. This document addresses in particular the following: 1.Problem description: –the scale and evolution of the environmental and sustainability problems directly linked to the apparent absence or insufficient use of corporate sustainability management practices by EU companies to be tackled by this Directive and the added value of the Directive in relation to the comprehensive package of measures to promote sustainability under the Green Deal; –why the market and competitive dynamics together with the further evolution of companies’ corporate strategies and risk management systems are considered insufficient and as regards the assumed causal link between using corporate sustainability tools and their practical effect in tackling the problems;

2.Impacts of the preferred option: –issues related to third countries, integrating observations (i) on expected developments in third countries (including taking into account EU and international trade and development support measures), (ii) on impacts on third countries and on suppliers in third countries; –the enforcement mechanism, further expanding on the added value of a two-pillar enforcement system that builds on administrative enforcement and civil liability; –impacts on competition and competitiveness. Regulatory fitness and simplification Small and medium-sized enterprises, including micro enterprises are not included in the scope and indirect effects on them will be mitigated through supporting measures and guidelines at Union and Member State level as well in business to business relations with the use of model contractual clauses and by proportionality requirements for the larger business partner. Fundamental rights As explained in the impact assessment and based on existing evidence, mandatory due diligence requirements can have significant benefits for the protection and promotion of fundamental rights. 4.BUDGETARY IMPLICATIONS There are no direct implications to the Union budget. 5.OTHER ELEMENTS Implementation plans and monitoring, evaluation and reporting arrangements The Commission will set up a European Network of Supervisory Authorities to help with the implementation of this Directive. Such Network will be composed by the representatives of the supervisory authorities designated by the Member States and where necessary joined by other Union agencies with relevant expertise in the areas covered by this Directive, to ensure compliance by the companies of their due diligence obligations, in order to facilitate and ensure the coordination and convergence of regulatory, investigative, sanctioning and supervisory practices, and the sharing of information among these supervisory authorities. After seven years following the end of the transposition period, the Commission shall report on the implementation of this Directive, including, among other aspects, its effectiveness. The report shall be accompanied, if appropriate, by a legislative proposal. In order to provide clarity and support to companies and Member States with the implementation of the directive, the Commission will issue guidance, where necessary. Explanatory documents To ensure the proper implementation of this Directive, the explanatory document, e.g. in the form of correlation tables would be necessary. Detailed explanation of the specific provisions of the proposal Article 1 sets out the subject matter of the Directive, i.e. laying down rules on obligations of due diligence by companies regarding actual and potential human rights and environmental adverse impacts, with respect to their own operations, the operations of their subsidiaries, and the value chain operations carried out by established business relationships; the provision also specifies that this Directive establishes rules on liability for violations of the due diligence obligation. Article 2 establishes the personal scope of application of the Directive and sets out the criteria based on which a Member State is competent to regulate matters covered in this Directive.

Article 3 contains definitions for the purpose of this Directive. Article 4 requires Member States to ensure that companies conduct human rights and environmental due diligence by complying with the specific requirements listed in Articles 5 to 11 of the Directive. Article 5 requires Member States to ensure that companies integrate due diligence into all corporate policies and have in place a due diligence policy that is updated annually. The provision specifies that this policy should include a description of the company’s approach to due diligence, of a code of conduct to be followed by the company’s employees and subsidiaries, of the processes put in place to implement due diligence. Article 6 establishes the obligation for Member States to ensure that companies take appropriate measures to identify actual or potential adverse human rights and environmental impacts in their own operations, in their subsidiaries and at the level of their established direct or indirect business relationships in their value chain. Article 7 sets out the requirement for Member States to ensure that companies take appropriate measures to prevent potential adverse impacts identified pursuant to Article 6, or to adequately mitigate those impacts, where prevention is not possible or requires gradual implementation. Article 8 establishes the obligation for Member States to ensure that companies take appropriate measures to bring to an end actual adverse human rights and environmental impacts that they had or could have identified pursuant to Article 6. Where an adverse impact that has occurred at the level of established direct or indirect established business relationships cannot be brought to an end, Member States should ensure that companies minimise the extent of the impact. Article 9 sets out the obligation for Member States to ensure that companies provide for the possibility to submit complaints to the company in case of legitimate concerns regarding those potential or actual adverse impacts, including in the company’s value chain. Companies are required to grant this possibility to persons who are affected or have reasonable grounds to believe that they might be affected by an adverse impact, to trade unions and other workers’ representatives representing individuals working in the value chain concerned, and to civil society organisations active in the area concerned. Article 10 introduces the obligation for Member States to require companies to periodically assess the implementation of their due diligence measures in order to verify that adverse impacts are properly identified and that preventive or corrective measures are implemented, and to determine the extent to which adverse impacts have been prevented or brought to an end or their extent minimised. Article 11 establishes the obligation for Member States to ensure that companies that are not subject to reporting requirements under Directive 2013/34/EU report on the matters covered by this Directive and publish an annual statement on their website. Article 12 sets out the obligation for the Commission to adopt guidance about non-binding model contract clauses to help companies comply with Article 7(2), point (b), and Article 8(3) point (c). Article 13 sets out the possibility for the Commission, in order to provide support to companies or to Member State authorities on how companies should fulfil their due diligence obligations, to issue guidelines, for specific sectors or specific adverse impacts, in consultation with the European Union Agency for Fundamental Rights, the European Environment Agency, and where appropriate with international bodies having expertise in due diligence. Article 14 requires the Member States and Commission to provide accompanying measures to companies in the scope of this Directive actors and to actors along global value chains that are indirectly impacted by the obligations of the Directive. Such support can range from the operation of dedicated websites, portals or platforms to financial support to SMEs, and facilitation of joint stakeholder initiatives. This provision further clarifies that companies may rely on industry schemes and multi-stakeholder initiatives to support the implementation of due diligence and that the Commission, in collaboration with Member States, may issue guidance for assessing the fitness of such schemes. Article 15 requires the Member States ensure that certain companies adopt a plan to ensure that the business model and strategy of the company are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C in line with the Paris Agreement. Article 16 introduces the requirement for companies formed in accordance with the legislation of a third country and falling within the scope of application of the present Directive pursuant to Article 2(2), to designate a sufficiently mandated authorised representative in the Union to be addressed by Member States’ competent authorities, on all issues necessary for the receipt of, compliance with and enforcement of legal acts issued in relation to this Directive. Article 17 sets out the requirement for Member States to designate one or more national supervisory authorities in order to ensure compliance by companies with their due diligence obligations and their obligation under Article 15(1) and (2) and to exercise the powers of enforcement of those obligations in accordance with Article 18. Article 18 sets out the appropriate powers and resources of the supervisory authorities designated by the Member States to carry out their tasks of supervision and enforcement. Article 19 establishes the requirement for Member States to ensure that any natural or legal person that has reasons to believe, on the basis of objective circumstances, that a company does not appropriately comply with the provisions of this Directive, is entitled to submit substantiated concerns, in particular in the Member State of his or her habitual residence, registered office, place of work or place of the alleged infringement, to the supervisory authorities. Article 20 sets out that Member States shall lay down rules on sanctions applicable to infringements of the national provisions adopted pursuant to this Directive, and shall take all measures necessary to ensure that they are implemented. The sanctions shall be effective, dissuasive and proportionate. Member States shall ensure that decision of the supervisory authorities containing sanctions related to the breach of the provisions of this directive should be published. Article 21 introduces a European Network of Supervisory Authorities composed by the representatives of the supervisory national authorities referred to in Article 16, with the aim to facilitate and ensure the coordination and alignment of regulatory, investigative, sanctioning and supervisory practices, and the sharing of information among these supervisory authorities. Article 22 sets out the requirement for Member States to lay down rules governing the civil liability of the company for damages arising due to its failure to comply with the due diligence obligations under specific conditions. It also introduces the obligation for Member States to ensure that the liability provided for in paragraphs 1 to 3 of this Article is not denied on the sole ground that the law applicable to such claims is not the law of a Member State.

Article 23 establishes the application of Directive (EU) 2019/1937 of the European Parliament and of the Council of 23 October 2019 on the protection of persons who report breaches of Union law, to the reporting of all breaches of this Directive and the protection of persons reporting such breaches. Article 23 clarifies conditions of public support for companies. Article 25 clarifies directors’ duty of care. Article 26 lays down the duty for directors of EU companies to set up and oversee the implementation of corporate sustainability due diligence processes and measures and to adapt the corporate strategy to due diligence. Article 27 amends the Annex of Directive (EU) No 2019/1937. Article 28 sets out the rules concerning delegated acts. Article 29 contains a provision on the review of this Directive. Article 30 contains provisions on the transposition of the Directive. Article 31 sets the date of when this Directive enters into force. Article 32 sets out the addressees of this Directive. The lists contained in the Annex specify the adverse environmental impacts and adverse human rights impacts relevant for this Directive, to cover the violation of rights and prohibitions including the international human rights agreements (Part I Section 1), human rights and fundamental freedoms conventions (Part I Section 2), and the violation of internationally recognised objectives and prohibitions included in the environmental conventions (Part II). 2022/0051 (COD) Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937 (Text with EEA relevance) THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION, Having regard to the Treaty on the Functioning of the European Union, and in particular Article 50(1) and (2)(g) and Article 114 thereof, Having regard to the proposal from the European Commission, After transmission of the draft legislative act to the national parliaments,

Having regard to the opinion of the European Economic and Social Committee, Acting in accordance with the ordinary legislative procedure, Whereas: (1)The Union is founded on the respect for human dignity, freedom, democracy, equality, the rule of law and respect for human rights as enshrined in the EU Charter of Fundamental Rights. Those core values that have inspired the Union’s own creation, as well as the universality and indivisibility of human rights, and respect for the principles of the United Nations Charter and international law, should guide the Union’s action on the international scene. Such action includes fostering the sustainable economic, social and environmental development of developing countries. (2)A high level of protection and improvement of the quality of the environment and promoting European core values are among the priorities of the Union, as set out in the Commission’s Communication on A European Green Deal. These objectives require the involvement not only of the public authorities but also of private actors, in particular companies. (3)In its Communication on a Strong Social Europe for Just Transition, the Commission committed to upgrading Europe’s social market economy to achieve a just transition to sustainability. This Directive will also contribute to the European Pillar of Social Rights, which promotes rights ensuring fair working conditions. It forms part of the EU policies and strategies relating to the promotion of decent work worldwide, including in global value chains, as referred to in the Commission Communication on decent work worldwide. (4)The behaviour of companies across all sectors of the economy is key to success in the Union’s sustainability objectives as Union companies, especially large ones, rely on global value chains. It is also in the interest of companies to protect human rights and the environment, in particular given the rising concern of consumers and investors regarding these topics. Several initiatives fostering enterprises which support value-oriented transformation already exist on Union, as well as national level. (5)Existing international standards on responsible business conduct specify that companies should protect human rights and set out how they should address the protection of the environment across their operations and value chains. The United Nations Guiding Principles on Business and Human Rights recognise the responsibility of companies to exercise human rights due diligence by identifying, preventing and mitigating the adverse impacts of their operations on human rights and by accounting for how they address those impacts. Those Guiding Principles state that businesses should avoid infringing human rights and should address adverse human rights impacts that they have caused, contributed to or are linked with in their own operations, subsidiaries and through their direct and indirect business relationships. (6)The concept of human rights due diligence was specified and further developed in the OECD Guidelines for Multinational Enterprises which extended the application of due diligence to environmental and governance topics. The OECD Guidance on Responsible Business Conduct and sectoral guidance are internationally recognised frameworks setting out practical due diligence steps to help companies identify, prevent, mitigate and account for how they address actual and potential impacts in their operations, value chains and other business relationships. The concept of due diligence is also embedded in the recommendations of the International Labour Organisation (ILO) Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy. (7)The United Nations’ Sustainable Development Goals, adopted by all United Nations Member States in 2015, include the objectives to promote sustained, inclusive and sustainable economic growth. The Union has set itself the objective to deliver on the UN Sustainable Development Goals. The private sector contributes to those aims. (8)International agreements under the United Nations Framework Convention on Climate Change, to which the Union and the Member States are parties, such as the Paris Agreement and the recent Glasgow Climate Pact, set out precise avenues to address climate change and keep global warming within 1.5 C degrees. Besides specific actions being expected from all signatory Parties, the role of the private sector, in particular its investment strategies, is considered central to achieve these objectives. (9)In the European Climate Law, the Union also legally committed to becoming climate-neutral by 2050 and to reducing emissions by at least 55% by 2030. Both these commitments require changing the way in which companies produce and procure. The Commission’s 2030 Climate Target Plan models various degrees of emission reductions required from different economic sectors, though all need to see considerable reductions under all scenarios for the Union to meet its climate objectives. The Plan also underlines that “changes in corporate governance rules and practices, including on sustainable finance, will make company owners and managers prioritise sustainability objectives in their actions and strategies.” The 2019 Communication on the European Green Deal sets out that all Union actions and policies should pull together to help the Union achieve a successful and just transition towards a sustainable future. It also sets out that sustainability should be further embedded into the corporate governance framework. (10)According to the Commission Communication on forging a climate-resilient Europe presenting the Union Strategy on Adaptation to climate change, new investment and policy decisions should be climate-informed and future-proof, including for larger businesses managing value chains. This Directive should be consistent with that Strategy. Similarly, there should be consistency with the Commission Directive […] amending Directive 2013/36/EU as regards supervisory powers, sanctions, third-country branches, and environmental, social and governance risks (Capital Requirements Directive), which sets out clear requirements for banks’ governance rules including knowledge about environmental, social and governance risks at board of directors level. (11)The Action Plan on a Circular Economy, the Biodiversity strategy, the Farm to Fork strategy and the Chemicals strategy and Updating the 2020 New Industrial Strategy: Building a stronger Single Market for Europe’s recovery, Industry 5.0 and the European Pillar of Social Rights Action Plan and the 2021 Trade Policy Review list an initiative on sustainable corporate governance among their elements. (12)This Directive is in coherence with the EU Action Plan on Human Rights and Democracy 2020-2024. This Action Plan defines as a priority to strengthen the Union’s engagement to actively promote the global implementation of the United Nations Guiding Principles on Business and Human Rights and other relevant international guidelines such as the OECD Guidelines for Multinational Enterprises, including by advancing relevant due diligence standards. (13)The European Parliament, in its resolution of 10 March 2021 calls upon the Commission to propose Union rules for a comprehensive corporate due diligence obligation. The Council Conclusions on Human Rights and Decent Work in Global Supply Chains of 1 December 2020 called upon the Commission to table a proposal for a Union legal framework on sustainable corporate governance, including cross-sector corporate due diligence obligations along global supply chains. The European Parliament also calls for clarifying directors` duties in its own initiative report adopted on 2 December 2020 on sustainable corporate governance. In their Joint Declaration on EU Legislative Priorities for 2022, the European Parliament, the Council of the European Union and the Commission have committed, to deliver on an economy that works for people, and to improve the regulatory framework on sustainable corporate governance. (14)This Directive aims to ensure that companies active in the internal market contribute to sustainable development and the sustainability transition of economies and societies through the identification, prevention and mitigation, bringing to an end and minimisation of potential or actual adverse human rights and environmental impacts connected with companies’ own operations, subsidiaries and value chains. (15)Companies should take appropriate steps to set up and carry out due diligence measures, with respect to their own operations, their subsidiaries, as well as their established direct and indirect business relationships throughout their value chains in accordance with the provisions of this Directive. This Directive should not require companies to guarantee, in all circumstances, that adverse impacts will never occur or that they will be stopped. For example with respect to business relationships where the adverse impact results from State intervention, the company might not be in a position to arrive at such results. Therefore, the main obligations in this Directive should be ‘obligations of means’. The company should take the appropriate measures which can reasonably be expected to result in prevention or minimisation of the adverse impact under the circumstances of the specific case. Account should be taken of the specificities of the company’s value chain, sector or geographical area in which its value chain partners operate, the company’s power to influence its direct and indirect business relationships, and whether the company could increase its power of influence. (16)The due diligence process set out in this Directive should cover the six steps defined by the OECD Due Diligence Guidance for Responsible Business Conduct, which include due diligence measures for companies to identify and address adverse human rights and environmental impacts. This encompasses the following steps: (1) integrating due diligence into policies and management systems, (2) identifying and assessing adverse human rights and environmental impacts, (3) preventing, ceasing or minimising actual and potential adverse human rights, and environmental impacts, (4) assessing the effectiveness of measures, (5) communicating, (6) providing remediation. (17)Adverse human rights and environmental impact occur in companies’ own operations, subsidiaries, products, and in their value chains, in particular at the level of raw material sourcing, manufacturing, or at the level of product or waste disposal. In order for the due diligence to have a meaningful impact, it should cover human rights and environmental adverse impacts generated throughout the life-cycle of production and use and disposal of product or provision of services, at the level of own operations, subsidiaries and in value chains.

(18)The value chain should cover activities related to the production of a good or provision of services by a company, including the development of the product or the service and the use and disposal of the product as well as the related activities of established business relationships of the company. It should encompass upstream established direct and indirect business relationships that design, extract, manufacture, transport, store and supply raw material, products, parts of products, or provide services to the company that are necessary to carry out the company’s activities, and also downstream relationships, including established direct and indirect business relationships, that use or receive products, parts of products or services from the company up to the end of life of the product, including inter alia the distribution of the product to retailers, the transport and storage of the product, dismantling of the product, its recycling, composting or landfilling. (19)As regards regulated financial undertakings providing loan, credit, or other financial services, “value chain” with respect to the provision of such services should be limited to the activities of the clients receiving such services, and the subsidiaries thereof whose activities are linked to the contract in question. Clients that are households and natural persons not acting in a professional or business capacity, as well as small and medium sized undertakings, should not be considered to be part of the value chain. The activities of the companies or other legal entities that are included in the value chain of that client should not be covered. (20)In order to allow companies to properly identify the adverse impacts in their value chain and to make it possible for them to exercise appropriate leverage, the due diligence obligations should be limited in this Directive to established business relationships. For the purpose of this Directive, established business relationships should mean such direct and indirect business relationships which are, or which are expected to be lasting, in view of their intensity and duration and which do not represent a negligible or ancillary part of the value chain. The nature of business relationships as “established” should be reassessed periodically, and at least every 12 months. If the direct business relationship of a company is established, then all linked indirect business relationships should also be considered as established regarding that company. (21)Under this Directive, EU companies with more than 500 employees on average and a worldwide net turnover exceeding EUR 150 million in the financial year preceding the last financial year should be required to comply with due diligence. As regards companies which do not fulfil those criteria, but which had more than 250 employees on average and more than EUR 40 million worldwide net turnover in the financial year preceding the last financial year and which operate in one or more high-impact sectors, due diligence should apply 2 years after the end of the transposition period of this directive, in order to provide for a longer adaptation period. In order to ensure a proportionate burden, companies operating in such high-impact sectors should be required to comply with more targeted due diligence focusing on severe adverse impacts. Temporary agency workers, including those posted under Article 1(3), point (c), of Directive 96/71/EC, as amended by Directive 2018/957/EU of the European Parliament and of the Council, should be included in the calculation of the number of employees in the user company. Posted workers under Article 1(3), points (a) and (b), of Directive 96/71/EC, as amended by Directive 2018/957/EU, should only be included in the calculation of the number of employees of the sending company. (22)In order to reflect the priority areas of international action aimed at tackling human rights and environmental issues, the selection of high-impact sectors for the purposes of this Directive should be based on existing sectoral OECD due diligence guidance. The following sectors should be regarded as high-impact for the purposes of this Directive: the manufacture of textiles, leather and related products (including footwear), and the wholesale trade of textiles, clothing and footwear; agriculture, forestry, fisheries (including aquaculture), the manufacture of food products, and the wholesale trade of agricultural raw materials, live animals, wood, food, and beverages; the extraction of mineral resources regardless of where they are extracted from (including crude petroleum, natural gas, coal, lignite, metals and metal ores, as well as all other, non-metallic minerals and quarry products), the manufacture of basic metal products, other non-metallic mineral products and fabricated metal products (except machinery and equipment), and the wholesale trade of mineral resources, basic and intermediate mineral products (including metals and metal ores, construction materials, fuels, chemicals and other intermediate products). As regards the financial sector, due to its specificities, in particular as regards the value chain and the services offered, even if it is covered by sector-specific OECD guidance, it should not form part of the high-impact sectors covered by this Directive. At the same time, in this sector, the broader coverage of actual and potential adverse impacts should be ensured by also including very large companies in the scope that are regulated financial undertakings, even if they do not have a legal form with limited liability. (23)In order to achieve fully the objectives of this Directive addressing human rights and adverse environmental impacts with respect to companies’ operations, subsidiaries and value chains, third-country companies with significant operations in the EU should also be covered. More specifically, the Directive should apply to third-country companies which generated a net turnover of at least EUR 150 million in the Union in the financial year preceding the last financial year or a net turnover of more than EUR 40 million but less than EUR 150 million in the financial year preceding the last financial year in one or more of the high-impact sectors, as of 2 years after the end of the transposition period of this Directive. (24)For defining the scope of application in relation to non-EU companies the described turnover criterion should be chosen as it creates a territorial connection between the third-country companies and the Union territory. Turnover is a proxy for the effects that the activities of those companies could have on the internal market. In accordance with international law, such effects justify the application of Union law to third-country companies. To ensure identification of the relevant turnover of companies concerned, the methods for calculating net turnover for non-EU companies as laid down in Directive (EU) 2013/34 as amended by Directive (EU) 2021/2101 should be used. To ensure effective enforcement of this Directive, an employee threshold should, in turn, not be applied to determine which third-country companies fall under this Directive, as the notion of “employees” retained for the purposes of this Directive is based on Union law and could not be easily transposed outside of the Union. In the absence of a clear and consistent methodology, including in accounting frameworks, to determine the employees of third-country companies, such employee threshold would therefore create legal uncertainty and would be difficult to apply for supervisory authorities. The definition of turnover should be based on Directive 2013/34/EU which has already established the methods for calculating net turnover for non-Union companies, as turnover and revenue definitions are similar in international accounting frameworks too. With a view to ensuring that the supervisory authority knows which third country companies generate the required turnover in the Union to fall under the scope of this Directive, this Directive should require that a supervisory authority in the Member State where the third country company’s authorised representative is domiciled or established and, where it is different, a supervisory authority in the Member State in which the company generated most of its net turnover in the Union in the financial year preceding the last financial year are informed that the company is a company falling under the scope of this Directive. (25)In order to achieve a meaningful contribution to the sustainability transition, due diligence under this Directive should be carried out with respect to adverse human rights impact on protected persons resulting from the violation of one of the rights and prohibitions as enshrined in the international conventions as listed in the Annex to this Directive. In order to ensure a comprehensive coverage of human rights, a violation of a prohibition or right not specifically listed in that Annex which directly impairs a legal interest protected in those conventions should also form part of the adverse human rights impact covered by this Directive, provided that the company concerned could have reasonably established the risk of such impairment and any appropriate measures to be taken in order to comply with the due diligence obligations under this Directive, taking into account all relevant circumstances of their operations, such as the sector and operational context. Due diligence should further encompass adverse environmental impacts resulting from the violation of one of the prohibitions and obligations pursuant to the international environmental conventions listed in the Annex to this Directive. (26)Companies have guidance at their disposal that illustrates how their activities may impact human rights and which corporate behaviour is prohibited in accordance with internationally recognised human rights. Such guidance is included for instance in The United Nations Guiding Principles Reporting Framework and the United Nations Guiding Principles Interpretative Guide. Using relevant international guidelines and standards as a reference, the Commission should be able to issue additional guidance that will serve as a practical tool for companies. (27)In order to conduct appropriate human rights, and environmental due diligence with respect to their operations, their subsidiaries, and their value chains, companies covered by this Directive should integrate due diligence into corporate policies, identify, prevent and mitigate as well as bring to an end and minimise the extent of potential and actual adverse human rights and environmental impacts, establish and maintain a complaints procedure, monitor the effectiveness of the taken measures in accordance with the requirements that are set up in this Directive and communicate publicly on their due diligence. In order to ensure clarity for companies, in particular the steps of preventing and mitigating potential adverse impacts and of bringing to an end, or when this is not possible, minimising actual adverse impacts should be clearly distinguished in this Directive. (28)In order to ensure that due diligence forms part of companies’ corporate policies, and in line with the relevant international framework, companies should integrate due diligence into all their corporate policies and have in place a due diligence policy. The due diligence policy should contain a description of the company’s approach, including in the long term, to due diligence, a code of conduct describing the rules and principles to be followed by the company’s employees and subsidiaries; a description of the processes put in place to implement due diligence, including the measures taken to verify compliance with the code of conduct and to extend its application to established business relationships. The code of conduct should apply in all relevant corporate functions and operations, including procurement and purchasing decisions. Companies should also update their due diligence policy annually. (29)To comply with due diligence obligations, companies need to take appropriate measures with respect to identification, prevention and bringing to an end adverse impacts. An ‘appropriate measure’ should mean a measure that is capable of achieving the objectives of due diligence, commensurate with the degree of severity and the likelihood of the adverse impact, and reasonably available to the company, taking into account the circumstances of the specific case, including characteristics of the economic sector and of the specific business relationship and the company’s influence thereof, and the need to ensure prioritisation of action. In this context, in line with international frameworks, the company’s influence over a business relationship should include, on the one hand its ability to persuade the business relationship to take action to bring to an end or prevent adverse impacts (for example through ownership or factual control, market power, pre-qualification requirements, linking business incentives to human rights and environmental performance, etc.) and, on the other hand, the degree of influence or leverage that the company could reasonably exercise, for example through cooperation with the business partner in question or engagement with another company which is the direct business partner of the business relationship associated with adverse impact. (30)Under the due diligence obligations set out by this Directive, a company should identify actual or potential adverse human rights and environmental impacts. In order to allow for a comprehensive identification of adverse impacts, such identification should be based on quantitative and qualitative information. For instance, as regards adverse environmental impacts, the company should obtain information about baseline conditions at higher risk sites or facilities in value chains. Identification of adverse impacts should include assessing the human rights, and environmental context in a dynamic way and in regular intervals: prior to a new activity or relationship, prior to major decisions or changes in the operation; in response to or anticipation of changes in the operating environment; and periodically, at least every 12 months, throughout the life of an activity or relationship. Regulated financial undertakings providing loan, credit, or other financial services should identify the adverse impacts only at the inception of the contract. When identifying adverse impacts, companies should also identify and assess the impact of a business relationship’s business model and strategies, including trading, procurement and pricing practices. Where the company cannot prevent, bring to an end or minimize all its adverse impacts at the same time, it should be able to prioritize its action, provided it takes the measures reasonably available to the company, taking into account the specific circumstances. (31)In order to avoid undue burden on the smaller companies operating in high-impact sectors which are covered by this Directive, those companies should only be obliged to identify those actual or potential severe adverse impacts that are relevant to the respective sector. (32)In line with international standards, prevention and mitigation as well as bringing to an end and minimisation of adverse impacts should take into account the interests of those adversely impacted. In order to enable continuous engagement with the value chain business partner instead of termination of business relations (disengagement) and possibly exacerbating adverse impacts, this Directive should ensure that disengagement is a last-resort action, in line with the Union`s policy of zero-tolerance on child labour. Terminating a business relationship in which child labour was found could expose the child to even more severe adverse human rights impacts. This should therefore be taken into account when deciding on the appropriate action to take. (33)Under the due diligence obligations set out by this Directive, if a company identifies potential adverse human rights or environmental impacts, it should take appropriate measures to prevent and adequately mitigate them. To provide companies with legal clarity and certainty, this Directive should set out the actions companies should be expected to take for prevention and mitigation of potential adverse impacts where relevant depending on the circumstances. (34)So as to comply with the prevention and mitigation obligation under this Directive, companies should be required to take the following actions, where relevant. Where necessary due to the complexity of prevention measures, companies should develop and implement a prevention action plan. Companies should seek to obtain contractual assurances from a direct partner with whom they have an established business relationship that it will ensure compliance with the code of conduct or the prevention action plan, including by seeking corresponding contractual assurances from its partners to the extent that their activities are part of the companies’ value chain. The contractual assurances should be accompanied by appropriate measures to verify compliance. To ensure comprehensive prevention of actual and potential adverse impacts, companies should also make investments which aim to prevent adverse impacts, provide targeted and proportionate support for an SME with which they have an established business relationship such as financing, for example, through direct financing, low-interest loans, guarantees of continued sourcing, and assistance in securing financing, to help implement the code of conduct or prevention action plan, or technical guidance such as in the form of training, management systems upgrading, and collaborate with other companies. (35)In order to reflect the full range of options for the company in cases where potential impacts could not be addressed by the described prevention or minimisation measures, this Directive should also refer to the possibility for the company to seek to conclude a contract with the indirect business partner, with a view to achieving compliance with the company’s code of conduct or a prevention action plan, and conduct appropriate measures to verify compliance of the indirect business relationship with the contract. (36)In order to ensure that prevention and mitigation of potential adverse impacts is effective, companies should prioritize engagement with business relationships in the value chain, instead of terminating the business relationship, as a last resort action after attempting at preventing and mitigating adverse potential impacts without success. However, the Directive should also, for cases where potential adverse impacts could not be addressed by the described prevention or mitigation measures, refer to the obligation for companies to refrain from entering into new or extending existing relations with the partner in question and, where the law governing their relations so entitles them to, to either temporarily suspend commercial relationships with the partner in question, while pursuing prevention and minimisation efforts, if there is reasonable expectation that these efforts are to succeed in the short-term; or to terminate the business relationship with respect to the activities concerned if the potential adverse impact is severe. In order to allow companies to fulfil that obligation, Member States should provide for the availability of an option to terminate the business relationship in contracts governed by their laws. It is possible that prevention of adverse impacts at the level of indirect business relationships requires collaboration with another company, for example a company which has a direct contractual relationship with the supplier. In some instances, such collaboration could be the only realistic way of preventing adverse impacts, in particular, where the indirect business relationship is not ready to enter into a contract with the company. In these instances, the company should collaborate with the entity which can most effectively prevent or mitigate adverse impacts at the level of the indirect business relationship while respecting competition law. (37)As regards direct and indirect business relationships, industry cooperation, industry schemes and multi-stakeholder initiatives can help create additional leverage to identify, mitigate, and prevent adverse impacts. Therefore it should be possible for companies to rely on such initiatives to support the implementation of their due diligence obligations laid down in this Directive to the extent that such schemes and initiatives are appropriate to support the fulfilment of those obligations. Companies could assess, at their own initiative, the alignment of these schemes and initiatives with the obligations under this Directive. In order to ensure full information on such initiatives, the Directive should also refer to the possibility for the Commission and the Member States to facilitate the dissemination of information on such schemes or initiatives and their outcomes. The Commission, in collaboration with Member States, may issue guidance for assessing the fitness of industry schemes and multi-stakeholder initiatives.

(38)Under the due diligence obligations set out by this Directive, if a company identifies actual human rights or environmental adverse impacts, it should take appropriate measures to bring those to an end. It can be expected that a company is able to bring to an end actual adverse impacts in their own operations and in subsidiaries. However, it should be clarified that, as regards established business relationships, where adverse impacts cannot be brought to an end, companies should minimise the extent of such impacts. Minimisation of the extent of adverse impacts should require an outcome that is the closest possible to bringing the adverse impact to an end. To provide companies with legal clarity and certainty, this Directive should define which actions companies should be required to take for bringing actual human rights and environmental adverse impacts to an end and minimisation of their extent, where relevant depending on the circumstances. (39)So as to comply with the obligation of bringing to an end and minimising the extent of actual adverse impacts under this Directive, companies should be required to take the following actions, where relevant. They should neutralise the adverse impact or minimise its extent, with an action proportionate to the significance and scale of the adverse impact and to the contribution of the company’s conduct to the adverse impact. Where necessary due to the fact that the adverse impact cannot be immediately brought to an end, companies should develop and implement a corrective action plan with reasonable and clearly defined timelines for action and qualitative and quantitative indicators for measuring improvement. Companies should also seek to obtain contractual assurances from a direct business partner with whom they have an established business relationship that they will ensure compliance with the company’s code of conduct and, as necessary, a prevention action plan, including by seeking corresponding contractual assurances from its partners, to the extent that their activities are part of the company’s value chain. The contractual assurances should be accompanied by the appropriate measures to verify compliance. Finally, companies should also make investments aiming at ceasing or minimising the extent of adverse impact, provide targeted and proportionate support for an SMEs with which they have an established business relationship and collaborate with other entities, including, where relevant, to increase the company’s ability to bring the adverse impact to an end. (40)In order to reflect the full range of options for the company in cases where actual impacts could not be addressed by the described measures, this Directive should also refer to the possibility for the company to seek to conclude a contract with the indirect business partner, with a view to achieving compliance with the company’s code of conduct or a corrective action plan, and conduct appropriate measures to verify compliance of the indirect business relationship with the contract. (41)In order to ensure that bringing actual adverse impacts to an end or minimising them is effective, companies should prioritize engagement with business relationships in the value chain, instead of terminating the business relationship, as a last resort action after attempting at bringing actual adverse impacts to an end or minimising them without success. However, this Directive should also, for cases where actual adverse impacts could not be brought to an end or adequately mitigated by the described measures, refer to the obligation for companies to refrain from entering into new or extending existing relations with the partner in question and, where the law governing their relations so entitles them to, to either temporarily suspend commercial relationships with the partner in question, while pursuing efforts to bring to an end or minimise the extent of the adverse impact, or terminate the business relationship with respect to the activities concerned, if the adverse impact is considered severe. In order to allow companies to fulfil that obligation, Member States should provide for the availability of an option to terminate the business relationship in contracts governed by their laws. (42)Companies should provide the possibility for persons and organisations to submit complaints directly to them in case of legitimate concerns regarding actual or potential human rights and environmental adverse impacts. Organisations who could submit such complaints should include trade unions and other workers’ representatives representing individuals working in the value chain concerned and civil society organisations active in the areas related to the value chain concerned where they have knowledge about a potential or actual adverse impact. Companies should establish a procedure for dealing with those complaints and inform workers, trade unions and other workers’ representatives, where relevant, about such processes. Recourse to the complaints and remediation mechanism should not prevent the complainant from having recourse to judicial remedies. In accordance with international standards, complaints should be entitled to request from the company appropriate follow-up on the complaint and to meet with the company’s representatives at an appropriate level to discuss potential or actual severe adverse impacts that are the subject matter of the complaint. This access should not lead to unreasonable solicitations of companies. (43)Companies should monitor the implementation and effectiveness of their due diligence measures. They should carry out periodic assessments of their own operations, those of their subsidiaries and, where related to the value chains of the company, those of their established business relationships, to monitor the effectiveness of the identification, prevention, minimisation, bringing to an end and mitigation of human rights and environmental adverse impacts. Such assessments should verify that adverse impacts are properly identified, due diligence measures are implemented and adverse impacts have actually been prevented or brought to an end. In order to ensure that such assessments are up-to-date, they should be carried out at least every 12 months and be revised in-between if there are reasonable grounds to believe that significant new risks of adverse impact could have arisen. (44)Like in the existing international standards set by the United Nations Guiding Principles on Business and Human Rights and the OECD framework, it forms part of the due diligence requirement to communicate externally relevant information on due diligence policies, processes and activities conducted to identify and address actual or potential adverse impacts, including the findings and outcomes of those activities. The proposal to amend Directive 2013/34/EU as regards corporate sustainability reporting sets out relevant reporting obligations for the companies covered by this directive. In order to avoid duplicating reporting obligations, this Directive should therefore not introduce any new reporting obligations in addition to those under Directive 2013/34/EU for the companies covered by that Directive as well as the reporting standards that should be developed under it. As regards companies that are within the scope of this Directive, but do not fall under Directive 2013/34/EU, in order to comply with their obligation of communicating as part of the due diligence under this Directive, they should publish on their website an annual statement in a language custo