CELEX: 52022PC0071
Language: en
Date: 2022-02-23
Title: Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937

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}
EN                                                                                 EN
 ---pagebreak---                                    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 economy1 in line with the European Green
   Deal2 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 diligence3, 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.4 In their Joint Declaration on EU Legislative Priorities for 20225, the European
   Parliament, the Council of the European Union and the European Commission have
   1
           Regulation (EU) 2021/1119 of the European Parliament and of the Council of 30 June 2021 establishing
           the framework for achieving climate neutrality and amending Regulations (EC) No 401/2009 and (EU)
           2018/1999 (‘European Climate Law’), which also includes a binding target to cut domestic net
           greenhouse gas emissions by at least 55% compared to 1990 levels by 2030.
   2
           Communication from the Commission on the European Green Deal, COM/2019/640 final.
   3
           So far France (Loi relative au devoir de vigilance, 2017) and Germany (Sorgfaltspflichtengesetz, 2021)
           have introduced a horizontal due diligence law, other Member States (Belgium, the Netherlands,
           Luxembourg and Sweden) are planning to do so in the near future, and the Netherlands has introduced a
           more targeted law on child labour (Wet zorgplicht kinderarbeidm 2019).
   4
           European Parliament resolution of 10 March 2021 with recommendations to the Commission on
           corporate due diligence and corporate accountability (2020/2129(INL)); Council Conclusions on
           Human Rights and Decent Work in Global Supply Chains of 1 December 2020 (13512/20).
   5
           Joint declaration of the European Parliament, the Council of the European Union and the European
           Commission on EU Legislative Priorities for 2022 (OJ C 514I, 21.12.2021, p. 1).
EN                                                        1                                                       EN
 ---pagebreak---    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, 6 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.7 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.8 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.
   6
           United Nations’ “Guiding Principles on Business and Human Rights: Implementing the United Nations
           ‘Protect,       Respect         and       Remedy’       Framework”       (2011),       available       at
           https://www.ohchr.org/Documents/Publications/GuidingPrinciplesBusinessHR_EN.pdf.
           OECD        Guidelines      for     Multinational   Enterprises    (2011    update),    available     at:
           https://doi.org/10.1787/9789264115415-en, with set of recommendations on responsible business
           conduct, as well as specific OECD Due Diligence Guidance for Responsible Business Conduct (2018)
           and OECD sectoral guidance, available at: https://mneguidelines.oecd.org/mneguidelines/.
   7
           See Impact Assessment accompanying this proposal, p. 15, 23.
   8
           The Study on due diligence, European Commission, Directorate-General for Justice and Consumers,
           Smit, L., Bright, C., et al., Study on due diligence requirements through the supply chain: final report,
           Publications Office, 2020, https://data.europa.eu/doi/10.2838/39830, p. 221, indicates that corporate
           risk assessment processes continue to focus on the materiality of the risks to the company, despite
           international guidance (UNGPs, OECD) which clarifies that the relevant risks for due diligence must
           extend beyond the risks of the company to those who are affected (the rights-holders). Negative
           corporate impacts as a consequence of globalisation and failure to undertake due diligence, ranging
           from environmental disasters (see at https://www.business-humanrights.org/en/blog/brumadinho-dam-
           collapse-lessons-in-corporate-due-diligence-and-remedy-for-harm-done/) and land grabbing (see at
           https://www.europarl.europa.eu/RegData/etudes/STUD/2016/578007/EXPO_STU(2016)578007_EN.p
           df)          to     serious      violations    of    labour     and    human      rights,     (see     at
           https://www.europarl.europa.eu/RegData/etudes/BRIE/2014/538222/EPRS_BRI(2014)538222_REV1_
           EN.pdf) are well documented.
EN                                                           2                                                       EN
 ---pagebreak---    In the last years, emerging legal frameworks on corporate due diligence in Member States 9
   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
   At EU level, sustainable corporate governance has been mainly fostered indirectly by
   imposing reporting requirements in the Non-Financial Reporting Directive (NFRD)10 on
   9
           See footnote 3.
   10
            Directive 2014/95/EU amending Directive 2013/34/EU as regards disclosure of non-financial and
            diversity information by certain large undertakings and groups (OJ L 330, 15.11.2014, p. 1–9). The
            NFRD is therefore an amendment of the Accounting Directive, i.e. of Directive 2013/34/EU on the
            annual financial statements, consolidated financial statements and related reports of certain types of
            undertakings, amending Directive 2006/43/EC and repealing Council Directives 78/660/EEC and
            83/349/EEC (OJ L 182, 29.6.2013).
EN                                                        3                                                        EN
 ---pagebreak---    approximately 12 000 companies11 concerning environmental, social and human rights related
   risks, impacts, measures (including due diligence) and policies.12 The NFRD had some
   positive impact on improvement of responsible business operation, but has not resulted in the
   majority of companies taking sufficient account of their adverse impacts in their value
   chains.13
   The Commission’s recent proposal for a Corporate Sustainability Reporting Directive
   (CSRD), revising the NFRD14, would extend the scope of the companies covered to all large
   and all listed companies15, require the audit (assurance) of reported information and
   strengthen the standardisation of reported information by empowering the Commission to
   adopt sustainability reporting standards.16 This Directive will complement the current NFRD
   and its proposed amendments (proposal for CSRD) by adding a substantive corporate duty for
   some companies to perform due diligence to identify, prevent, mitigate and account for
   external harm resulting from adverse human rights and environmental impacts in the
   company’s own operations, its subsidiaries and in the value chain. Of particular relevance of
   the proposal on CSRD is that it mandates disclosure of plans of an undertaking to ensure that
   its 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. The two
   initiatives are closely interrelated and will lead to synergies. First, a proper information
   collection for reporting purposes under the proposed CSRD requires setting up processes,
   which is closely related to identifying adverse impacts in accordance with the due diligence
   duty set up by this Directive. Second, the CSRD will cover the last step of the due diligence
   duty, namely the reporting stage, for companies that are also covered by the CSRD. Third,
   this Directive will set obligations for companies to have in place the plan ensuring 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 on which the
   11
            Large public-interest entities that have more than 500 employees (and the balance sheet total or net
            turnover of which exceeds the Accounting Directive’s threshold for large enterprises), including listed
            companies, banks and insurance companies. See CEPS’ Study on the Non-Financial Reporting
            Directive, prepared for the European Commission to support the review of the NFRD, November 2020,
            available       at     https://op.europa.eu/en/publication-detail/-/publication/1ef8fe0e-98e1-11eb-b85c-
            01aa75ed71a1/language-en.
   12
            See also some provisions of SRD II, i.e. Directive (EU) 2017/828 amending Directive 2007/36/EC as
            regards the encouragement of long-term shareholder engagement (OJ L 132, 20.5.2017, p. 1–25).
   13
            The Impact Assessment accompanying the Commission’s proposal for the Corporate Sustainability
            Reporting Directive (SWD/2021/150 final) and the CEPS’ Study on the Non-Financial Reporting
            Directive (section 2) found a limited change in corporate policies as a result of the NFRD, consistent
            with the perception of main stakeholders who could not identify a clear pattern of change in corporate
            behaviour driven by these reporting rules.
   14
            Proposal for a Directive of the European Parliament and of the Council amending Directive
            2013/34/EU, Directive 2004/109/EC, Directive 2006/43/EC and Regulation (EU) No 537/2014, as
            regards corporate sustainability reporting (COM/2021/189 final).
   15
            The sustainability reporting obligation would apply to all large companies as defined by the Accounting
            Directive (which the CSRD would amend) and, as of 2026, to companies (including non-EU companies
            but excluding all micro enterprises) listed on EU regulated markets.
   16
            The elaboration of draft sustainability reporting standards started in parallel with the legislative process
            in a project task force established by the European Financial Reporting Advisory Group (EFRAG) at
            the request of the Commission.
EN                                                          4                                                            EN
 ---pagebreak---    CSRD requires to report. Thus, this Directive will lead to companies’ reporting being more
   complete and effective. Therefore, complementarity will increase effectiveness of both
   measures and drive corporate behavioural change for those companies.
   This Directive will also underpin the Sustainable Finance Disclosure Regulation17 (SFDR)
   that has recently entered into force and applies to financial market participants (such as
   investment fund and portfolio managers, insurance undertakings selling insurance-based
   investment products and undertakings providing various pension products) and financial
   advisers. Under the SFDR, these undertakings are required to publish, among others, a
   statement on their due diligence policies with respect to principal adverse impacts of their
   investment decisions on sustainability factors on a comply or explain basis. At the same time,
   for companies with more than 500 employees the publication of such a statement is
   mandatory, and the Commission is empowered to adopt regulatory technical standards on the
   sustainability indicators in relation to the various types of adverse impacts.18
   Similarly, this Directive will complement the recent Taxonomy Regulation19, a transparency
   tool that facilitates decisions on investment and helps tackle greenwashing by providing a
   categorisation of environmentally sustainable investments in economic activities that also
   meet a minimum social safeguard.20 The reporting covers also minimum safeguards
   established in Article 18 of the Taxonomy Regulation that refer to procedures companies
   should implement to ensure the alignment with the OECD Guidelines for Multinational
   Enterprises and the UN Guiding Principles on Business and Human Rights, including the
   principles and rights set out in the eight fundamental conventions identified in the Declaration
   of the International Labour Organization on Fundamental Principles and Rights at Work and
   the International Bill of Human Rights when carrying out an economic activity categorized as
   “sustainable”. Like NFRD and the proposal for CSRD, the Taxonomy Regulation does not
   impose substantive duties on companies other than public reporting requirements, and
   investors can use such information when allocating capital to companies. By requiring
   companies to identify their adverse risks in all their operations and value chains, this Directive
   may help in providing more detailed information to the investors. It therefore complements
   the Taxonomy Regulation as it has the potential to further help investors to allocate capital to
   responsible and sustainable companies. Moreover, the Taxonomy Regulation (as providing a
   common language for sustainable economic activities for investment purposes) can serve as a
   guiding tool for companies to attract sustainable financing for their corrective action plans and
   roadmaps.
   17
           Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on
           sustainability‐related disclosures in the financial services sector (OJ L 317, 9.12.2019, p. 1–16).
   18
           The three European Supervisory Authorities published on 4 February 2021 their Final Report (available
           at https://www.esma.europa.eu/press-news/esma-news/three-european-supervisory-authorities-publish-
           final-report-and-draft-rts) to the Commission, including the draft regulatory technical standards on
           disclosures under the SFDR.
   19
           Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the
           establishment of a framework to facilitate sustainable investment, and amending Regulation (EU)
           2019/2088 (OJ L 198, 22.6.2020, p. 13–43).
   20
           The Taxonomy will be developed gradually. Minimum social safeguards apply to all Taxonomy-
           eligible investments.
EN                                                          5                                                    EN
 ---pagebreak---    This Directive will complement Directive 2011/36/EU on preventing and combating
   trafficking in human beings and protecting its victims21, which constitutes a comprehensive
   legal framework to effectively fight all forms of exploitation in the Union by natural and legal
   persons, in particular forced labour, sexual exploitation, as well as begging, slavery or
   practices similar to slavery, servitude, or the exploitation of criminal activities, or the removal
   of organs. It also establishes the liability of legal persons for the offences referred to in that
   Directive committed for their benefit by any person who has a leading position within the
   legal person or the commission of the offence was possible due to the lack of supervision or
   control. Directive 2011/36/EU also provides for sanctions on the legal person held liable.
   Furthermore, this Directive will complement the Employers’ Sanctions Directive22, which
   prohibits the employment of irregularly staying third-country nationals, including victims of
   trafficking in human beings. The Employers’ Sanctions Directive lays down minimum
   standards on sanctions and other measures to be applied in the Member States against
   employers who infringe upon the Directive.
   This Directive will also complement existing or planned sectoral and product-related value
   chain due diligence instruments at EU level due to its cross-sectoral scope and broad range of
   sustainability impacts covered:
   The so-called Conflict Minerals Regulation23 applies to four specific minerals and metals. It
   requires EU companies in the supply chain to ensure they import tin, tungsten, tantalum and
   gold from responsible and conflict-free sources only and put in place more specific
   mechanisms for conducting due diligence, e.g. an independent third-party audit of supply
   chain due diligence. The due diligence provisions of this Directive address also environmental
   adverse impacts and will apply to value chains of additional minerals that are not covered in
   the Conflict Minerals Regulation but produce human rights, climate and environmental
   adverse impacts.
   The Commission’s proposal for a Regulation on deforestation-free supply chains24 focuses on
   certain commodities and product supply chains. It has a very specific objective, namely to
   reduce the impact of EU consumption and production on deforestation and forest degradation
   worldwide. Its requirements will, in some areas, be more prescriptive compared to the general
   due diligence duties under this Directive. It also includes a prohibition of placing on the
   market certain commodities and derived products if the requirement of “legal” and
   21
           Directive 2011/36/EU of the European Parliament and of the Council of 5 April 2011 on preventing and
           combating trafficking in human beings and protecting its victims, and replacing Council Framework
           Decision 2002/629/JHA (OJ L 101, 15 April 2011, p.1).
   22
           Directive 2009/52/EC of the European Parliament and of the Council of 18 June 2009 providing for
           minimum standards on sanctions and measures against employers of illegally staying third-country
           nationals (OJ L 168, 30. June 2009).
   23
           Regulation (EU) 2017/821 of the European Parliament and of the Council of 17 May 2017 laying down
           supply chain due diligence obligations for Union importers of tin, tantalum and tungsten, their ores, and
           gold originating from conflict-affected and high-risk areas (OJ L 130, 19.5.2017, p. 1–20).
   24
           Proposal for a Regulation of the European Parliament and of the Council on the making available on the
           Union market as well as export from the Union of certain commodities and products associated with
           deforestation and forest degradation and repealing Regulation (EU) No 995/2010 (COM(2021) 706
           final).
EN                                                        6                                                          EN
 ---pagebreak---    “deforestation free” cannot be ascertained through due diligence. This prohibition will apply
   to all operators placing the relevant products on the Union market, including EU and non-EU
   companies, irrespective of their legal form and size. Therefore, while the overall objectives of
   the two initiatives are mutually supportive, their specific objectives are different. This
   Directive will complement the Regulation on deforestation-free products by introducing a
   value chain due diligence related to activities that are not covered by the Regulation on
   deforestation-free products but might be directly or indirectly leading to deforestation.
   The Commission’s proposal for a new Batteries Regulation25 has the specific objectives of
   reducing environmental, climate and social impacts throughout all stages of the battery life
   cycle, strengthening the functioning of the internal market, and ensuring a level playing field
   through a common set of rules. It requires economic operators placing industrial or electric
   vehicle batteries (including incorporated in vehicles) larger than 2 kWh on the Union market
   to establish supply chain due diligence policies. It focusses on those raw materials of which a
   significant amount of the global production goes into battery manufacturing and that may
   pose social or environmental adverse impacts (cobalt, natural graphite, lithium, and nickel).
   The economic operators must submit compliance documentation for third-party verification
   by notified bodies and are subject to checks by the national market surveillance authorities.
   This Directive will complement the Batteries Regulation by introducing a value chain due
   diligence related to raw materials that are not covered in that Regulation but without requiring
   certification for placing the products on the EU market.
   The future Sustainable Products Initiative (SPI) aims to revise the current Ecodesign
   Directive26 and concerns more broadly the sustainability of products placed on the EU market
   and the transparency of related information.
   This proposal will play an essential role in tackling the use of forced labour the global value
   chains. As announced in the Communication on decent work worldwide27 the Commission is
   preparing a new legislative proposal that will effectively prohibit the placing on the Union
   market of products made by forced labour, including forced child labour. The new initiative
   will cover both domestic and imported products and combine a ban with a robust, risk-based
   enforcement framework. The new instrument will build on international standards and
   complement horizontal and sectoral initiatives, in particular the due diligence obligations as
   laid down in this proposal.
   This Directive is without prejudice to the application of other requirements in the areas of
   human rights, protection of the environment and climate change under other Union legislative
   acts. If the provisions of this Directive conflict with a provision of another Union legislative
   act pursuing the same objectives and providing for more extensive or more specific
   25
            Proposal for a Regulation of the European Parliament and of the Council concerning batteries and waste
            batteries, repealing Directive 2006/66/EC and amending Regulation (EU) No 2019/1020
            (COM/2020/798 final).
   26
            Directive 2009/125/EC of the European Parliament and of the Council of 21 October 2009 establishing
            a framework for the setting of ecodesign requirements for energy-related products (OJ L 285,
            31.10.2009, p. 10).
   27
            Communication from the Commission to the European Parliament, the Council and the European
            Economic and Social Committee on decent work worldwide for a global just transition and a
            sustainable recovery, COM(2022) 66 final.
EN                                                        7                                                        EN
 ---pagebreak---    obligations, the provisions of the other Union legislative act should prevail to the extent of the
   conflict and should apply to those specific obligations
   Consistency with other Union policies
   This Directive is important to fulfil objectives of various existing and planned Union
   measures in the field of the human rights, including labour rights, and environment.
   As part of the European Green Deal, the Commission has listed an initiative on sustainable
   corporate governance among the deliverables of the Action Plan on a Circular Economy, the
   Biodiversity strategy, the Farm to Fork strategy, the Chemicals strategy, Updating the 2020
   New Industrial Strategy: Building a stronger Single Market for Europe’s recovery, and the
   Strategy for Financing the Transition to a Sustainable Economy.
   EU environmental law introduces various environmental requirements for companies,
   Member States, or defines goals for the Union28. However, it generally does not apply to
   value chains outside the Union where up to 80-90% of the environmental harm of EU
   production may occur29. The Environmental Liability Directive30 establishes a framework for
   environmental liability with regard to prevention and remedying environmental damage based
   on the “polluter pays” principle for companies’ own operations. It does not cover companies’
   value chains. The civil liability related to adverse environmental impacts of this Directive will
   be complementary to the Environmental Liability Directive.
   This Directive will complement EU climate legislation, including the European Climate Law,
   setting in stone the Union’s climate ambition, with the intermediate target of reducing net
   greenhouse gas emissions by at least 55% by 2030, to set Europe on a responsible path to
   becoming climate-neutral by 2050. Most specifically, this Directive will complement the “Fit
   for 55” Package31 and its various key actions, such as setting more ambitious energy
   efficiency and renewable energy targets for Member States by 2030 or the upgrading of the
   EU Emissions Trading System32, which needs to be underpinned by a wider transformation of
   production processes to achieve climate neutrality by 2050 across the economy and
   throughout value chains. The “Fit for 55” Package will only indirectly apply to some non-EU
   28
           For example it introduces limitations on the release of some pollutants, defines EU goals (such as the
           European Climate Law) or sets targets for Member States (such as for energy efficiency), defines
           obligations for Member States (e.g. on protection of natural habitats), establishes minimum content in
           authorisation procedures for some economic activities (e.g. Environmental Impact Assessment), etc.
   29
           See e.g. Jungmichel, Norbert, Christina Schampel and Daniel Weiss (2017): Atlas on Environmental
           Impacts - Supply Chains – Environmental Impacts and Hot Spots in the Supply Chain, Adephi/Systain,
           available at https://www.adelphi.de/en/system/files/mediathek/bilder/Umweltatlas%20Lieferkette%20-
           %20adelphi-Systain-englisch.pdf.
   30
           Directive 2004/35/CE of the European Parliament and of the Council of 21 April 2004 on
           environmental liability with regard to the prevention and remedying of environmental damage (OJ L
           143, 30.4.2004, p. 56–75).
   31
           The “Fit for 55” Package is a series of proposals adopted by the Commission on 14 July 2021 aiming to
           make the EU's climate, energy, land use, transport and taxation policies fit for reducing net greenhouse
           gas emissions by at least 55% by 2030, compared to 1990 levels.
   32
           Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC
           establishing a system for greenhouse gas emission allowance trading within the Union, Decision (EU)
           2015/1814 concerning the establishment and operation of a market stability reserve for the Union
           greenhouse gas emission trading scheme and Regulation (EU) 2015/757 (COM/2021/551 final).
EN                                                        8                                                         EN
 ---pagebreak---    value chains of EU companies through the Carbon Border Adjustment Mechanism (CBAM)33
   which aims at preventing “carbon leakage”34 by imposing a carbon adjustment price for
   selected imported products not subject to the carbon price deriving from the EU Emission
   Trading System.
   Existing EU health and safety, and fundamental rights legislation targets very specific adverse
   impacts (such as violations of the right to privacy and data protection, discrimination, specific
   health aspects related to dangerous substances, threats to health and safety of workers,
   violations of rights of the child, etc.) within the Union35 but does not apply in all cases to
   companies’ value chains outside the Union.
   The initiative is in line with the EU Action Plan on Human Rights and Democracy 2020-
   202436, which includes a commitment for the Union and Member States to strengthen their
   engagement to actively promote the implementation of international standards on responsible
   business conduct such as the UN Guiding Principles on Business and Human Rights and the
   OECD Guidelines on Multinational Enterprises and Due Diligence. It is consistent with the
   EU Strategy on the Rights of the Child37 which commits the Union to a zero tolerance
   approach against child labour and to ensure that supply chains of EU companies are free of
   child labour. In the EU Strategy on Combatting Trafficking in Human Beings 2021- 202538
   the Commission committed to put forward a legislative proposal on sustainable corporate
   governance to foster long-term sustainable and responsible corporate behaviour. The initiative
   also contributes to the goals of the Commission’s Communication on decent work
   worldwide39, which is adopted together with this proposal.
   This Directive will contribute to the European Pillar of Social Rights as both promote rights
   such as fair working conditions40. 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
   33
           Proposal for a Regulation of the European Parliament and of the Council establishing a carbon border
           adjustment mechanism (COM(2021) 564 final).
   34
           “Carbon leakage” resulting from the increased EU climate ambition could lead to increase total global
           emissions. The CBAM carbon adjustment price on selected types of imported products in the iron steel,
           aluminium, cement, electricity, fertilizers sectors would level the playing field between EU and
           imported products.
   35
           Under EU law, every EU worker has certain minimum rights relating to protection against
           discrimination based on sex, race, religion, age, disability and sexual orientation, labour law (part-time
           work, fixed-term contracts, working hours, informing and consulting employees). A summary is
           available                                          at                                          https://eur-
           lex.europa.eu/summary/chapter/employment_and_social_policy.html?root_default=SUM_1_CODED%
           3D17&locale=en.
   36
           Joint Communication to the European Parliament and the Council on the EU Action Plan on Human
           Rights and Democracy 2020-2024 (JOIN/2020/5 final).
   37
           Communication from the Commission on the EU strategy on the rights of the child (COM/2021/142
           final).
   38
           Communication from the Commission on the EU Strategy on Combatting Trafficking in Human Beings
           2021- 2025 (COM(2021) 171 final).
   39
           (COM(2022)66 final).
   40
           E.g. Pillar 10 of European Pillar of Social Rights on healthy, safe and well-adapted work environment
           and Article 7(b) International Covenant on Economic, Social and Cultural Rights (see annex of this
           Directive) on just and favourable conditions at work including safe and healthy working conditions.
EN                                                         9                                                           EN
 ---pagebreak---    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 establishment41. 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.42
   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,43 while others are in the process of legislating or considering action44. Also, an
   increasing number of Member States have recently been regulating the matter by requiring
   directors to take into account the company’s external impacts45, prioritize the interests of
   41
           It is recalled that as regards corporate governance measures, the EU has already legislated based on the
           same legal basis, e.g. Shareholders Rights Directives I and II.
   42
           See e.g. Case C 380/03 Germany v Parliament and Council [2006] ECR I-11573, paragraph 38 and the
           case-law cited.
   43
           See footnote 3. As regards EEA countries, Norway has adopted due diligence legislation.
   44
           Austria, Belgium, Denmark, Finland, Italy, Luxembourg, the Netherlands (regarding broader legislation
           on responsible business conduct). There are civil society campaigns in favour of introducing due
           diligence legislation ongoing in Ireland, Spain and Sweden. Annex 8 of the Impact Assessment
           accompanying this proposal provides a detailed overview on Member State/EEA laws and initiatives.
   45
           French Loi Pacte.
EN                                                         10                                                       EN
 ---pagebreak---    stakeholders in their decisions46, or adopt a policy statement on the company’s human rights
   strategy47. 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.48 Personal scope, substantive due diligence requirements, enforcement regimes and
   related directors’ duties diverge and may do so even more in the future.49 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.50
   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.
   46
           For example the Netherlands.
   47
           See the German Sorgfaltspflichtengesetz).
   48
           For instance, the Dutch law referred to above sets up horizontal mandatory due diligence for child
           labour concerns through the whole value chain. In Austria, a political party referred a draft bill on social
           responsibility regarding forced and child labour in the garment sector.
   49
           The French Loi relative au devoir de vigilance and the German Sorgfaltspflichtengesetz differ
           considerably in terms of personal scope material requirements and enforcement regime.
   50
           For instance, pursuant to the German Sorgfaltspflichtengesetz, any company with a branch office and at
           least 3000 employees in Germany (1000 as from 2024) fall within the scope of the law.
EN                                                       11                                                             EN
 ---pagebreak---    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.51 A number of companies have been brought before courts for causing
   51
            The French Loi relative au devoir de vigilance includes a provision on civil liability. The German
            Sorgfaltspflichtengesetz clarifies that a violation of an obligation under the law does not give rise to any
            civil liability while general liability rules remain unaffected. Moreover national civil liability
            legislations are not harmonized.
EN                                                           12                                                          EN
 ---pagebreak---    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 UNFCCC52’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%53) 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 today54 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 diligence55, while others are in the process of legislating or
   52
            United Nations Framework Convention on Climate Change
   53
            This number comes from the Impact Assessment of the Shareholders Rights Directive II.
   54
            E.g. food producer Danone has recently been forced to cut costs by investors on grounds of lack of
            short-term profitability, see article Can Anglo-Saxon activist investors whip Danone into shape?,
            available at https://www.economist.com/business/2021/02/20/can-anglo-saxon-activist-investors-whip-
            danone-into-shape.
   55
            See footnote 3.
EN                                                      13                                                      EN
 ---pagebreak---    considering action56. 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 level57.
   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
   56
            See footnote 44.
   57
            In 2014, the UN Human Rights Council decided to establish an open-ended intergovernmental working
            group (OEIGWG) on transnational corporations and other business enterprises with respect to human
            rights, whose mandate shall be to elaborate an international legally binding instrument (LBI) to
            regulate, in international human rights law, the activities of transnational corporations and other
            business enterprises. In 2021, the OEIGWG released a third revised draft LBI on business activities and
            human rights, including due diligence measures and corporate liability for human rights abuses.
EN                                                       14                                                         EN
 ---pagebreak---    large companies58 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 employees59 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 guidance60. 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
   58
           Large limited liability companies with more than 500 employees and a net turnover of more than EUR
           150 million.
   59
           Large limited liability companies with more than 250 employees and a net turnover of more than EUR
           40 million but not simultaneously exceeding both the 500 employee and the net turnover EUR
           150 million net turnover thresholds, as well as third-country companies of a comparable legal form with
           a net EU turnover of EUR 40 to 150 million.
   60
           The OECD developed such sectoral guidance in order to promote the effective observance of OECD
           Guidelines on Multinational Enterprises. See the list of sectoral guidance documents at:
           http://mneguidelines.oecd.org/sectors/.
EN                                                        15                                                       EN
 ---pagebreak---               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 employee61, 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 companies62, based on the
              estimations of the Commission, it will only cover about 4 000 third-country
              companies63. 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
   61
            For the Union see for example Article 5 of the Commission Recommendation of 6 May 2003
            concerning the definition of micro, small and medium-sized companies (2003/361/EC) (OJ L 124,
            20.5.2003, p. 36).
   62
            In group 1: 9 400 companies, in group 2: 3 400 companies.
   63
            In group 1: 2 600 companies, in group 2: 1 400 companies. The methodology used for calculating the
            number of third-country companies is explained in the accompanying Staff Working Document.
EN                                                       16                                                    EN
 ---pagebreak---    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
EN                                                   17                                               EN
 ---pagebreak---    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 consultation64, 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.65 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 approach66. 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-
   64
           Summary of the open public consultation for the initiative on sustainable corporate governance,
           available at https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12548-Sustainable-
           corporate-governance/public-consultation_en.
   65
           For instance, in response to the open public consultation, NGOs supported the need for action with
           95.9%, companies with 68.4% (large companies with 75.5%, SMEs with 58.7 %) and business
           associations with 59.6 %.
   66
           While 97.2% of NGOs preferred a horizontal approach, overall companies did so with 86.8%, including
           SMEs (81.8%), as well as business association (85.3%). This is true also for Member States
           respondents.
EN                                                        18                                                         EN
 ---pagebreak---    country companies which are not established in the EU but carry out activities of a certain
   scale in the EU67.
   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.68
   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 69 and for
   a study on directors’ duties and sustainable corporate governance70. 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
   67
           97 % of respondents agreed to this statement (NGOs 96.1%, business associations 96.5%, companies
           93.8%, including SMEs 86.4%). All Member State respondents agree with this statement as well.
   68
           It was followed by the option of judicial enforcement with liability (49%) and supervision by competent
           national authorities based on complaints about non-compliance with effective sanctions (44%).
   69
           See reference in footnote 8.
   70
           European Commission, Directorate-General for Justice and Consumers, Study on directors’ duties and
           sustainable      corporate     governance:       final    report,      Publications    Office,   2020,
           https://data.europa.eu/doi/10.2838/472901. https://data.europa.eu/doi/10.2838/472901.
EN                                                        19                                                       EN
 ---pagebreak---    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 202171, 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
   71
            SEC(2022)95
EN                                                 20                                                 EN
 ---pagebreak---    –         the urgency of 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
EN                                                  21                                                EN
 ---pagebreak---    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 standards72, 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:
   72
           See footnote 6.
EN                                                  22                                                 EN
 ---pagebreak---    –        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
EN                                                23                                                EN
 ---pagebreak---    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).
EN                                                 24                                                  EN
 ---pagebreak---    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
EN                                                   25                                               EN
 ---pagebreak---    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).
EN                                                  26                                                 EN
 ---pagebreak---                                                            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 Committee73,
   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 Deal74. These objectives require the
           involvement not only of the public authorities but also of private actors, in particular
           companies.
   73
           OJ C , , p. .
   74
           Communication from the Commission to the European Parliament the European Council, the Council, the
           European Economic and Social Committee and the Committee of the Region “The European Green Deal”
           (COM/2019/640 final).
EN                                                  27                                                       EN
 ---pagebreak---    (3) In its Communication on a Strong Social Europe for Just Transition75, 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
       worldwide76.
   (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 Union77, as well as national78 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 Rights79 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 Enterprises80 which extended the application of due
       diligence to environmental and governance topics. The OECD Guidance on Responsible
   75
       Communication from the Commission to the European Parliament, the Council, the European Economic
       and Social Committee and the Committee of the Regions – A Strong Social Europe for Just Transitions
       (COM/2020/14 final).
   76
       Communication from the Commission to the European Parliament, the Council and the European
       Economic and Social Committee on decent work worldwide for a global just transition and a sustainable
       recovery, COM(2022) 66 final.
   77
       ‘Enterprise Models and the EU agenda’, CEPS Policy Insights, No PI2021-02/ January 2021.
   78
       E.g. https://www.economie.gouv.fr/entreprises/societe-mission
   79
       United Nations’ “Guiding Principles on Business and Human Rights: Implementing the United Nations
       ‘Protect,      Respect        and       Remedy’        Framework”,       2011,       available     at
       https://www.ohchr.org/documents/publications/guidingprinciplesbusinesshr_en.pdf.
   80
       OECD Guidelines for Multinational Enterprises, 2011 updated edition, available at
       http://mneguidelines.oecd.org/guidelines/.
EN                                                 28                                                      EN
 ---pagebreak---        Business Conduct and sectoral guidance81 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. 82
   (7) The United Nations’ Sustainable Development Goals83, 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
       Agreement84 and the recent Glasgow Climate Pact85, 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 Law86, 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 Plan87 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 Deal88
   81
       OECD Guidance on Responsible Business Conduct, 2018, and sector-specific guidance, available at
       https://www.oecd.org/investment/due-diligence-guidance-for-responsible-business-conduct.htm.
   82
       The International Labour Organisation’s “Tripartite Declaration of Principles concerning Multinational
       Enterprises        and       Social        Policy,     Fifth    Edition,       2017,        available        at:
       https://www.ilo.org/empent/Publications/WCMS_094386/lang--en/index.htm.
   83
       https://www.un.org/ga/search/view_doc.asp?symbol=A/RES/70/1&Lang=E.
   84
       https://unfccc.int/files/essential_background/convention/application/pdf/english_paris_agreement.pdf.
   85
       Glasgow Climate Pact, adopted on 13 November 2021 at COP26 in Glasgow,
       https://unfccc.int/sites/default/files/resource/cma2021_L16_adv.pdf.https://unfccc.int/sites/default/files/reso
       urce/cma2021_L16_adv.pdf.
   86
       Regulation (EU) 2021/1119 of the European Parliament and of the Council of 30 June 2021 establishing the
       framework for achieving climate neutrality and amending Regulations (EC) No 401/2009 and (EU)
       2018/1999 (‘European Climate Law’) PE/27/2021/REV/1 (OJ L 243, 9.7.2021, p. 1).
   87
       SWD/2020/176 final.
   88
       COM/2019/640 final.
EN                                                      29                                                           EN
 ---pagebreak---         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 Europe89
        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)90,
        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 Economy91, the Biodiversity strategy92, the Farm to Fork
        strategy93 and the Chemicals strategy94 and Updating the 2020 New Industrial Strategy:
        Building a stronger Single Market for Europe’s recovery95, Industry 5.096 and the
        European Pillar of Social Rights Action Plan97 and the 2021 Trade Policy Review98 list
        an initiative on sustainable corporate governance among their elements.
   89
        Communication from the Commission to the European Parliament, the Council, the European Economic
        and Social Committee and the Committee of the Regions on Forging a climate-resilient Europe – the new
        EU Strategy on Adaptation to Climate Change (COM/2021/82 final), available at https://eur-
        lex.europa.eu/legal-content/EN/TXT/?uri=COM:2021:82:FIN.
   90
        OJ C […], […], p. […].
   91
        Communication from the Commission to the European Parliament, the Council, the European Economic
        and Social Committee and the Committee of the Regions on A new Circular Economy Action Plan For a
        cleaner and more competitive Europe (COM/2020/98 final).
   92
        Communication from the Commission to the European Parliament, the Council, the European Economic
        and Social Committee and the Committee of the Regions on the EU Biodiversity Strategy for 2030
        Bringing nature back into our lives (COM/2020/380 final).
   93
        Communication from the Commission to the European Parliament, the Council, the European Economic
        and Social Committee and the Committee of the Regions on A Farm to Fork Strategy for a fair, healthy and
        environmentally-friendly food system (COM/2020/381 final).
   94
        Communication from the Commission to the European Parliament, the Council, the European Economic
        and Social Committee and the Committee of the Regions on the Chemicals Strategy for Sustainability
        Towards a Toxic-Free Environment (COM/2020/667 final).
   95
        Communication from the Commission to the European Parliament, the Council, the European Economic
        and Social Committee and the Committee of the Regions on Updating the 2020 New Industrial Strategy:
        Building a stronger Single Market for Europe’s recovery (COM/2021/350 final).
   96
        Industry     5.0;   https://ec.europa.eu/info/research-and-innovation/research-area/industrial-research-and-
        innovation/industry-50_en
   97
        https://op.europa.eu/webpub/empl/european-pillar-of-social-rights/en/
EN                                                     30                                                          EN
 ---pagebreak---    (12) This Directive is in coherence with the EU Action Plan on Human Rights and Democracy
        2020-202499. 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 obligation100. 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.101 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 2022102, 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
   98
        Communication from the Commission to the European Parliament, the Council, the European Economic
        and Social Committee and the Committee of the Regions, Trade Policy Review – An Open, Sustainable
        and Assertive Trade Policy (COM/2021/66/final).
   99
        Joint Communication to the European Parliament and the Council on the EU Action Plan on Human Rights
        and Democracy 2020-2024 (JOIN/2020/5 final).
   100
        European Parliament resolution of 10 March 2021 with recommendations to the Commission on corporate
        due diligence and corporate accountability (2020/2129(INL)), P9_TA(2021)0073, available at
        https://oeil.secure.europarl.europa.eu/oeil/popups/ficheprocedure.do?lang=en&reference=2020/2129(INL).
   101
        Council Conclusions on Human Rights and Decent Work in Global Supply Chains, 1 December 2020
        (13512/20).
   102
        Joint declaration of the European Parliament, the Council of the European Union and the European
        Commission          on       EU        Legislative        Priorities    for  2022,      available    at
        https://ec.europa.eu/info/sites/default/files/joint_declaration_2022.pdf.
EN                                                        31                                                 EN
 ---pagebreak---         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.
EN                                              32                                                  EN
 ---pagebreak---    (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 Council103, 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-
   103
        Directive (EU) 2018/957 of the European Parliament and of the Council of 28 June 2018 amending
        Directive 96/71/EC concerning the posting of workers in the framework of the provision of services (OJ L
        173, 9.7.2018, p. 16).
EN                                                  33                                                         EN
 ---pagebreak---         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.
EN                                             34                                                   EN
 ---pagebreak---    (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 Framework104 and the United Nations
        Guiding Principles Interpretative Guide105. 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
   104
        https://www.ungpreporting.org/wp-content/uploads/UNGPReportingFramework_withguidance2017.pdf.
   105
        https://www.ohchr.org/Documents/Issues/Business/RtRInterpretativeGuide.pdf.https://www.ohchr.org/Doc
        uments/Issues/Business/RtRInterpretativeGuide.pdf.
EN                                                  35                                                     EN
 ---pagebreak---         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.
EN                                                36                                                 EN
 ---pagebreak---    (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
EN                                               37                                                  EN
 ---pagebreak---         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
EN                                              38                                                  EN
 ---pagebreak---         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
EN                                               39                                                EN
 ---pagebreak---         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 customary in the sphere of international
        business.
   (45) In order to facilitate companies’ compliance with their due diligence requirements
        through their value chain and limiting shifting compliance burden on SME business
        partners, the Commission should provide guidance on model contractual clauses.
   (46) In order to provide support and practical tools to companies or to Member State
        authorities on how companies should fulfil their due diligence obligations, the
        Commission, using relevant international guidelines and standards as a reference, and in
        consultation with Member States and stakeholders, the European Union Agency for
        Fundamental Rights, the European Environment Agency, and where appropriate with
        international bodies having expertise in due diligence, should have the possibility to issue
        guidelines, including for specific sectors or specific adverse impacts.
EN                                              40                                                 EN
 ---pagebreak---    (47) Although SMEs are not included in the scope of this Directive, they could be impacted by
        its provisions as contractors or subcontractors to the companies which are in the scope.
        The aim is nevertheless to mitigate financial or administrative burden on SMEs, many of
        which are already struggling in the context of the global economic and sanitary crisis. In
        order to support SMEs, Member States should set up and operate, either individually or
        jointly, dedicated websites, portals or platforms, and Member States could also
        financially support SMEs and help them build capacity. Such support should also be
        made accessible, and where necessary adapted and extended to upstream economic
        operators in third countries. Companies whose business partner is an SME, are also
        encouraged to support them to comply with due diligence measures, in case such
        requirements would jeopardize the viability of the SME and use fair, reasonable, non-
        discriminatory and proportionate requirements vis-a-vis the SMEs.
   (48) In order to complement Member State support to SMEs, the Commission may build on
        existing EU tools, projects and other actions helping with the due diligence
        implementation in the EU and in third countries. It may set up new support measures that
        provide help to companies, including SMEs on due diligence requirements, including an
        observatory for value chain transparency and the facilitation of joint stakeholder
        initiatives.
   (49) The Commission and Member States should continue to work in partnership with third
        countries to support upstream economic operators build the capacity to effectively
        prevent and mitigate adverse human rights and environmental impacts of their operations
        and business relationships, paying specific attention to the challenges faced by
        smallholders. They should use their neighbourhood, development and international
        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. This could include working with
        partner country governments, the local private sector and stakeholders on addressing the
        root causes of adverse human rights and environmental impacts.
   (50) In order to ensure that this Directive effectively contributes to combating climate change,
        companies should 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. In case climate is
        or should have been identified as a principal risk for or a principal impact of the
        company’s operations, the company should include emissions reduction objectives in its
        plan.
   (51) With a view to ensure that such emission reduction plan is properly implemented and
        embedded in the financial incentives of directors, the plan should be duly taken into
        account when setting directors’ variable remuneration, if variable remuneration is linked
        to the contribution of a director to the company’s business strategy and long-term
        interests and sustainability.
   (52) In order to allow for the effective oversight of and, where necessary, enforcement of this
        Directive in relation to those companies that are not governed by the law of a Member
        State, those companies should designate a sufficiently mandated authorised representative
        in the Union and provide information relating to their authorised representatives. It
EN                                              41                                                EN
 ---pagebreak---         should be possible for the authorised representative to also function as point of contact,
        provided the relevant requirements of this Directive are complied with.
   (53) In order to ensure the monitoring of the correct implementation of companies’ due
        diligence obligations and ensure the proper enforcement of this Directive, Member States
        should designate one or more national supervisory authorities. These supervisory
        authorities should be of a public nature, independent from the companies falling within
        the scope of this Directive or other market interests, and free of conflicts of interest. In
        accordance with national law, Member States should ensure appropriate financing of the
        competent authority. They should be entitled to carry out investigations, on their own
        initiative or based on complaints or substantiated concerns raised under this Directive.
        Where competent authorities under sectoral legislation exist, Member States could
        identify those as responsible for the application of this Directive in their areas of
        competence. They could designate authorities for the supervision of regulated financial
        undertaking also as supervisory authorities for the purposes of this Directive.
   (54) In order to ensure effective enforcement of national measures implementing this
        Directive, Member States should provide for dissuasive, proportionate and effective
        sanctions for infringements of those measures. In order for such sanction regime to be
        effective, administrative sanctions to be imposed by the national supervisory authorities
        should include pecuniary sanctions. Where the legal system of a Member State does not
        provide for administrative sanctions as foreseen in this Directive, the rules on
        administrative sanctions should be applied in such a way that the sanction is initiated by
        the competent supervisory authority and imposed by the judicial authority. Therefore, it is
        necessary that those Member States ensure that the application of the rules and sanctions
        has an equivalent effect to the administrative sanctions imposed by the competent
        supervisory authorities.
   (55) In order to ensure consistent application and enforcement of national provisions adopted
        pursuant to this Directive, national supervisory authorities should cooperate and
        coordinate their action. For that purpose a European Network of Supervisory Authorities
        should be set up by the Commission and the supervisory authorities should assist each
        other in performing their tasks and provide mutual assistance.
   (56) In order to ensure effective compensation of victims of adverse impacts, Member States
        should be required to lay down rules governing the civil liability of companies for
        damages arising due to its failure to comply with the due diligence process. The company
        should be liable for damages if they failed to comply with the obligations to prevent and
        mitigate potential adverse impacts or to bring actual impacts to an end and minimise their
        extent, and as a result of this failure an adverse impact that should have been identified,
        prevented, mitigated, brought to an end or its extent minimised through the appropriate
        measures occurred and led to damage.
   (57) As regards damages occurring at the level of established indirect business relationships,
        the liability of the company should be subject to specific conditions. The company should
        not be liable if it carried out specific due diligence measures. However, it should not be
        exonerated from liability through implementing such measures in case it was
        unreasonable 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
EN                                               42                                                EN
 ---pagebreak---         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.
   (58) The liability regime does not regulate who should prove that the company’s action was
        reasonably adequate under the circumstances of the case, therefore this question is left to
        national law.
   (59) As regards civil liability rules, the civil liability of a company for damages arising due to
        its failure to carry out adequate due diligence should be without prejudice to civil liability
        of its subsidiaries or the respective civil liability of direct and indirect business partners in
        the value chain. Also, the civil liability rules under this Directive should be without
        prejudice to Union or national rules on civil liability related to adverse human rights
        impacts or to adverse environmental impacts that provide for liability in situations not
        covered by or providing for stricter liability than this Directive.
   (60) As regards civil liability arising from adverse environmental impacts, persons who suffer
        damage can claim compensation under this Directive even where they overlap with
        human rights claims.
   (61) In order to ensure that victims of human rights and environmental harms can bring an
        action for damages and claim compensation for damages arising due to a company’s
        failure to comply with the due diligence obligations stemming from this Directive, even
        where the law applicable to such claims is not the law of a Member State, as could be for
        instance be the case in accordance with international private law rules when the damage
        occurs in a third country, this Directive should require Member States to ensure that the
        liability provided for in provisions of national law transposing this Article is of overriding
        mandatory application in cases where the law applicable to claims to that effect is not the
        law of a Member State.
   (62) The civil liability regime under this Directive should be without prejudice to the
        Environmental Liability Directive 2004/35/EC. This Directive should not prevent
        Member States from imposing further, more stringent obligations on companies or from
        otherwise taking further measures having the same objectives as that Directive.
   (63) In all Member States’ national laws, directors owe a duty of care to the company. In order
        to ensure that this general duty is understood and applied in a manner which is coherent
        and consistent with the due diligence obligations introduced by this Directive and that
        directors systematically take into account sustainability matters in their decisions, this
        Directive should clarify, in a harmonised manner, the general duty of care of directors to
        act in the best interest of the company, by laying down that directors take into account the
        sustainability matters as referred to in Directive 2013/34/EU, including, where applicable,
        human rights, climate change and environmental consequences, including in the short,
        medium and long term horizons. Such clarification does not require changing existing
        national corporate structures.
   (64) Responsibility for due diligence should be assigned to the company’s directors, in line
        with the international due diligence frameworks. Directors should therefore be
EN                                                43                                                    EN
 ---pagebreak---         responsible for putting in place and overseeing the due diligence actions as laid down in
        this Directive and for adopting the company’s due diligence policy, taking into account
        the input of stakeholders and civil society organisations and integrating due diligence into
        corporate management systems. Directors should also adapt the corporate strategy to
        actual and potential impacts identified and any due diligence measures taken.
   (65) Persons who work for companies subject to due diligence obligations under this Directive
        or who are in contact with such companies in the context of their work-related activities
        can play a key role in exposing breaches of the rules of this Directive. They can thus
        contribute to preventing and deterring such breaches and strengthening the enforcement
        of this Directive. Directive (EU) 2019/1937 of the European Parliament and of the
        Council106 should therefore apply to the reporting of all breaches of this Directive and to
        the protection of persons reporting such breaches.
   (66) In order to specify the information that companies not subject to reporting requirements
        under the provisions on corporate sustainability reporting under Directive 2013/34/EU
        should be communicating on the matters covered by this Directive, the power to adopt
        acts in accordance with Article 290 of the Treaty on the Functioning of the European
        Union should be delegated to the Commission in respect of determining additional rules
        concerning the content and criteria of such reporting, specifying information on the
        description of due diligence, potential and actual impacts and actions taken on those. It is
        of particular importance that the Commission carry out appropriate consultations during
        its preparatory work, including at expert level, and that those consultations be conducted
        in accordance with the principles laid down in the Interinstitutional Agreement of 13
        April 2016 on Better Law-Making107. In particular, to ensure equal participation in the
        preparation of delegated acts, the European Parliament and the Council receive all
        documents at the same time as Member States' experts, and their experts systematically
        have access to meetings of Commission expert groups dealing with the preparation of
        delegated acts.
   (67) This Directive should be applied in compliance with Union data protection law and the
        right to the protection of privacy and personal data as enshrined in Articles 7 and 8 of the
        Charter of Fundamental Rights of the European Union. Any processing of personal data
        under this Directive is to be undertaken in accordance with Regulation (EU) 2016/679 of
        the European Parliament and of the Council108, including the requirements of purpose
        limitation, data minimisation and storage limitation.
   106
        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 (OJ L 305, 26.11.2019, p. 17).
   107
        OJ L 123, 12.5.2016, p. 1.
   108
        Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the
        protection of natural persons with regard to the processing of personal data and on the free movement of
EN                                                    44                                                       EN
 ---pagebreak---    (68) The European Data Protection Supervisor was consulted in accordance with Article 28(2)
        of Regulation (EU) 2018/1725 of the European Parliament and of the Council109 and
        delivered an opinion on … 2022.
   (69) This Directive is without prejudice to obligations in the areas of human rights, protection
        of the environment and climate change under other Union legislative acts. If the
        provisions of this Directive conflict with a provision of another Union legislative act
        pursuing the same objectives and providing for more extensive or more specific
        obligations, the provisions of the other Union legislative act should prevail to the extent
        of the conflict and shall apply to those specific obligations.
   (70) The Commission should assess and report whether new sectors should be added to the list
        of high-impact sectors covered by this Directive, in order to align it to guidance from the
        Organisation for Economic Cooperation and Development or in light of clear evidence on
        labour exploitation, human rights violations or newly emerging environmental threats,
        whether the list of relevant international conventions referred to in this Directive should
        be amended, in particular in the light of international developments, or whether the
        provisions on due diligence under this Directive should be extended to adverse climate
        impacts.
   (71) The objective of this Directive, namely better exploiting the potential of the single market
        to contribute to the transition to a sustainable economy and contributing to sustainable
        development through the prevention and mitigation of potential or actual human rights
        and environmental adverse impacts in companies’ value chains, cannot be sufficiently
        achieved by the Member States acting individually or in an uncoordinated manner, but
        can rather, by reason of the scale and effects of the actions, be better achieved at Union
        level. In particular, addressed problems and their causes are of a transnational dimension,
        as many companies are operating Union wide or globally and value chains expand to
        other Member States and to third countries. Moreover, individual Member States’
        measures risk being ineffective and lead to fragmentation of the internal market.
        Therefore, the Union may adopt measures, in accordance with the principle of
        subsidiarity as set out in Article 5 TEU. In accordance with the principle of
        proportionality, as set out in that Article, this Directive does not go beyond what is
        necessary in order to achieve that objective.
        such data, and repealing Directive 95/46/EC (General Data Protection Regulation) OJ L 119, 4.5.2016, p.
        1–88.
   109
        Regulation (EU) 2018/1725 of the European Parliament and of the Council of 23 October 2018 on the
        protection of natural persons with regard to the processing of personal data by the Union institutions,
        bodies, offices and agencies and on the free movement of such data (OJ L 295, 21.11.2018, p. 39).
EN                                                    45                                                     EN
 ---pagebreak---    HAVE ADOPTED THIS DIRECTIVE:
                                                Article 1
                                           Subject matter
   1.    This Directive lays down rules
         (a)   on obligations for companies regarding actual and potential human rights adverse
               impacts and environmental adverse impacts, with respect to their own operations,
               the operations of their subsidiaries, and the value chain operations carried out by
               entities with whom the company has an established business relationship and
         (b)   on liability for violations of the obligations mentioned above.
         The nature of business relationships as ‘established’ shall be reassessed periodically,
         and at least every 12 months.
   2.    This Directive shall not constitute grounds for reducing the level of protection of human
         rights or of protection of the environment or the protection of the climate provided for
         by the law of Member States at the time of the adoption of this Directive.
   3.    This Directive shall be without prejudice to obligations in the areas of human rights,
         protection of the environment and climate change under other Union legislative acts. If
         the provisions of this Directive conflict with a provision of another Union legislative act
         pursuing the same objectives and providing for more extensive or more specific
         obligations, the provisions of the other Union legislative act shall prevail to the extent
         of the conflict and shall apply to those specific obligations.
                                                Article 2
                                                 Scope
   1.    This Directive shall apply to companies which are formed in accordance with the
         legislation of a Member State and which fulfil one of the following conditions:
         (a)   the company had more than 500 employees on average and had a net worldwide
               turnover of more than EUR 150 million in the last financial year for which annual
               financial statements have been prepared;
         (b)   the company did not reach the thresholds under point (a), but had more than 250
               employees on average and had a net worldwide turnover of more than EUR 40
               million in the last financial year for which annual financial statements have been
               prepared, provided that at least 50% of this net turnover was generated in one or
               more of the following sectors:
               (i)    the manufacture of textiles, leather and related products (including
                      footwear), and the wholesale trade of textiles, clothing and footwear;
EN                                               46                                                EN
 ---pagebreak---                   (ii)   agriculture, forestry, fisheries (including aquaculture), the manufacture of
                         food products, and the wholesale trade of agricultural raw materials, live
                         animals, wood, food, and beverages;
                  (iii) the extraction of mineral resources regardless from where they are extracted
                         (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).
   2.       This Directive shall also apply to companies which are formed in accordance with the
            legislation of a third country, and fulfil one of the following conditions:
            (a)   generated a net turnover of more than EUR 150 million in the Union in the
                  financial year preceding the last financial year;
            (b)   generated a net turnover of more than EUR 40 million but not more than EUR 150
                  million in the Union in the financial year preceding the last financial year,
                  provided that at least 50% of its net worldwide turnover was generated in one or
                  more of the sectors listed in paragraph 1, point (b).
   3.       For the purposes of paragraph 1, the number of part-time employees shall be calculated
            on a full-time equivalent basis. Temporary agency workers shall be included in the
            calculation of the number of employees in the same way as if they were workers
            employed directly for the same period of time by the company.
   4.       As regards the companies referred to in paragraph 1, the Member State competent to
            regulate matters covered in this Directive shall be the Member State in which the
            company has its registered office.
                                                  Article 3
                                                Definitions
   For the purpose of this Directive, the following definitions shall apply:
   (a)      ‘company’ means any of the following:
EN                                                  47                                                EN
 ---pagebreak---          (i)    a legal person constituted as one of the legal forms listed in Annex I to Directive
                2013/34/EU of the European Parliament and of the Council110;
         (ii)   a legal person constituted in accordance with the law of a third country in a form
                comparable to those listed in Annex I and II of that Directive;
         (iii) a legal person constituted as one of the legal forms listed in Annex II to Directive
                2013/34/EU composed entirely of undertakings organised in one of the legal
                forms falling within points (i) and (ii);
         (iv) a regulated financial undertaking, regardless of its legal form, which is
                –      a credit institution as defined in Article 4(1), point (1), of Regulation (EU)
                       No 575/2013 the European Parliament and of the Council111;
                –      an investment firm as defined in Article 4(1), point (1), of Directive
                       2014/65/EU the European Parliament and of the Council112;
                –      an alternative investment fund manager (AIFM) as defined in Article 4(1),
                       point (b), of Directive 2011/61/EU of the European Parliament and of the
                       Council (2), including a manager of Euveca under Regulation (EU) No
                       345/2013 of the European Parliament and of the Council113, a manager of
                       EuSEF under Regulation (EU) No 346/2013 of the European Parliament and
                       of the Council114 and a manager of ELTIF under Regulation (EU) 2015/760
                       of the European Parliament and of the Council115;
   110
       Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual
       financial statements, consolidated financial statements and related reports of certain types of undertakings
       (OJ L 182, 29.6.2013, p. 19).
   111
       Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on
       prudential requirements for credit institutions and investment firms and amending Regulation (EU) No
       648/2012 (OJ L 176, 27.6.2013, p. 1).
   112
       Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in
       financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (OJ L 173,
       12.6.2014, p. 349).
   113
       Regulation (EU) No 345/2013 of the European Parliament and of the Council of 17 April 2013 on
       European venture capital funds (OJ L 115, 25.4.2013, p. 1).
   114
       Regulation (EU) No 346/2013 of the European Parliament and of the Council of 17 April 2013 on
       European social entrepreneurship funds (OJ L 115, 25.4.2013, p. 18).
   115
       Regulation (EU) 2015/760 of the European Parliament and of the Council of 29 April 2015 on European
       long-term investment funds (OJ L 123, 19.5.2015, p. 98).
EN                                                    48                                                          EN
 ---pagebreak---                  –     an undertaking for collective investment in transferable securities (UCITS)
                       management company as defined Article 2(1), point (b), of Directive
                       2009/65/EC of the European Parliament and of the Council116;
                 –     an insurance undertaking as defined in Article 13, point (1), of Directive
                       2009/138/EC of the European Parliament and of the Council117;
                 –     a reinsurance undertaking as defined in Article 13, point (4), of Directive
                       2009/138/EC;
                 –     an institution for occupational retirement provision as defined in Article 1,
                       point (6) of Directive 2016/2341 of the European Parliament and of the
                       Council118;
                 –     pension institutions operating pension schemes which are considered to be
                       social security schemes covered by Regulation (EC) No 883/2004 of the
                       European Parliament and of the Council119 and Regulation (EC) No
                       987/2009 of the European Parliament and of the Council120 as well as any
                       legal entity set up for the purpose of investment of such schemes;
                 –     an alternative investment fund (AIF) managed by an AIFM as defined in
                       Article 4(1), point (b), of Directive 2011/61/EU or an AIF supervised under
                       the applicable national law;
                 –     UCITS in the meaning of Article 1(2) of Directive 2009/65/EC;
                 –     a central counterparty as defined in Article 2, point (1), of Regulation (EU)
                       No 648/2012 of the European Parliament and of the Council121;
   116
       Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination
       of laws, regulations and administrative provisions relating to undertakings for collective investment in
       transferable securities (UCITS) (OJ L 302, 17.11.2009, p. 32).
   117
       Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-
       up and pursuit of the business of Insurance and Reinsurance (Solvency II) (OJ L 335, 17.12.2009, p. 1).
   118
       Directive (EU) 2016/2341 of the European Parliament and of the Council of 14 December 2016 on the
       activities and supervision of institutions for occupational retirement provision (IORPs) (OJ L 354,
       23.12.2016, p. 37).
   119
       Regulation (EC) No 883/2004 of the European Parliament and of the Council of 29 April 2004 on the
       coordination of social security systems (OJ L 166, 30.4.2004, p. 1).
   120
       Regulation (EC) No 987/2009 of the European Parliament and of the Council of 16 September 2009 laying
       down the procedure for implementing Regulation (EC) No 883/2004 on the coordination of social security
       systems (OJ L 284, 30.10.2009, p. 1).
   121
       Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC
       derivatives, central counterparties and trade repositories (OJ L 201, 27.7.2012, p. 1).
EN                                                     49                                                      EN
 ---pagebreak---                 –       a central securities depository as defined in Article 2(1), point (1), of
                        Regulation (EU) No 909/2014 of the European Parliament and of the
                        Council122;
                –       an insurance or reinsurance special purpose vehicle authorised in
                        accordance with Article 211 of Directive 2009/138/EC;
                –       ‘securitisation special purpose entity’ as defined in Article 2, point (2), of
                        Regulation (EU) No 2017/2402 of the European Parliament and of the
                        Council123;
                –       an insurance holding company as defined in Article 212(1), point (f), of
                        Directive 2009/138/EC or a mixed financial holding company as defined in
                        Article 212(1), point (h), of Directive 2009/138/EC, which is part of an
                        insurance group that is subject to supervision at the level of the group
                        pursuant to Article 213 of that Directive and which is not exempted from
                        group supervision pursuant to Article 214(2) of Directive 2009/138/EC;
                –       a payment institution as defined in point (d) of Article 1(1) of Directive
                        (EU) 2015/2366 of the European Parliament and of the Council124;
                –       an electronic money institution as defined in point (1) of Article 2 of
                        Directive 2009/110/EC of the European Parliament and of the Council125;
                –       a crowdfunding service provider as defined in point (e) Article 2(1) of
                        Regulation (EU) 2020/1503 of the European Parliament and of the
                        Council126;
                –       a crypto-asset service provider as defined in Article 3(1), point (8), of [the
                        proposal for a Regulation of the European Parliament and of the Council on
   122
       Regulation (EU) No 909/2014 of the European Parliament and of the Council of 23 July 2014 on improving
       securities settlement in the European Union and on central securities depositories and amending Directives
       98/26/EC and 2014/65/EU and Regulation (EU) No 236/2012 (OJ L 257, 28.8.2014, p. 1).
   123
       Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying
       down a general framework for securitisation and creating a specific framework for simple, transparent and
       standardised securitisation, and amending Directives 2009/65/EC, 2009/138/EC and 2011/61/EU and
       Regulations (EC) No 1060/2009 and (EU) No 648/2012 (OJ L 347, 28.12.2017, p. 35).
   124
       Directive (EU) 2015/2366 of the European Parliament and of the Council of 25 November 2015 on
       payment services in the internal market, amending Directives 2002/65/EC, 2009/110/EC and 2013/36/EU
       and Regulation (EU) No 1093/2010, and repealing Directive 2007/64/EC (OJ L 337, 23.12.2015, p. 35).
   125
       Directive 2009/110/EC of the European Parliament and of the Council of 16 September 2009 on the taking
       up, pursuit and prudential supervision of the business of electronic money institutions amending Directives
       2005/60/EC and 2006/48/EC and repealing Directive 2000/46/EC (OJ L 267, 10.10.2009, p. 7).
   126
       Regulation (EU) 2020/1503 of the European Parliament and of the Council of 7 October 2020 on European
       crowdfunding service providers for business, and amending Regulation (EU) 2017/1129 and Directive
       (EU) 2019/1937 (OJ L 347, 20.10.2020, p. 1).
EN                                                    50                                                         EN
 ---pagebreak---                        Markets in Crypto-assets, and amending Directive (EU) 2019/1937127]
                       where performing one or more crypto-asset services as defined in Article
                       3(1), point (9), of [the proposal for a Regulation of the European Parliament
                       and of the Council on Markets in Crypto-assets, and amending Directive
                       (EU) 2019/1937];
   (b)  ‘adverse environmental impact’ means an adverse impact on the environment resulting
        from the violation of one of the prohibitions and obligations pursuant to the
        international environmental conventions listed in the Annex, Part II;
   (c)  ‘adverse human rights impact’ means an adverse impact on protected persons resulting
        from the violation of one of the rights or prohibitions listed in the Annex, Part I Section
        1, as enshrined in the international conventions listed in the Annex, Part I Section 2;
   (d)  ‘subsidiary’ means a legal person through which the activity of a ‘controlled
        undertaking’ as defined in Article 2(1), point (f), of Directive 2004/109/EC of the
        European Parliament and of the Council128 is exercised;
   (e)  ‘business relationship’ means a relationship with a contractor, subcontractor or any
        other legal entities (‘partner’)
        (i)    with whom the company has a commercial agreement or to whom the company
               provides financing, insurance or reinsurance, or
        (ii)   that performs business operations related to the products or services of the
               company for or on behalf of the company;
   (f)  ‘established business relationship’ means a business relationship, whether direct or
        indirect, which is, or which is expected to be lasting, in view of its intensity or duration
        and which does not represent a negligible or merely ancillary part of the value chain;
   (g)  ‘value chain’ means activities related to the production of goods or the 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 upstream and
        downstream established business relationships of the company. As regards companies
        within the meaning of point (a)(iv), ‘value chain’ with respect to the provision of these
        specific services shall only include the activities of the clients receiving such loan,
        credit, and other financial services and of other companies belonging to the same group
        whose activities are linked to the contract in question. The value chain of such regulated
   127
       COM/2020/593 final.
   128
       Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the
       harmonisation of transparency requirements in relation to information about issuers whose securities are
       admitted to trading on a regulated market and amending Directive 2001/34/EC (OJ L 390, 31.12.2004, p.
       38).
EN                                                 51                                                         EN
 ---pagebreak---         financial undertakings does not cover SMEs receiving loan, credit, financing, insurance
        or reinsurance of such entities;
   (h)  ‘independent third-party verification’ means verification of the compliance by a
        company, or parts of its value chain, with human rights and environmental requirements
        resulting from the provisions of this Directive by an auditor which is independent from
        the company, free from any conflicts of interests, has experience and competence in
        environmental and human rights matters and is accountable for the quality and
        reliability of the audit;
   (i)  ‘SME’ means a micro, small or a medium-sized enterprise, irrespective of its legal form,
        that is not part of a large group, as those terms are defined in Article 3(1), (2), (3) and
        (7) of Directive 2013/34/EU;
   (j)  ‘industry initiative’ means a combination of voluntary value chain due diligence
        procedures, tools and mechanisms, including independent third-party verifications,
        developed and overseen by governments, industry associations or groupings of
        interested organisations;
   (k)  ‘authorised representative’ means a natural or legal person resident or established in the
        Union who has a mandate from a company within the meaning of point (a)(ii) to act on
        its behalf in relation to compliance with that company’s obligations pursuant to this
        Directive;
   (l)  ‘severe adverse impact’ means an adverse environmental impact or an adverse human
        rights impact that is especially significant by its nature, or affects a large number of
        persons or a large area of the environment, or which is irreversible, or is particularly
        difficult to remedy as a result of the measures necessary to restore the situation
        prevailing prior to the impact;
   (m)  ‘net turnover’ means
        (i)     the ‘net turnover’ as defined in Article 2, point (5), of Directive 2013/34/EU; or,
        (ii)    where the company applies international accounting standards adopted on the
                basis of Regulation (EC) No 1606/2002 of the European Parliament and of the
                Council129 or is a company within the meaning of point (a)(ii), the revenue as
                defined by or within the meaning of the financial reporting framework on the
                basis of which the financial statements of the company are prepared;
   (n)  ‘stakeholders’ means the company’s employees, the employees of its subsidiaries, and
        other individuals, groups, communities or entities whose rights or interests are or could
   129
       Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the
       application of international accounting standards (OJ L 243, 11.9.2002, p.1).
EN                                                    52                                               EN
 ---pagebreak---        be affected by the products, services and operations of that company, its subsidiaries
       and its business relationships;
   (o) ‘director’ means:
       (i)    any member of the administrative, management or supervisory bodies of a
              company;
       (ii)   where they are not members of the administrative, management or supervisory
              bodies of a company, the chief executive officer and, if such function exists in a
              company, the deputy chief executive officer;
       (iii) other persons who perform functions similar to those performed under point (i) or
              (ii);
   (p) ‘board of directors’ means the administrative or supervisory body responsible for
       supervising the executive management of the company, or, if no such body exists, the
       person or persons performing equivalent functions;
   (q) ‘appropriate measure’ means 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.
                                             Article 4
                                           Due diligence
   1.  Member States shall ensure that companies conduct human rights and environmental
       due diligence as laid down in Articles 5 to 11 (‘due diligence’) by carrying out the
       following actions:
       (a)    integrating due diligence into their policies in accordance with Article 5;
       (b)    identifying actual or potential adverse impacts in accordance with Article 6;
       (c)    preventing and mitigating potential adverse impacts, and bringing actual adverse
              impacts to an end and minimising their extent in accordance with Articles 7 and 8;
       (d)    establishing and maintaining a complaints procedure in accordance with Article 9;
       (e)    monitoring the effectiveness of their due diligence policy and measures in
              accordance with Article 10;
       (f)    publicly communicating on due diligence in accordance with Article 11.
   2.  Member States shall ensure that, for the purposes of due diligence, companies are
       entitled to share resources and information within their respective groups of companies
       and with other legal entities in compliance with applicable competition law.
EN                                             53                                              EN
 ---pagebreak---                                              Article 5
                      Integrating due diligence into companies’ policies
   1. Member States shall ensure that companies integrate due diligence into all their
      corporate policies and have in place a due diligence policy. The due diligence policy
      shall contain all of the following:
      (a)    a description of the company’s approach, including in the long term, to due
             diligence;
      (b)    a code of conduct describing rules and principles to be followed by the company’s
             employees and subsidiaries;
      (c)    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.
   2. Member States shall ensure that the companies update their due diligence policy
      annually.
                                             Article 6
                       Identifying actual and potential adverse impacts
   1. Member States shall ensure that companies take appropriate measures to identify actual
      and potential adverse human rights impacts and adverse environmental impacts arising
      from their own operations or those of their subsidiaries and, where related to their value
      chains, from their established business relationships, in accordance with paragraph 2, 3
      and 4.
   2. By way of derogation from paragraph 1, companies referred to in Article 2(1), point (b),
      and Article 2(2), point (b), shall only be required to identify actual and potential severe
      adverse impacts relevant to the respective sector mentioned in Article 2(1), point (b).
   3. When companies referred to in Article 3, point (a)(iv), provide credit, loan or other
      financial services, identification of actual and potential adverse human rights impacts
      and adverse environmental impacts shall be carried out only before providing that
      service..
   4. Member States shall ensure that, for the purposes of identifying the adverse impacts
      referred to in paragraph 1 based on, where appropriate, quantitative and qualitative
      information, companies are entitled to make use of appropriate resources, including
      independent reports and information gathered through the complaints procedure
      provided for in Article 9. Companies shall, where relevant, also carry out consultations
      with potentially affected groups including workers and other relevant stakeholders to
      gather information on actual or potential adverse impacts.
EN                                            54                                                EN
 ---pagebreak---                                             Article 7
                           Preventing potential adverse impacts
   1. Member States shall ensure that companies take appropriate measures to prevent, or
      where prevention is not possible or not immediately possible, adequately mitigate
      potential adverse human rights impacts and adverse environmental impacts that have
      been, or should have been, identified pursuant to Article 6, in accordance with
      paragraphs 2, 3, 4 and 5 of this Article.
   2. Companies shall be required to take the following actions, where relevant:
      (a)   where necessary due to the nature or complexity of the measures required for
            prevention, develop and implement a prevention action plan, with reasonable and
            clearly defined timelines for action and qualitative and quantitative indicators for
            measuring improvement. The prevention action plan shall be developed in
            consultation with affected stakeholders;
      (b)   seek contractual assurances from a business partner with whom it has a direct
            business relationship that it 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 (contractual cascading). When
            such contractual assurances are obtained, paragraph 4 shall apply;
      (c)   make necessary investments, such as into management or production processes
            and infrastructures, to comply with paragraph 1;
      (d)   provide targeted and proportionate support for an SME with which the company
            has an established business relationship, where compliance with the code of
            conduct or the prevention action plan would jeopardise the viability of the SME;
      (e)   in compliance with Union law including competition law, collaborate with other
            entities, including, where relevant, to increase the company’s ability to bring the
            adverse impact to an end, in particular where no other action is suitable or
            effective.
   3. As regards potential adverse impacts that could not be prevented or adequately
      mitigated by the measures in paragraph 2, the company may seek to conclude a contract
      with a partner with whom it has an indirect relationship, with a view to achieving
      compliance with the company’s code of conduct or a prevention action plan. When such
      a contract is concluded, paragraph 4 shall apply.
   4. The contractual assurances or the contract shall be accompanied by the appropriate
      measures to verify compliance. For the purposes of verifying compliance, the company
      may refer to suitable industry initiatives or independent third-party verification.
      When contractual assurances are obtained from, or a contract is entered into, with an
      SME, the terms used shall be fair, reasonable and non-discriminatory. Where measures
      to verify compliance are carried out in relation to SMEs, the company shall bear the cost
      of the independent third-party verification.
EN                                           55                                                EN
 ---pagebreak---    5. As regards potential adverse impacts within the meaning of paragraph 1 that could not
      be prevented or adequately mitigated by the measures in paragraphs 2, 3 and 4, the
      company shall be required to refrain from entering into new or extending existing
      relations with the partner in connection with or in the value chain of which the impact
      has arisen and shall, where the law governing their relations so entitles them to, take the
      following actions:
      (a)    temporarily suspend commercial relations with the partner in question, while
             pursuing prevention and minimisation efforts, if there is reasonable expectation
             that these efforts will succeed in the short-term;
      (b)    terminate the business relationship with respect to the activities concerned if the
             potential adverse impact is severe.
      Member States shall provide for the availability of an option to terminate the business
      relationship in contracts governed by their laws.
   6. By way of derogation from paragraph 5, point (b), when companies referred to in
      Article 3, point (a)(iv), provide credit, loan or other financial services, they shall not be
      required to terminate the credit, loan or other financial service contract when this can be
      reasonably expected to cause substantial prejudice to the entity to whom that service is
      being provided.
                                            Article 8
                         Bringing actual adverse impacts to an end
   1. Member States shall ensure that companies take appropriate measures to bring actual
      adverse impacts that have been, or should have been, identified pursuant to Article 6 to
      an end, in accordance with paragraphs 2 to 6 of this Article.
   2. Where the adverse impact cannot be brought to an end, Member States shall ensure that
      companies minimise the extent of such an impact.
   3. Companies shall be required to take the following actions, where relevant:
      (a)    neutralise the adverse impact or minimise its extent, including by the payment of
             damages to the affected persons and of financial compensation to the affected
             communities. The action shall be proportionate to the significance and scale of the
             adverse impact and to the contribution of the company’s conduct to the adverse
             impact;
      (b)    where necessary due to the fact that the adverse impact cannot be immediately
             brought to an end, develop and implement a corrective action plan with reasonable
             and clearly defined timelines for action and qualitative and quantitative indicators
             for measuring improvement. Where relevant, the corrective action plan shall be
             developed in consultation with stakeholders;
      (c)    seek contractual assurances from a direct partner with whom it has an established
             business relationship that it will ensure compliance with the code of conduct and,
             as necessary, a corrective action plan, including by seeking corresponding
             contractual assurances from its partners, to the extent that they are part of the
EN                                            56                                                  EN
 ---pagebreak---              value chain (contractual cascading). When such contractual assurances are
             obtained, paragraph 5 shall apply.
      (d)    make necessary investments, such as into management or production processes
             and infrastructures to comply with paragraphs 1, 2 and 3;
      (e)    provide targeted and proportionate support for an SME with which the company
             has an established business relationship, where compliance with the code of
             conduct or the corrective action plan would jeopardise the viability of the SME;
      (f)    in compliance with Union law including competition law, collaborate with other
             entities, including, where relevant, to increase the company’s ability to bring the
             adverse impact to an end, in particular where no other action is suitable or
             effective.
   4. As regards actual adverse impacts that could not be brought to an end or adequately
      mitigated by the measures in paragraph 3, the company may seek to conclude a contract
      with a partner with whom it has an indirect relationship, with a view to achieving
      compliance with the company’s code of conduct or a corrective action plan. When such
      a contract is concluded, paragraph 5 shall apply.
   5. The contractual assurances or the contract shall be accompanied by the appropriate
      measures to verify compliance. For the purposes of verifying compliance, the company
      may refer to suitable industry initiatives or independent third-party verification.
      When contractual assurances are obtained from, or a contract is entered into, with an
      SME, the terms used shall be fair, reasonable and non-discriminatory. Where measures
      to verify compliance are carried out in relation to SMEs, the company shall bear the cost
      of the independent third-party verification.
   6. As regards actual adverse impacts within the meaning of paragraph 1 that could not be
      brought to an end or the extent of which could not be minimised by the measures
      provided for in paragraphs 3, 4 and 5, the company shall refrain from entering into new
      or extending existing relations with the partner in connection to or in the value chain of
      which the impact has arisen and shall, where the law governing their relations so entitles
      them to, take one of the following actions:
      (a)    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
      (b)    terminate the business relationship with respect to the activities concerned, if the
             adverse impact is considered severe.
      Member States shall provide for the availability of an option to terminate the business
      relationship in contracts governed by their laws.
   7. By way of derogation from paragraph 6, point (b), when companies referred to in
      Article 3, point (a)(iv), provide credit, loan or other financial services, they shall not be
      required to terminate the credit, loan or other financial service contract, when this can
      be reasonably expected to cause substantial prejudice to the entity to whom that service
      is being provided.
EN                                            57                                                  EN
 ---pagebreak---                                                   Article 9
                                          Complaints procedure
   1.       Member States shall ensure that companies provide the possibility for persons and
            organisations listed in paragraph 2 to submit complaints to them where they have
            legitimate concerns regarding actual or potential adverse human rights impacts and
            adverse environmental impacts with respect to their own operations, the operations of
            their subsidiaries and their value chains.
   2.       Member States shall ensure that the complaints may be submitted by:
            (a)    persons who are affected or have reasonable grounds to believe that they might be
                   affected by an adverse impact,
            (b)    trade unions and other workers’ representatives representing individuals working
                   in the value chain concerned,
            (c)    civil society organisations active in the areas related to the value chain concerned.
   3.       Member States shall ensure that the companies establish a procedure for dealing with
            complaints referred to in paragraph 1, including a procedure when the company
            considers the complaint to be unfounded, and inform the relevant workers and trade
            unions of those procedures. Member States shall ensure that where the complaint is
            well-founded, the adverse impact that is the subject matter of the complaint is deemed
            to be identified within the meaning of Article 6.
   4.       Member States shall ensure that complainants are entitled
            (a)    to request appropriate follow-up on the complaint from the company with which
                   they have filed a complaint pursuant to paragraph 1, and
            (b)    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.
                                                 Article 10
                                                Monitoring
   Member States shall ensure that companies carry out periodic assessments of their own
   operations and measures, 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, mitigation, bringing to an end and minimisation of the extent of
   human rights and environmental adverse impacts. Such assessments shall be based, where
   appropriate, on qualitative and quantitative indicators and be carried out at least every 12 months
   and whenever there are reasonable grounds to believe that significant new risks of the occurrence
   of those adverse impacts may arise. The due diligence policy shall be updated in accordance with
   the outcome of those assessments.
EN                                                  58                                                  EN
 ---pagebreak---                                                  Article 11
                                             Communicating
   Member States shall ensure that companies that are not subject to reporting requirements under
   Articles 19a and 29a of Directive 2013/34/EU report on the matters covered by this Directive by
   publishing on their website an annual statement in a language customary in the sphere of
   international business. The statement shall be published by 30 April each year, covering the
   previous calendar year.
   The Commission shall adopt delegated acts in accordance with Article 28 concerning the content
   and criteria for such reporting under paragraph 1, specifying information on the description of
   due diligence, potential and actual adverse impacts and actions taken on those.
                                                 Article 12
                                        Model contractual clauses
   In order to provide support to companies to facilitate their compliance with Article 7(2),
   point (b), and Article 8(3), point (c), the Commission shall adopt guidance about voluntary
   model contract clauses.
                                                 Article 13
                                                Guidelines
   In order to provide support to companies or to Member State authorities on how companies
   should fulfil their due diligence obligations, the Commission, in consultation with Member
   States and stakeholders, the European Union Agency for Fundamental Rights, the European
   Environment Agency, and where appropriate with international bodies having expertise in due
   diligence, may issue guidelines, including for specific sectors or specific adverse impacts.
                                                 Article 14
                                        Accompanying measures
   1.       Member States shall, in order to provide information and support to companies and the
            partners with whom they have established business relationships in their value chains in
            their efforts to fulfil the obligations resulting from this Directive, set up and operate
            individually or jointly dedicated websites, platforms or portals. Specific consideration
            shall be given, in that respect, to the SMEs that are present in the value chains of
            companies.
   2.       Without prejudice to applicable State aid rules, Member States may financially support
            SMEs.
   3.       The Commission may complement Member States’ support measures building on
            existing Union action to support due diligence in the Union and in third countries and
            may devise new measures, including facilitation of joint stakeholder initiatives to help
            companies fulfil their obligations.
EN                                                 59                                               EN
 ---pagebreak---    4. Companies may rely on industry schemes and multi-stakeholder initiatives to support
      the implementation of their obligations referred to in Articles 5 to 11 of this Directive to
      the extent that such schemes and initiatives are appropriate to support the fulfilment of
      those obligations. The Commission and the Member States may facilitate the
      dissemination of information on such schemes or initiatives and their outcome. The
      Commission, in collaboration with Member States, may issue guidance for assessing the
      fitness of industry schemes and multi-stakeholder initiatives.
                                            Article 15
                                  Combating climate change
   1. Member States shall ensure that companies referred to in Article 2(1), point (a), and
      Article 2(2), point (a), shall 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. This plan shall,
      in particular, identify, on the basis of information reasonably available to the company,
      the extent to which climate change is a risk for, or an impact of, the company’s
      operations.
   2. Member States shall ensure that, in case climate change is or should have been
      identified as a principal risk for, or a principal impact of, the company’s operations, the
      company includes emission reduction objectives in its plan.
   3. Member States shall ensure that companies duly take into account the fulfilment of the
      obligations referred to in paragraphs 1 and 2 when setting variable remuneration, if
      variable remuneration is linked to the contribution of a director to the company’s
      business strategy and long-term interests and sustainability.
                                            Article 16
                                  Authorised representative
   1. Member States shall ensure that each company referred to in Article 2(2) designates a
      legal or natural person as its authorised representative, established or domiciled in one
      of the Member States where it operates. The designation shall be valid when confirmed
      as accepted by the authorised representative.
   2. Member States shall ensure that the name, address, electronic mail address and
      telephone number of the authorised representative is notified to a supervisory authority
      in the Member State where the authorised representative is domiciled or established.
      Member States shall ensure that the authorised representative is obliged to provide,
      upon request, a copy of the designation in an official language of a Member State to any
      of the supervisory authorities.
   3. Member States shall ensure that a supervisory authority in the Member State where the
      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 within the meaning of Article 2(2).
EN                                            60                                                 EN
 ---pagebreak---    4. Member States shall ensure that each company empowers its authorised representative
      to receive communications from supervisory authorities on all matters necessary for
      compliance with and enforcement of national provisions transposing this Directive.
      Companies shall be required to provide their authorised representative with the
      necessary powers and resources to cooperate with supervisory authorities.
                                          Article 17
                                  Supervisory Authorities
   1. Each Member State shall designate one or more supervisory authorities to supervise
      compliance with the obligations laid down in national provisions adopted pursuant to
      Articles 6 to 11 and Article 15(1) and (2) (‘supervisory authority’).
   2. As regards the companies referred to in Article 2(1), the competent supervisory
      authority shall be that of the Member State in which the company has its registered
      office.
   3. As regards companies referred to in Article 2(2), the competent supervisory authority
      shall be that of the Member State in which the company has a branch. If the company
      does not have a branch in any Member State, or has branches located in different
      Member States, the competent supervisory authority shall be the supervisory authority
      of 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 before the date indicated in
      Article 30 or the date on which the company first fulfils the criteria laid down in Article
      2(2), whichever comes last.
      Companies referred to in Article 2(2) may, on the basis of a change in circumstances
      leading to it generating most of its turnover in the Union in a different Member State,
      make a duly reasoned request to change the supervisory authority that is competent to
      regulate matters covered in this Directive in respect of that company.
   4. Where a Member State designates more than one supervisory authority, it shall ensure
      that the respective competences of those authorities are clearly defined and that they
      cooperate closely and effectively with each other.
   5. Member States may designate the authorities for the supervision of regulated financial
      undertakings also as supervisory authorities for the purposes of this Directive.
   6. By the date indicated in Article 30(1), point (a), Member States shall inform the
      Commission of the names and contact details of the supervisory authorities designated
      pursuant to this Article, as well as of their respective competence where there are
      several designated supervisory authorities. They shall inform the Commission of any
      changes thereto.
   7. The Commission shall make publicly available, including on its website, a list of the
      supervisory authorities. The Commission shall regularly update the list on the basis of
      the information received from the Member States.
   8. Member States shall guarantee the independence of the supervisory authorities and shall
      ensure that they, and all persons working for or who have worked for them and auditors
EN                                          61                                                  EN
 ---pagebreak---       or experts acting on their behalf, exercise their powers impartially, transparently and
      with due respect for obligations of professional secrecy. In particular, Member States
      shall ensure that the authority is legally and functionally independent from the
      companies falling within the scope of this Directive or other market interests, that its
      staff and the persons responsible for its management are free of conflicts of interest,
      subject to confidentiality requirements, and that they refrain from any action
      incompatible with their duties.
                                            Article 18
                              Powers of supervisory authorities
   1. Member States shall ensure that the supervisory authorities have adequate powers and
      resources to carry out the tasks assigned to them under this Directive, including the
      power to request information and carry out investigations related to compliance with the
      obligations set out in this Directive.
   2. A supervisory authority may initiate an investigation on its own motion or as a result of
      substantiated concerns communicated to it pursuant to Article 19, where it considers
      that it has sufficient information indicating a possible breach by a company of the
      obligations provided for in the national provisions adopted pursuant to this Directive.
   3. Inspections shall be conducted in compliance with the national law of the Member State
      in which the inspection is carried out and with prior warning to the company, except
      where prior notification hinders the effectiveness of the inspection. Where, as part of its
      investigation, a supervisory authority wishes to carry out an inspection on the territory
      of a Member State other than its own, it shall seek assistance from the supervisory
      authority in that Member State pursuant to Article 21(2).
   4. If, as a result of the actions taken pursuant to paragraphs 1 and 2, a supervisory
      authority identifies a failure to comply with national provisions adopted pursuant to this
      Directive, it shall grant the company concerned an appropriate period of time to take
      remedial action, if such action is possible.
      Taking remedial action does not preclude the imposition of administrative sanctions or
      the triggering of civil liability in case of damages, in accordance with Articles 20 and
      22, respectively.
   5. When carrying out their tasks, supervisory authorities shall have at least the following
      powers:
      (a)    to order the cessation of infringements of the national provisions adopted pursuant
             to this Directive, abstention from any repetition of the relevant conduct and,
             where appropriate, remedial action proportionate to the infringement and
             necessary to bring it to an end;
      (b)    to impose pecuniary sanctions in accordance with Article 20;
      (c)    to adopt interim measures to avoid the risk of severe and irreparable harm.
   6. Where the legal system of the Member State does not provide for administrative
      sanctions, this Article and Article 20 may be implemented in such a manner that the
EN                                            62                                                EN
 ---pagebreak---       sanction is initiated by the competent supervisory authority and imposed by the
      competent national courts, while ensuring that those legal remedies are effective and
      have an equivalent effect to the administrative sanctions imposed by supervisory
      authorities.
   7. Member States shall ensure that each natural or legal person has the right to an effective
      judicial remedy against a legally binding decision by a supervisory authority concerning
      them.
                                           Article 19
                                    Substantiated concerns
   1. Member States shall ensure that natural and legal persons are entitled to submit
      substantiated concerns to any supervisory authority when they have reasons to believe,
      on the basis of objective circumstances, that a company is failing to comply with the
      national provisions adopted pursuant to this Directive (‘substantiated concerns’).
   2. Where the substantiated concern falls under the competence of another supervisory
      authority, the authority receiving the concern shall transmit it to that authority.
   3. Member States shall ensure that supervisory authorities assess the substantiated
      concerns and, where appropriate, exercise their powers as referred to in Article 18.
   4. The supervisory authority shall, as soon as possible and in accordance with the relevant
      provisions of national law and in compliance with Union law, inform the person
      referred to in paragraph 1 of the result of the assessment of their substantiated concern
      and shall provide the reasoning for it.
   5. Member States shall ensure that the persons submitting the substantiated concern
      according to this Article and having, in accordance with national law, a legitimate
      interest in the matter have access to a court or other independent and impartial public
      body competent to review the procedural and substantive legality of the decisions, acts
      or failure to act of the supervisory authority.
                                           Article 20
                                           Sanctions
   1. Member States shall lay down the rules on sanctions applicable to infringements of
      national provisions adopted pursuant to this Directive, and shall take all measures
      necessary to ensure that they are implemented. The sanctions provided for shall be
      effective, proportionate and dissuasive.
   2. In deciding whether to impose sanctions and, if so, in determining their nature and
      appropriate level, due account shall be taken of the company’s efforts to comply with
      any remedial action required of them by a supervisory authority, any investments made
      and any targeted support provided pursuant to Articles 7 and 8, as well as collaboration
      with other entities to address adverse impacts in its value chains, as the case may be.
   3. When pecuniary sanctions are imposed, they shall be based on the company’s turnover.
EN                                           63                                                EN
 ---pagebreak---    4. Member States shall ensure that any decision of the supervisory authorities containing
      sanctions related to the breach of the provisions of this directive is published.
                                           Article 21
                       European Network of Supervisory Authorities
   1. The Commission shall set up a European Network of Supervisory Authorities,
      composed of representatives of the supervisory authorities. The Network shall facilitate
      the cooperation of the supervisory authorities and the coordination and alignment of
      regulatory, investigative, sanctioning and supervisory practices of the supervisory
      authorities and, as appropriate, sharing of information among them.
      The Commission may invite Union agencies with relevant expertise in the areas covered
      by this Directive to join the European Network of Supervisory Authorities.
   2. Supervisory authorities shall provide each other with relevant information and mutual
      assistance in carrying out their duties and shall put in place measures for effective
      cooperation with each other. Mutual assistance shall include collaboration with a view
      to the exercise of the powers referred to in Article 18, including in relation to
      inspections and information requests.
   3. Supervisory authorities shall take all appropriate steps needed to reply to a request for
      assistance by another supervisory authority without undue delay and no later than 1
      month after receiving the request. Such steps may include, in particular, the
      transmission of relevant information on the conduct of an investigation.
   4. Requests for assistance shall contain all the necessary information, including the
      purpose of and reasons for the request. Supervisory authorities shall only use the
      information received through a request for assistance for the purpose for which it was
      requested.
   5. The requested supervisory authority shall inform the requesting supervisory authority of
      the results or, as the case may be, of the progress regarding the measures to be taken in
      order to respond to the request for assistance.
   6. Supervisory authorities shall not charge each other fees for actions and measures taken
      pursuant to a request for assistance.
      However, supervisory authorities may agree on rules to indemnify each other for
      specific expenditure arising from the provision of assistance in exceptional cases.
   7. The supervisory authority that is competent pursuant to Article 17(3) shall inform the
      European Network of Supervisory Authorities of that fact and of any request to change
      the competent supervisory authority.
   8. When doubts exist as to the attribution of competence, the information on which that
      attribution is based will be shared with the European Network of Supervisory
      Authorities, which may coordinate efforts to find a solution.
EN                                           64                                               EN
 ---pagebreak---                                                   Article 22
                                                Civil liability
   1.       Member States shall ensure that companies are liable for damages if:
            (a)   they failed to comply with the obligations laid down in Articles 7 and 8 and;
            (b)   as a result of this failure an adverse impact that should have been identified,
                  prevented, mitigated, brought to an end or its extent minimised through the
                  appropriate measures laid down in Articles 7 and 8 occurred and led to damage.
   2.       Notwithstanding paragraph 1, Member States shall ensure that where a company has
            taken the actions referred to in Article 7(2), point (b) and Article 7(4), or Article 8(3),
            point (c), and Article 8(5), it shall not be liable for damages caused by an adverse
            impact arising as a result of the activities of an indirect partner with whom it has an
            established business relationship, 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 the assessment of the existence and extent of liability under this paragraph, due
            account shall 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
            pursuant to Articles 7 and 8, as well as any collaboration with other entities to address
            adverse impacts in its value chains.
   3.       The civil liability of a company for damages arising under this provision shall be
            without prejudice to the civil liability of its subsidiaries or of any direct and indirect
            business partners in the value chain.
   4.       The civil liability rules under this Directive shall be without prejudice to Union or
            national rules on civil liability related to adverse human rights impacts or to adverse
            environmental impacts that provide for liability in situations not covered by or
            providing for stricter liability than this Directive.
   5.       Member States shall ensure that the liability provided for in provisions of national law
            transposing this Article is of overriding mandatory application in cases where the law
            applicable to claims to that effect is not the law of a Member State.
                                                  Article 23
                      Reporting of breaches and protection of reporting persons
   Directive (EU) 2019/1937 shall apply to the reporting of all breaches of this Directive and the
   protection of persons reporting such breaches.
EN                                                   65                                              EN
 ---pagebreak---                                                 Article 24
                                             Public support
   Member States shall ensure that companies applying for public support certify that no sanctions
   have been imposed on them for a failure to comply with the obligations of this Directive.
                                                Article 25
                                         Directors’ duty of care
   1.      Member States shall ensure that, when fulfilling their duty to act in the best interest of
           the company, directors of companies referred to in Article 2(1) take into account the
           consequences of their decisions for sustainability matters, including, where applicable,
           human rights, climate change and environmental consequences, including in the short,
           medium and long term.
   2.      Member States shall ensure that their laws, regulations and administrative provisions
           providing for a breach of directors’ duties apply also to the provisions of this Article.
                                                Article 26
                               Setting up and overseeing due diligence
   1.      Member States shall ensure that directors of companies referred to in Article 2(1) are
           responsible for putting in place and overseeing the due diligence actions referred to in
           Article 4 and in particular the due diligence policy referred to in Article 5, with due
           consideration for relevant input from stakeholders and civil society organisations. The
           directors shall report to the board of directors in that respect.
   2.      Member States shall ensure that directors take steps to adapt the corporate strategy to
           take into account the actual and potential adverse impacts identified pursuant to
           Article 6 and any measures taken pursuant to Articles 7 to 9.
                                                Article 27
                             Amendment to Directive (EU) No 2019/1937
   In Point E.2 of Part I of the Annex to Directive (EU) No 2019/1937, the following point is
   added:
EN                                                66                                                 EN
 ---pagebreak---    ‘(vi) [Directive … of the European Parliament and of the Council of … on Corporate
   Sustainability Due Diligence and amending Directive (EU) 2019/1937*+]’
                                                       Article 28
                                            Exercise of the delegation
   1.       The power to adopt delegated acts is conferred on the Commission subject to the
            conditions laid down in this Article.
   2.       The power to adopt delegated acts referred to in Article 11 shall be conferred on the
            Commission for an indeterminate period of time.
   3.       The delegation of power referred to in Article 11 may be revoked at any time by the
            European Parliament or by the Council. A decision to revoke shall put an end to the
            delegation of the power specified in that decision. It shall take effect the day following
            the publication of the decision in the Official Journal of the European Union or at a
            later date specified therein. It shall not affect the validity of any delegated acts already
            in force.
   4.       Before adopting a delegated act, the Commission shall consult experts designated by
            each Member State in accordance with the principles laid down in the Interinstitutional
            Agreement of 13 April 2016 on Better Law-Making.
   5.       As soon as it adopts a delegated act, the Commission shall notify it simultaneously to
            the European Parliament and to the Council.
   6.       A delegated act adopted pursuant to Article 11 shall enter into force only if no objection
            has been expressed either by the European Parliament or the Council within a period of
            two months of notification of that act to the European Parliament and the Council or if,
            before the expiry of that period, the European Parliament and the Council have both
            informed the Commission that they will not object. That period shall be extended by
            two months at the initiative of the European Parliament or of the Council."
                                                       Article 29
                                                        Review
   No later than … [OP please insert the date = 7 years after the date of entry into force of this
   Directive], the Commission shall submit a report to the European Parliament and to the Council
   on the implementation of this Directive. The report shall evaluate the effectiveness of this
   Directive in reaching its objectives and assess the following issues:
   +
          OJ: Please insert in the text the number and the date of the Directive contained in document ... and insert
          the OJ reference of that Directive in the footnote.
EN                                                        67                                                       EN
 ---pagebreak---    (a)       whether the thresholds regarding the number of employees and net turnover laid down
             in Article 2(1) need to be lowered;
   (b)       whether the list of sectors in Article 2(1), point (b), needs to be changed, including in
             order to align it to guidance from the Organisation for Economic Cooperation and
             Development;
   (c)       whether the Annex needs to be modified, including in light of international
             developments
   (d)       whether Articles 4 to 14 should be extended to adverse climate impacts.
                                                  Article 30
                                                Transposition
   1.        Member States shall adopt and publish, by … [OJ to insert: 2 years from the entry into
             force of this Directive] at the latest, regulations and administrative provisions necessary
             to comply with this Directive. They shall forthwith communicate to the Commission the
             text of those provisions.
             They shall apply those provisions as follows:
             (a)   from… [OJ to insert: 2 years from the entry into force of this Directive] as regards
                   companies referred to in Article 2(1), point (a), and Article 2(2), point (a);
             (b)   from … [OJ to insert: 4 years from the entry into force of this Directive] as
                   regards companies referred to in Article 2(1), point (b), and Article 2(2), point (b).
             When Member States adopt those provisions, they shall contain a reference to this
             Directive or be accompanied by such a reference on the occasion of their official
             publication. Member States shall determine how such reference is to be made.
   2.        Member States shall communicate to the Commission the text of the main provisions of
             national law which they adopt in the field covered by this Directive.
                                                  Article 31
                                               Entry into force
   This Directive shall enter into force on the twentieth day following that of its publication in the
   Official Journal of the European Union.
EN                                                    68                                                EN
 ---pagebreak---                                               Article 32
                                             Addressees
   This Directive is addressed to the Member States.
   Done at Brussels,
   For the European Parliament                For the Council
   The President                              The President
EN                                              69            EN
 ---documentbreak---                         EUROPEAN
                        COMMISSION
                                                 Brussels, 23.2.2022
                                                 COM(2022) 71 final
                                                 ANNEX
                                        ANNEX
                                 to the proposal for a
    DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL
   on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937
         {SEC(2022) 95 final} - {SWD(2022) 38 final} - {SWD(2022) 39 final} -
                     {SWD(2022) 42 final} - {SWD(2022) 43 final}
EN                                                                                 EN
 ---pagebreak---                                              ANNEX
   PART I
   1.     VIOLATIONS OF RIGHTS AND PROHIBITIONS INCLUDED IN INTERNATIONAL HUMAN
          RIGHTS AGREEMENTS
   1.     Violation of the people's right to dispose of a land's natural resources and to not be
          deprived of means of subsistence in accordance with Article 1 of the International
          Covenant on Civil and Political Rights;
   2.     Violation of the right to life and security in accordance with Article 3 of the
          Universal Declaration on Human rights;
   3.     Violation of the prohibition of torture, cruel, inhuman or degrading treatment in
          accordance with Article 5 of the Universal Declaration of Human Rights;
   4.     Violation of the right to liberty and security in accordance with Article 9 of the
          Universal Declaration of Human Rights;
   5.     Violation of the prohibition of arbitrary or unlawful interference with a person's
          privacy, family, home or correspondence and attacks on their reputation, in
          accordance with Article 17 of the Universal Declaration of Human Rights;
   6.     Violation of the prohibition of interference with the freedom of thought, conscience
          and religion in accordance with Article 18 of the Universal Declaration of Human
          Rights;
   7.     Violation of the right to enjoy just and favourable conditions of work including a fair
          wage, a decent living, safe and healthy working conditions and reasonable limitation
          of working hours in accordance with Article 7 of the International Covenant on
          Economic, Social and Cultural Rights;
   8.     Violation of the prohibition to restrict workers’ access to adequate housing, if the
          workforce is housed in accommodation provided by the company, and to restrict
          workers’ access to adequate food, clothing, and water and sanitation in the work
          place in accordance with Article 11 of the International Covenant on Economic,
          Social and Cultural Rights;
   9.     Violation of the right of the child to have his or her best interests given primary
          consideration in all decisions and actions that affect children in accordance with
          Article 3 of the Convention of the Rights of the Child; violation of the right of the
          child to develop to his or her full potential in accordance with Article 6 of the
          Convention of the Rights of the Child; violation of the right of the child to the
          highest attainable standard of health in accordance with Article 24 of the Convention
          on the Rights of the Child; violation of the right to social security and an adequate
          standard of living in accordance with Article 26 and 27 of the Convention on the
          Rights of the Child; violation of the right to education in accordance with Article 28
          of the Convention on the Rights of the Child; violation of the right of the child to be
          protected from all forms of sexual exploitation and sexual abuse and to be protected
          from being abducted, sold or moved illegally to a different place in or outside their
          country for the purpose of exploitation, in accordance with Articles 34 and 35 of the
          Convention of the Rights of the Child;
EN                                               1                                                EN
 ---pagebreak---    10. Violation of the prohibition of the employment of a child under the age at which
       compulsory schooling is completed and, in any case, is not less than 15 years, except
       where the law of the place of employment so provides in accordance with Article 2
       (4) and Articles 4 to 8 of the International Labour Organization Minimum Age
       Convention, 1973 (No. 138);
   11. Violation of the prohibition of child labour pursuant to Article 32 of the Convention
       on the Rights of the Child, including the worst forms of child labour for children
       (persons below the age of 18 years) in accordance with Article 3 of the of the
       International Labour Organization Worst Forms of Child Labour Convention, 1999
       (No. 182). This includes:
       (a)   All forms of slavery or practices similar to slavery, such as the sale and
             trafficking of children, debt bondage and serfdom, as well as forced or
             compulsory labour, including the forced or compulsory recruitment of children
             for use in armed conflicts,
       (b)   The use, procuring or offering of a child for prostitution, for the production of
             pornography or for pornographic performances,
       (c)   The use, procuring or offering of a child for illicit activities, in particular for
             the production of or trafficking in drugs,
       (d)   Work which, by its nature or the circumstances in which it is carried out, is
             likely to harm the health, safety or morals of children;
   12. Violation of the prohibition of forced labour; this includes all work or service that is
       exacted from any person under the menace of any penalty and for which the said
       person has not offered himself or herself voluntarily, for example as a result of debt
       bondage or trafficking in human beings; excluded from forced labour are any work
       or services that comply with Article 2 (2) of International Labour Organization
       Forced Labour Convention, 1930 (No. 29) or with Article 8 (3) (b) and (c) of the
       International Covenant on Civil and Political Rights;
   13. Violation of the prohibition of all forms of slavery, practices akin to slavery, serfdom
       or other forms of domination or oppression in the workplace, such as extreme
       economic or sexual exploitation and humiliation in accordance with Article 4 of the
       Universal Declaration of Human Rights and Art. 8 of the International Covenant on
       Civil and Political Rights;
   14. Violation of the prohibition of human trafficking in accordance with Article 3 of the
       Palermo Protocol to Prevent, Suppress and Punish Trafficking in Persons Especially
       Women and Children, supplementing the United Nations Convention against
       Transnational Organized Crime;
   15. Violation of the right to freedom of association, assembly, the rights to organise and
       collective bargaining in accordance with Article 20 of the Universal Declaration of
       Human Rights, Articles 21 and 22 of the International Covenant on Civil and
       Political Rights Article 8 of the International Covenant on Economic, Social and
       Cultural Rights, the International Labour Organization Freedom of Association and
       Protection of the Right to Organise Convention, 1948 (No. 87) and the International
       Labour Organization Right to Organise and Collective Bargaining Convention, 1949
       (No. 98), including the following rights:
       (a)   workers are free to form or join trade unions,
EN                                            2                                                  EN
 ---pagebreak---        (b)    the formation, joining and membership of a trade union must not be used as a
              reason for unjustified discrimination or retaliation,
       (c)    workers’ organisations are free to operate in accordance with applicable in line
              with their constitutions and rules without interference from the authorities;
       (d)    the right to strike and the right to collective bargaining;
   16. Violation of the prohibition of unequal treatment in employment, unless this is
       justified by the requirements of the employment in accordance with Article 2 and
       Article 3 of the International Labour Organisation Equal Remuneration Convention,
       1951 (No. 100), Article 1 and Article 2 of the International Labour Organisation
       Discrimination (Employment and Occupation) Convention, 1958 (No. 111) and
       Article 7 of the International Covenant on Economic, Social and Cultural Rights;
       unequal treatment includes, in particular, the payment of unequal remuneration for
       work of equal value;
   17. Violation of the prohibition of withholding an adequate living wage in accordance
       with Article 7 of the International Covenant on Economic, Social and Cultural
       Rights;
   18. Violation of the prohibition of causing any measurable environmental degradation,
       such as harmful soil change, water or air pollution, harmful emissions or excessive
       water consumption or other impact on natural resources, that
       (a)    impairs the natural bases for the preservation and production of food or
       (b)    denies a person access to safe and clean drinking water or
       (c)    makes it difficult for a person to access sanitary facilities or destroys them or
       (d)    harms the health, safety, the normal use of property or land or the normal
              conduct of economic activity of a person or
       (e)    affects ecological integrity, such as deforestation,
       in accordance with Article 3 of the Universal Declaration of Human Rights, Article 5
       of the International Covenant on Civil and Political Rights and Article 12 of the
       International Covenant on Economic, Social and Cultural Rights;
   19. Violation of the prohibition to unlawfully evict or take land, forests and waters when
       acquiring, developing or otherwise use land, forests and waters, including by
       deforestation, the use of which secures the livelihood of a person in accordance with
       Article 11 of the International Covenant on Economic, Social and Cultural Rights;
   20. Violation of the indigenous peoples’ right to the lands, territories and resources
       which they have traditionally owned, occupied or otherwise used or acquired in
       accordance with Article 25, 26 (1) and (2), 27, and 29 (2) of the United Nations
       Declaration on the Rights of Indigenous Peoples;
   21. Violation of a prohibition or right not covered by points 1 to 20 above but included
       in the human rights agreements listed in Section 2 of this Part, which directly impairs
       a legal interest protected in those agreements, 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 obligations referred to in Article 4
       of this Directive taking into account all relevant circumstances of their operations,
       such as the sector and operational context.
EN                                               3                                              EN
 ---pagebreak---    2. HUMAN RIGHTS AND FUNDAMENTAL FREEDOMS CONVENTIONS
        The Universal Declaration of Human Rights;
        The International Covenant on Civil and Political Rights;
        The International Covenant on Economic, Social and Cultural Rights;
        The Convention on the Prevention and Punishment of the Crime of Genocide;
        The Convention against Torture and other Cruel, Inhuman or Degrading
         Treatment or Punishment;
        The International Convention on the Elimination of All Forms of Racial
         Discrimination;
        The Convention on the Elimination of All Forms of Discrimination Against
         Women;
        The Convention on the Rights of the Child;
        The Convention on the Rights of Persons with Disabilities;
        The United Nations Declaration on the Rights of Indigenous Peoples;
        The Declaration on the Rights of Persons Belonging to National or Ethnic,
         Religious and Linguistic Minorities;
        United Nations Convention against Transnational Organised Crime and the
         Palermo Protocol to Prevent, Suppress and Punish Trafficking in Persons
         Especially Women and Children, supplementing the United Nations
         Convention against Transnational Organized Crime;
        The International Labour Organization’s Declaration on Fundamental
         Principles and Rights at Work;
        The International Labour Organization’s Tripartite Declaration of Principles
         concerning Multinational Enterprises and Social Policy;
        The International Labour Organization’s core/fundamental conventions:
              Freedom of Association and Protection of the Right to Organise
               Convention, 1948 (No. 87)
              Right to Organise and Collective Bargaining Convention, 1949 (No. 98)
              Forced Labour Convention, 1930 (No. 29) and its 2014 Protocol;
              Abolition of Forced Labour Convention, 1957 (No. 105)
              Minimum Age Convention, 1973 (No. 138)
              Worst Forms of Child Labour Convention, 1999 (No. 182)
              Equal Remuneration Convention, 1951 (No. 100)
              Discrimination (Employment and Occupation) Convention, 1958 (No.
               111)
EN                                      4                                             EN
 ---pagebreak---    PART II
   VIOLATIONS OF INTERNATIONALLY RECOGNIZED OBJECTIVES AND PROHIBITIONS INCLUDED
   IN ENVIRONMENTAL CONVENTIONS
   1.      Violation of the obligation to take the necessary measures related to the use of
           biological resources in order to avoid or minimize adverse impacts on biological
           diversity, in line with Article 10 (b) of the 1992 Convention on Biological Diversity
           and [taking into account possible amendments following the post 2020 UN
           Convention on Biological Diversity], including the obligations of the Cartagena
           Protocol on the development, handling, transport, use, transfer and release of living
           modified organisms and of the Nagoya Protocol on Access to Genetic Resources and
           the Fair and Equitable Sharing of Benefits Arising from their Utilization to the
           Convention on Biological Diversity of 12 October 2014;
   2.      Violation of the prohibition to import or export any specimen included in an
           Appendix of the Convention on International Trade in Endangered Species of Wild
           Fauna and Flora (CITES) of 3 March 1973 without a permit, pursuant to Articles
           III, IV and V;
   3.      Violation of the prohibition of the manufacture of mercury-added products pursuant
           to Article 4 (1) and Annex A Part I of the Minamata Convention on Mercury of 10
           October 2013 (Minamata Convention);
   4.      Violation of the prohibition of the use of mercury and mercury compounds in
           manufacturing processes within the meaning of Article 5 (2) and Annex B Part I of
           the Minamata Convention from the phase-out date specified in the Convention for
           the respective products and processes;
   5.      Violation of the prohibition of the treatment of mercury waste contrary to the
           provisions of Article 11 (3) of the Minamata Convention;
   6.      Violation of the prohibition of the production and use of chemicals pursuant to
           Article 3 (1) (a) (i) and Annex A of the Stockholm Convention of 22 May 2001 on
           Persistent Organic Pollutants (POPs Convention), in the version of Regulation (EU)
           2019/1021 of the European Parliament and of the Council of 20 June 2019 on
           persistent organic pollutants (OJ L 169 of 25 June 2019 pp. 45-77;
   7.      Violation of the prohibition of the handling, collection, storage and disposal of
           waste in a manner that is not environmentally sound in accordance with the
           regulations in force in the applicable jurisdiction under the provisions of Article 6
           (1) (d) (i) and (ii) of the POPs Convention;
   8.      Violation of the prohibition of importing a chemical listed in Annex III of the
           Convention on the Prior Informed Consent Procedure for Certain Hazardous
           Chemicals and Pesticides in International Trade (UNEP/FAO), adopted on 10
           September 1998, as indicated by the importing Party to the Convention in line with
           the Prior Informed Consent (PIC) Procedure;
   9.      Violation of the prohibition of the production and consumption of specific substances
           that deplete the ozone layer (i.e., CFCs, Halons, CTC, TCA, BCM, MB, HBFCs and
           HCFCs) after their phase-out pursuant to the Vienna Convention for the protection of
EN                                                 5                                             EN
 ---pagebreak---        the Ozone Layer and its Montreal Protocol on substances that deplete the Ozone
       Layer;
   10. Violation of the prohibition of exports of hazardous waste within the meaning of
       Article 1 (1) and other wastes within the meaning of Article 1 (2) of the Basel
       Convention on the Control of Transboundary Movements of Hazardous Wastes and
       their Disposal of 22 March 1989 (Basel Convention) and within the meaning of
       Regulation (EC) No 1013/2006 of the European Parliament and of the Council of 14
       June 2006 on shipments of waste (OJ L 190 of 12 July 2006 pp. 1-98) (Regulation
       (EC) No 1013/2006), as last amended by Commission Delegated Regulation (EU)
       2020/2174 of 19 October 2020 (OJ L 433 of 22 December 2020 pp. 11-19)
       (a)   to a party that has prohibited the import of such hazardous and other wastes
             (Article 4 (1) (b) of the Basel Convention),
       (b)   to a state of import as defined in Article 2 no. 11 of the Basel Convention that
             does not consent in writing to the specific import, in the case where that state
             of import has not prohibited the import of such hazardous wastes (Article 4 (1)
             (c) of the Basel Convention),
       (c)   to a non-party to the Basel Convention (Article 4 (5) of the Basel Convention),
       (d)   to a state of import if such hazardous wastes or other wastes are not managed
             in an environmentally sound manner in that state or elsewhere (Article 4 (8)
             sentence 1 of the Basel Convention);
   11. Violation of the prohibition of the export of hazardous wastes from countries listed in
       Annex VII to the Basel Convention to countries not listed in Annex VII (Article 4A
       of the Basel Convention, Article 36 of Regulation (EC) No 1013/2006);
   12. Violation of the prohibition of the import of hazardous wastes and other wastes from
       a non-party to the Basel Convention (Article 4 (5) of the Basel Convention).
EN                                            6                                                EN