EU: NEW OBLIGATIONS FOR COMPANIES WITH REGARD TO THE PROTECTION OF HUMAN RIGHTS AND OF THE ENVIRONMENT

EU: New obligations for companies with regard to the protection of human rights and of the environment

On July 25, 2024, entered into force the Directive on corporate sustainability due diligence (Directive 2024/1760). The European Regulation is aimed at determining companies to act sustainably and responsibly.

This means, on the one hand, to analyse the actual and potential harmful impact of their own operations, of their subsidiaries or of their partners along the supply chain on the human rights and the environment, and, on the other hand, to take concrete steps to prevent and mitigate such adverse impacts.

The directive also states that such requirements shall not impair the level of protection of human rights, employment or social rights provided by the national legislation or collective agreements nor shall they replace the obligations provided by other legislative acts of the European Union.

In case of conflict, the stricter provisions of the European regulations shall prevail. Member States are bound to transpose this directive in their national legislation and to inform the Commission about the measures adopted until July 26, 2026.

Such rules shall become enforceable starting with 2027 for the first group of target companies (see below).

The Commission shall elaborate and publish guidelines on how due diligence obligations are to be complied with, including the type of contractual clauses that can be voluntarily used.

Also, a single helpdesk shall be set up to help companies comply with their obligations.

Application field

The following categories of target companies:

• Companies formed according with the EU legislation, fulfilling one of the following conditions : (1) having more than 1,000 employees on average and a net worldwide turnover exceeding EUR 450 million in the last financial year for which annual financial statements have been or should have been adopted; (2) has not reached the thresholds mentioned above, but is the highest-ranking parent company of a group that has reached the respective thresholds; (3) having entered into franchising / licensing agreements in the Union amounting to more than EUR 22.5 million or had a net worldwide turnover of more than EUR 80 million;
• Third country companies fulfilling one of the following conditions: (1) generated a net turnover of at least EUR 450 million within the EU, (2) are the parent company of a group of companies having reached that threshold (3) entered into franchising or licensing agreements in the Union with independent third-party companies in return for royalties amounting to more than EUR 22.5 million and generated a net turnover in the EU over EUR 80 million

Companies meeting these conditions 2 consecutive financial years shall be governed by the law of the Member State where they have their registered office or, if they are international companies without branches in the EU, by the Member State where they get the highest turnover in the EU.

SME-s and microenterprises are not concerned by the directive, which warns on the need for protection measures for this category of companies that may be affected directly as business partners in the value chains.

Transposition

Member States shall apply these provisions as following:

• Starting with July 26, 2027 – the target companies that had an average over 5,000 employees and have generated a worldwide net turnover over EUR 1.500 billion during the financial year preceding July 26, 2027, for which the annual financial statements were or should have been adopted;
• Starting with July 26, 2027 – the target companies having generated a net turnover over EUR 1.5 billion in the EU;
• Staring with July 26, 2028 – companies that had an average headcount over 3,000 employees and a worldwide net turnover over EUR 900 billion;
• Starting with July 26, 2028 – target companies having generated a net turnover over EUR 900 million within the EU during the financial year preceding July 26, 2028;
• Starting with July 26, 2029 – the remaining target companies.

Obligation of diligence

The directive establishes an obligation to develop a due diligence policy and integrate it into risk management policies and systems. The central elements of this policy, which must be drawn up following consultation with employees and their representatives, include several actions such as:

• Identification and assessment of negative impacts, potential or actual, on human rights and the environment within the operations of the company, its subsidiaries and, if they are related to the value chain, their business partners;
• Measures to foresee, mitigate and remedy these risks;
• Measures to ensure transparency and dialogue with interested parties, including by establishing a notification mechanism and a procedure for dealing with possible complaints;
• A public communication regarding due diligence. According to the directive, the companies concerned shall publish on their websites a statement on the due diligence policies, processes and activities carried out, and after January 1, 2029, this statement will also be sent to the body specially designated by the Member States, to be accessible to the general public.
• The due diligence policy must also include a long-term approach to this issue, a code of conduct that establishes the rules and principles that govern the company's activity and in relation to its business partners, as well as a mechanism that allows monitoring compliance with these rules. The policy must be updated at least once every 24 months or after significant changes.

Fighting climate change

Large companies are required to adopt and implement a transition plan to mitigate climate change, aligned with the goal of climate neutrality for 2050 and limiting global warming to 1.5 degrees Celsius. The plan must be updated annually and must describe the progress made.

Penalties & Responsabilities

The sanctions that will have to be adopted for non-compliance with the measures provided for in the directive must be proportionate and effective, including pecuniary.

Where pecuniary sanctions are imposed, they will be based on the global net turnover of the company in tort.

The maximum limit for pecuniary sanctions will not be less than 5% of the company's worldwide net turnover in the financial year preceding the sanction.

In order to avoid artificially reducing potential administrative fines, Member States must ensure that, when a pecuniary penalty is imposed on a company that is part of a group, this penalty will be calculated taking into account the consolidated turnover at the level of the parent company.

Additionally, in order to ensure that victims of adverse effects have effective access to justice and compensation, states must establish rules governing the civil liability of companies for damages caused to a natural or legal person, if the company, intentionally or negligently , did not prevent or mitigate the potential adverse effects, did not eliminate the actual effects or did not take measures to reduce their extent, and the natural or legal person suffered damages as a result of this fact.

Civil liability of a company for damages resulting from the failure to observe the necessary diligence must be understood without prejudice to the civil liability of subsidiaries or direct and indirect business partners in the chain of activities.

When the company caused the damage jointly with a subsidiary or business partner, then the company shall be jointly and severally liable with the subsidiary or business partner in question.

A company cannot be held liable if the damage is caused only by its business partners in its chain of activities. Damages caused to a person's protected legal interests must be understood in accordance with national law.

Victims must be entitled to full compensation for the harm suffered, in accordance with national law. However, full compensation must not result in overcompensation, by punitive, multiple or other kind of compensation.

Limitation periods for filing civil liability claims for damages must be at least five years and in no case less than the limitation period provided for in general national civil liability regimes.