New challenges for business: sustainability and environmental quality

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European Environmental Bureau sends a warning signal: “no more business as usual”. Thus, to produce goods and services the European companies have to respect human health, sustainability, environmental quality and bio-diversity. It is, basically, about introducing new rules in entrepreneurship; however, some stumbling blocks are still tarnishing present progressive moves including corporate governance resistance to changes. A new directive’s draft is supposed to make a difference…  

New trends in entrepreneurship are reflecting modern challenges and the EU-wide drive for recovery and resilience are at the center of transitions in contemporary European business strategy. Businesses play a key role in creating sustainable and fair “social market economy”: presently, about a third of European companies recognise the need to act and take measures to address adverse effects of their actions on human rights and/or the environment, but progress is slow and uneven.
The increasing complexity and global nature of supply chains makes it challenging for companies to get reliable information on suppliers’ operations. The fragmentation of national rules on corporate, sustainability-related due diligence obligations further slows down the take-up of good practices.
Separate member states’ measures in sustainably-positive directions seemingly are not enough to help companies exploit their full potential and withstand global challenges: some common efforts and legal rules shall be included…

Therefore it is said in the acknowledgement from a news channel of the European Environmental Bureau, EEB: “no more business as usual”. While the EU is proclaiming the block as a leader both in human rights and sustainability, it “must critically look at the activities of its own companies”, acknowledges the EEB. Thus, to produce goods and services the European companies have to see that they do not harm neither people nor the surrounding environment and nature. That, basically, requires new rules for business; but a serious stumbling block is there presently: i.e. corporate resistance stands in the way.

Corporate Sustainability and due Diligence Directive, CSDDD
The directive was initially proposed by the European Commission in February 2022 and would require member states to introduce legislation to make companies responsible for violations of human rights and environmental safeguards along their entire value chain.
The Commission’s draft for a Directive on “corporate sustainability due diligence” aims at fostering sustainable and responsible corporate activity so that human rights and environmental considerations are included into companies’ operations and corporate governance. The new rules will ensure that businesses address adverse impacts of their actions, including regional and global value chains. Essentially, this means that companies will need to check for potential adverse human rights and environmental impacts from their own activities and that of their clients and suppliers, as well as how their services and products will be used and disposed of.
They will also need to take steps to minimise the risks of causing these adverse impacts through their business conduct, i.e. the process which is regularly known as due diligence. For example, some big companies need to have a plan to ensure that their business strategy is compatible with limiting global warming to 1.5 °C in line with the Paris Agreement; hence, corporate governance is to actually contribute to sustainability and climate change mitigation goals.
However, the Commission’s website acknowledges that “micro companies and SMEs are not concerned by the proposed rules; but the proposal provides supporting measures for SMEs, which could be indirectly affected”.
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The CSDDD’s aim is to make businesses sustainable and fair; the initiative has been popular among environment-minded businesses for its potential to safeguard both human rights to a healthy environment (throughout global value chains) and force businesses to make “right decisions” concerning environment and nature protection.
Huge potential for environmental protection is becoming even more important due to recent global attention to sustainability and climate change measures. Thus, from deforestation to plastic production, from mining raw materials to the emission of greenhouse gases, business is behind an overwhelming part of environmental degradation and climate change.
Hence, the CSDDD could help to tame the beast of unethical business practice and put consumers’ minds at ease when buying products and using services.
The new directive would make it compulsory for companies to evaluate and address their actual and potential human rights and environmental impacts which, outrageously, is not the case at the moment.
The EEB confirms that “while it was a long-awaited and milestone moment, the Commission’s initial proposal for the law was not very broad in scope and presented several loopholes”; it adds that the draft is only covering about one percent of businesses (excluding SMEs from any direct liability). However, the latter are actively involved in some high-risk business activity sectors, such as the textiles, mining industries, etc.

Limiting the “due diligence”
However, several EU states are trying to narrow the scope of the directive so that rather than covering the entire value chain of a company, it only covers the supply chain, or what is now being termed, the “chain of activities”. Limiting due diligence to these upstream activities (where materials for products are sourced and manufactured) would leave out downstream activities (the use and disposal of products) that are tied to many of the most severe impacts and would mean that companies’ ability to address their true actual and potential impacts is jeopardised.
Such an approach would hugely limit the directive’s capacity to safeguard sustainability and environmental protection, as it would let companies and financial institutions off the hook for the damage their products and investments cause, even when they are put to very harmful and/or illegal use, such as digital surveillance tools being used for illegal surveillance and investments being used in the destruction of the environment.
The directive provides a major opportunity to support climate change mitigation and reduce environmental degradation by holding companies accountable for damages. This could be realised, for example through holding companies responsible for the emissions they produce. However, currently, climate due diligence is absent from the directive: there should be introduced an immediate duty for companies to address climate change risks and impacts in their value chains, just like other environmental impacts and rights, recognising climate crisis emergency. Companies should also have concrete, enforceable obligations to develop and implement an effective transition plan in line with the Paris Agreement, including absolute emission reduction targets for the short, medium and long-term.

New rules’ enforcement
The rules on corporate sustainability due diligence will be enforced through the following means:
= Administrative supervision: the EU member states will designate an authority to supervise and impose effective, proportionate and dissuasive sanctions, including fines and compliance orders. At the EU-wide level, the Commission will set up a European Network of Supervisory Authorities that will bring together representatives of the national bodies to ensure a coordinated approach.
= Civil liability: the EU member states will ensure that victims get compensation for damages resulting from the failure to comply with the obligations of the new proposals.
Besides, the “rules of directors’ duties” will be enforced through already existing member states’ corporate and administrative legislation. However, the directive’s draft does not include an additional enforcement regime in case directors do not comply with their obligations under this directive.
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