Modern transitions in business and due diligence

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The European Union sends a warning signal – “no more business as usual”; thus, to produce goods and services companies have to respect sustainability, environmental quality, human health, bio-diversity, etc.; hence, new rules in entrepreneurship shall be introduced. 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 not only reflecting modern challenges and the EU-wide drive for recovery and resilience; they 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 the European Environmental Bureau, EEB acknowledged that the EU “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 in the form of corporate resistance.

Legal issues in “green business”
The only mentioning closer to “green business” is in the Commission’s website on “corporate sustainability due diligence”; the approach which aligns the “overall Commission objective of a just transition to a sustainable economy and a sustainable recovery”. It underlines that main EU-wide initiatives, i.e. the European “green deal” and Recovery-Resilience Facility confirmed the “importance of embedding sustainability into corporate governance”.
However, the purpose of the EU-wide corporate regulations is rather limited; it is a sphere mostly subject to the member states’ rules. For example, EU rules concerning business in general are oriented towards: setting up and carry business operations around the EU-27; providing protection for shareholders, employees and creditors with a particular interest in companies; making corporate activity more efficient, competitive and sustainable in the long term; and encouraging closer business cooperation among different EU countries.
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The proposal for a Directive on Corporate Sustainability Due Diligence (Commission Communication, 2022-71), adopted by the Commission at the end of February 2022, aims at “better enabling companies to identify and mitigate actual or potential… environmental adverse impact in the companies’ operation and value chains”; the proposal is still in the Union’s co-legislative process.
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It has to be noted that the Commission’s proposal uses the notion “due diligence”, which actually means “the exercise of reasonable care in the course of business”; e.g. Cambridge Dictionary describes due diligence as “detailed examination of a company and its financial records before being involved in a business arrangement”.

The aim of the Directive is to foster “sustainable and responsible corporate behavior” and to anchor human rights and environmental considerations in companies’ operations and corporate governance; the new rules will ensure that “businesses address adverse impacts of their actions, including in their value chains”.
Thus, expected benefits for companies –if a draft is adopted – are the following: – harmonised legal framework in the EU, creating legal certainty and level playing field; – greater customer trust and employees’ commitment; – better awareness of companies’ negative environmental and human rights impacts; – better risk management and adaptability; – increased attractiveness for talent, sustainability-oriented investors and public procurers; higher attention to innovation, and better access to finance.
However, it is business itself that will have to bear the estimated costs of the new rules, i.e. the costs of establishing and operating the due diligence procedures, such as transition’s costs, including expenditure and investments to change a company’s own operations and value chains to comply with the due diligence obligations.
At European 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. The directive does not include an additional enforcement regime in case businesses do not comply with their obligations under this directive.

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The timing of the Commission’s due diligence initiative seems too late: it should have been drafted long before the whole set of about a dozen of different EU-wide measures on “green business” were adopted.
Reference to the EU’s study on due diligence in: European Commission, Directorate-General for Justice and Consumers, Torres-Cortés, F., Salinier, C., Deringer, al., Study on due diligence requirements through the supply chain – Final report, Publications Office, 2020, in:
Additional publications on the issue in:

EMAS and “green diligence”
Another Commission’s website close to the “green diligence” is that of the corporate social responsibility, CRS and on “environmental initiatives for businesses”; both are dealing with the EU’s eco-management and audit scheme EMAS. The EMAS requirements are affecting small businesses and national authorities issuing EMAS certificates. It also includes the application for EMAS certification, EMAS governance, its role in the European institutions and EMAS-registered organisations.
EMAS also is part of the company’s environmental policy audit system: thus, part of companies’ CSR involves meeting environmental product requirements; the scope of CSR, however, extends well beyond these requirements alone, but it includes the EU product requirements and the EU-wide sustainable development policy and criteria and CSR in individual trade agreements, as well as impact and sustainability assessments of trade deals.

Corporate Sustainability and due Diligence Directive, CSDDD
The directive was initially proposed by the European Commission in February 2022; it required the 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 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.
The SMEs will also need to take steps to minimise the risks of causing 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.

Factors limiting the “due diligence”
However, corporate authorities in several EU states are trying to narrow the scope of the directive: instead of covering company’s entire value chain, it would only cover 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 jeopardized.
Such a “reaction” 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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