COMMISSION STAFF WORKING DOCUMENT Follow-up to the second opinion of the Regulatory Scrutiny Board Accompanying the document Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937

EN EN
EUROPEAN
COMMISSION
Brussels, 23.2.2022
SWD(2022) 39 final
COMMISSION STAFF WORKING DOCUMENT
Follow-up to the second opinion of the Regulatory Scrutiny Board
Accompanying the document
Proposal for a
DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL
on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937
{COM(2022) 71 final} - {SEC(2022) 95 final} - {SWD(2022) 38 final} -
{SWD(2022) 42 final} - {SWD(2022) 43 final}
Offentligt
KOM (2022) 0071 - SWD-dokument
Europaudvalget 2022
EN EN
TABLE OF CONTENTS
1. FINDINGS OF THE SECOND OPINION OF THE REGULATORY
SCRUTINY BOARD.....................................................................................................1
2. THE PROBLEM AND ITS EVOLUTION ...................................................................1
2.1. Increasing uptake of sustainability practices and shortcomings ..........................2
2.2. Links with other regulatory due diligence measures and with Green Deal
measures ...............................................................................................................3
2.3. Links with relevant international conventions, trade policy and
development support measures ............................................................................5
3. CHANGES TO THE PREFERRED OPTION...............................................................6
3.1. Preferred option in the impact assessment ...........................................................6
3.2. Material scope of the proposal .............................................................................7
3.3. Personal scope of the proposal...........................................................................10
3.4. Enforcement mechanism ....................................................................................14
4. ASSESSMENT OF IMPACTS....................................................................................17
4.1. Revised cost assessment.....................................................................................17
4.2. Proportionality....................................................................................................19
4.3. Impacts on third countries..................................................................................20
4.4. Contribution of potential soft mitigation measures............................................25
4.5. Impact on competition........................................................................................25
4.6. Impact on competitiveness.................................................................................27
LIST OF HUMAN RIGHTS AND ENVIRONMENTAL DUE
DILIGENCE OBLIGATIONS.....................................................................................30
A. Violation of rights and prohibitions included in international human rights
agreements..........................................................................................................30
B. Human rights and fundamental freedoms conventions ......................................33
Part II............................................................................................................................34
Violation of internationally recognized objectives and prohibitions included in
environmental conventions.................................................................................34
SUMMARY OF COSTS AND BENEFITS ..........................................36
OVERVIEW OF HOW THE COMMENTS OF THE
REGULATORY SCRUTINY BOARD HAVE BEEN ADDRESSED.......................42
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1. FINDINGS OF THE SECOND OPINION OF THE REGULATORY SCRUTINY BOARD
Following the negative opinion of the Regulatory Scrutiny Board (hereafter: the Board)
on the first draft impact assessment report on the Sustainable Corporate Governance
initiative of 7 May 2021, a revised impact assessment was submitted to the Board for a
second opinion on 5 November 2021. While noting the significant revision responding to
its initial comments, the Board nevertheless maintained its negative opinion on
26 November 20211
, referring to the following main shortcomings:
1. problem description remaining vague and not providing convincing evidence
that EU businesses, in particular small and medium-sized enterprises (SMEs),
do not already sufficiently reflect sustainability aspects;
2. policy options remaining too limited, not identifying key policy choices;
3. assessment of impacts not being sufficiently complete, balanced and neutral,
and uncertainty related to the realisation of benefits not being sufficiently
reflected; and
4. proportionality of the preferred option not sufficiently demonstrated.
This document provides additional evidence and explanations in response to the
above listed main findings and the specific suggestions for improvement provided by the
Board (for a summary of how these were addressed, please refer to Annex 3). As such,
this document complements the impact assessment2
, which was not revised in
substance and is published in parallel together with the opinions of the Regulatory
Scrutiny Board, thus allowing for transparency and comparability. This document also
complements the information provided in the Explanatory Memorandum accompanying
the proposal.
It is important to stress 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. They further led to adjustments of the preferred option that had
been put forward by the impact assessment. The corresponding changes made to the
proposal, as presented for adoption, are also explained in this document.
2. THE PROBLEM AND ITS EVOLUTION
This section responds to the Board’s recommendation to specify better the problem
definition and present a more balanced dynamic baseline scenario that integrates better
specific market and regulatory developments in the EU and in third countries (see Annex
3: Overview table, General comment 1 and Specific comments 1-2).
1
SEC(2022)95.
2
Commission Staff Working Document: ”Impact Assessment Report Accompanying the document
Proposal for a Directive of the European Parliament and the Council on Corporate Sustainability Due
Diligence and amending Directive (EU) 2019/37” (SWD(2022)42.
EN 2 EN
4.1. Increasing uptake of sustainability practices and shortcomings
The impact assessment presents evidence that many companies are already improving the
sustainability of their business operations. This is further supported by new evidence
showing that more than 90% of CEOs state that sustainability is important to their
company’s success and many companies develop sustainability strategies, and
market sustainable products or services.3
The EcoVadis Business Sustainability Risk
and Performance Index 2021, which is based on sustainability ratings, shows that the
general sustainability performance of rated companies is increasing across regions and
industries, and this trend can be expected to continue.4
Europe is the leading region in
that respect. For instance, the use of supplier codes of conduct and supplier assessments
has grown in 2020 from 14% to 26% and from 24% to 33% of companies, respectively,
compared to 2016.
However, progress in some areas remains slow. According to the EcoVadis index
mentioned above, key actions such as supply chain risk analysis remain underutilised. As
a result, less than 35% of the surveyed companies have policies on sustainable
procurement and supply chain due diligence in place.
Moreover, according to the 2021 European Sustainable Industry Barometer, while most
industry federations have embedded sustainability in general in their agendas, fewer
are directly undertaking relevant activities (e.g. target setting, leading impact projects
and providing annual disclosures).5
Significant disparities still exist among different
industry sectors.6
In light of increased calls for transparency in the value chain from investors and
consumers, it is expected, on the one hand, that corporate commitments on
sustainability will further develop.7
On the other hand, as explained in the impact
assessment, such pressure is not sufficient to mainstream the mitigation of adverse
3
Hoffman, A. J. (2018). The Next Phase of Business Sustainability. Stanford Social Innovation Review,
16(2), 35–39.
4
The EcoVadis Business Sustainability Risk and Performance Index 2021: Insights on global supply
chains ratings covers the period 2016-2020 and is based on data derived over 72 000 ratings conducted on
more than 46 000 companies.
5
From the interviewed industry federations, only 40% have included SDGs explicitly in their mission and
vision, 40% include time-bound targets in their sustainability roadmaps, 30% engage in practical
sustainability impact/improvement projects with their members, and only 30% participated in EU-funded
sustainability projects. See 2021 European Sustainable Industry Barometer – Assessing the maturity and
integration of sustainability factors in European industry, a report based on research produced by CSR
Europe and V.E, part of Moody’s ESG Solutions, page 28 of the report.
6
Industry federations from the materials sectors outperform those from consumer and retail-focused
sectors (see page 12 of the same report).
7
By way of example, in the lead up to COP 26, over 970 companies globally have reportedly set science-
based targets. A 2021 survey by the Energy & Climate Intelligence Unit and Oxford Net Zero found that
21% of the 2 000 publicly listed companies surveyed had committed to net zero emissions by 2050 at the
latest. However, the same survey also found that there was considerable variation in the quality of business
commitments with regard to their scope, governance mechanisms and implementation plans. A recent
benchmarking study by Climate Action 100+ found that of the 159 largest corporate emitters surveyed, no
company performed at a high level across all 9 indicators including the presence of a decarbonisation
strategy, capital allocation alignment, climate policy engagement and climate governance.
EN 3 EN
human rights and environmental impacts across all large companies. Furthermore,
without mandatory action, investors and consumers would miss consistent benchmarks to
be assured about the value chain standards, while companies would lack clarity about due
diligence standard to implement in the value chain. Hence, mandatory action would
lower transactions costs within the value chain and create a level playing field.
4.2. Links with other regulatory due diligence measures and with
measures under the European Green Deal
This initiative complements existing Union legislative measures and legislative
proposals that have already been adopted, or are being prepared, that set out sectoral or
product-specific due diligence requirements. It also contributes to the
comprehensive package of measures under the Green Deal. This section focuses on
the evolution of the problem in light of those relevant measures, complementing section
2.3 of the impact assessment.
The product-related and sector-specific Union initiatives setting out due diligence
obligations aim at improving specific sustainability concerns in supply or value chains
of certain products and sectors and are targeted at specific economic activities. The
Conflict Minerals Regulation8
which covers gold, tin, tungsten and tantalum supply
chains. The Deforestation Proposal (proposal for a Regulation on deforestation-free
products)9
concerns specific agricultural products, i.e. beef, palm oil, soy, wood, cocoa,
coffee and derived products.10
The Batteries Proposal (proposal for a Regulation
concerning batteries and waste batteries)11
establishes a supply chain due diligence
requirement related to specific kinds of industrial electric-vehicle batteries.
The above-mentioned measures aim at addressing very specific pressing sustainability
concerns that are particularly salient as regards the specific product concerned. The
Conflict Minerals Regulation aims at cutting finance of armed groups and abolishing
forced labour and other limited very serious human rights abuses, corruption and money
laundering in relation to the trade of the products in question. The Deforestation proposal
aims at addressing deforestation risk only. The Batteries Proposal addresses both
environmental and human/labour rights concerns related to the battery in question.
In addition, the Communication on decent work worldwide12
has announced that the
Commission is preparing a new legislative proposal that will effectively prohibit the
8
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.
9
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.
10
Further commodities can be added at a later stage.
11
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
12
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.
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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.
The Corporate Sustainability Due Diligence initiative sets up a horizontal due
diligence requirements that serve as a common denominator for companies in the scope
that are active in the Union. It contains basic requirements that serve as a lex generalis
regarding value chains and sustainability concerns that are not covered in one of the
sectorial initiatives. For instance, deforestation in construction, mining, or environmental
risks related to mining of conflict minerals would be covered by the horizontal due
diligence.
This initiative also clarifies that in case of human rights or environmental harm in a
company’s value chain, the company can be held liable under specific conditions. Civil
liability is an effective tool for ensuring compliance with the due diligence rules whilst
at the same time enabling victims of adverse impacts to seek remedy. None of these
existing or planned instruments include civil liability. Consequently, the problem of
the lack of companies’ accountability for adverse impacts occurring in their value chains
that this initiative seeks to address would only be partially addressed by the sector-
specific due diligence requirements included in existing and planned EU legislation.
Furthermore, it is expected that the package of measures adopted under the European
Green Deal will create a regulatory environment that encourages the green transition
of companies and responsible business behaviour within Europe, more broadly.
Several initiatives of the European Green Deal will materialise over the next years.
They include legislative and non-legislative measures, notably the Fit for 55 package
aiming to reduce greenhouse gas (GHG) emissions within the Union, the Zero Pollution
Action Plan (including the chemicals strategy for sustainability towards a toxic-free
environment), the EU Biodiversity Strategy for 2030 and the Farm-to-Fork Strategy. The
different measures aim to make the EU climate-neutral by 2050 and to preserve the EU's
natural environment and biodiversity. Together with Sustainable Finance Strategy,
especially the proposal for a Corporate Sustainability Reporting Directive, the
Sustainable Finance Disclosures Regulation and the Taxonomy Regulation, they will
have concrete impact in some areas and might raise awareness about external impacts
of companies’ operations in others.
This initiative will further contribute to the goals of the European Green Deal, as it
covers a broad range of environmental adverse impacts, which companies will be
expected to effectively mitigate, including impacts generated in value chains outside
the Union’s territory.
It is complementary to the Fit for 55 package. Its centrepiece, the EU Emissions
Trading System (ETS), covers the most carbon-intensive industrial sectors, transport and
buildings. However, the EU’s external climate footprint is not covered, save for
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proposed border adjustment limited to leakage-prone ETS sectors. The same is true for
other environmental concerns tackled by the Green Deal. For instance, the actions under
the Zero Pollution Action Plan do not include any concrete requirements for companies
that would lead to a reduction of the EU’s external pollution footprint. Besides, the
proposed measures under the above-mentioned EU strategies do not cover all industry
sectors and wide range of potential adverse impacts on the environment that are
covered by this initiative. This initiative is one of the concrete action points in the action
plan of the Farm-to-Fork Strategy that could deliver tangible results in making
agricultural and food value chains outside the EU sustainable. Apart from the
proposal for a Regulation on deforestation-free products, this initiative is also a specific
action in the action plan of the Biodiversity Strategy that could require companies to
contribute to the post-2020 biodiversity framework.
4.3. Links with relevant international conventions, trade policy and
development support measures
The Regulatory Scrutiny Board Opinion pointed to the need for more precision on the
selected international environmental conventions in the “material scope” (i.e. what is
covered) . To this end, the proposal does not simply put forward a list of international
conventions to be covered by due diligence duty (as has been done in the Annex to the
impact assessment), but explicitly identifies a list of concrete violations of the relevant
international agreements, following a strict selection based on the need to ensure clear
obligations for companies and legal certainty for EU and non-EU operations.
With regard to the Paris Agreement, companies (in Group 1) would be required to
adopt a plan to ensure they contribute to reaching the Union’s climate
commitments, building on the disclosures under the proposed Corporate Sustainability
Reporting Directive (see details in the section on the material scope) and adapt the
remuneration of directors thereto. This approach reflects that companies play an
important role in delivering on those goals and that it is a shared effort among public and
private sectors.
Regarding biodiversity, negotiations on updating existing global standards are currently
ongoing (Post-2020 Global Biodiversity Framework to the UN Convention on Biological
Diversity). While it is expected that this process would lead to setting action targets
for 2030, including for businesses to reduce their biodiversity-related impacts,
implementation in different countries could be varied, in line with the differences in
political commitments and capacities.13
Global trade policy has been used to address human-rights abuses and progress has been
achieved in including environmental matters in trade agreements, too. The bilateral
13
Target 15 aims for all businesses (public and private, large, medium and small) to assess and report on
their dependencies and impacts on biodiversity, from local to global, and progressively reduce negative
impacts, by at least half and increase positive impacts, reducing biodiversity-related risks to businesses and
moving towards the full sustainability of extraction and production practices, sourcing and supply chains,
and use and disposal, see First draft of the post-2020 global biodiversity framework (cbd.int), p. 7.
EN 6 EN
trade agreements of the EU, and of the US, have increasingly included labour-
related provisions, for instance on forced labour, child labour and employment
discrimination. This said, effective enforcement remains an issue.
The Commission plans to reinforce further the sustainability dimension of existing
and future trade agreements and to strengthen the enforcement of trade and
sustainable development commitments. At the same time, as announced in the Trade
Policy review, EU legislation on corporate sustainability due diligence is considered
to be an important initiative to promote sustainable and responsible value chains.
As regards unilateral trade instruments, the Union is reviewing its Generalised Scheme
of Preferences (GPS) also to strengthen further the scheme’s contribution to sustainable
development and compliance with international human rights and labour standards,
environmental protection, and good governance in the beneficiary countries.
These trade policy measures will create synergies with companies’ due diligence in the
value chain.
3. CHANGES TO THE PREFERRED OPTION
This section first recalls the content of the preferred option identified in the impact
assessment, then outlines how – after having reflected on the comments of the Board
concerning in particular proportionality, the enforcement mechanism, clarity and the
scope of the obligations (see especially general comments 2 and 4, and specific
comments 3 to 11, 16 and 17) – the preferred option was adapted to become more
focused in content and targeted in scope. For more details, please also see the
Explanatory Memorandum which covers this in the section on the impact assessment.
4.4. Preferred option in the impact assessment
In the impact assessment, the presented preferred option was a combination of either
option 3a or option 3b for corporate due diligence and of option 3 for directors’ duties.
The preferred option for the corporate due diligence obligation covered three groups of
companies:
 Group 1 comprised EU very large limited liability companies that have more
than 500 employees or net generate a turnover of at least EUR 350 million (sub-
option 3a) or companies that have more than 500 employees and generate at least
EUR 150 million net turnover (sub-option 3b).
 Under both scenarios, Group 2 consisted of companies not included in Group 1
but having more than 50 employees and more than EUR 8 million net turnover
(midcaps and medium-sized companies) and operating in high-impact sectors.
These companies were also proposed to be included in the personal scope of the
initiative, however, with more targeted due diligence obligations.
 Group 3 included third-country companies which generate a significant turnover
at the EU market, however, the level of this turnover was not further specified. In
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terms of enforcement, both administrative supervision and civil liability were
part of the preferred option.
Directors’ duties in the preferred option 3 presented in the impact assessment included
the following duties:
 The general duty to take into account the interests of stakeholders when acting in
the interest of the company: this was proposed to apply to all EU limited liability
companies.
 Specific duties (i) to identify stakeholders, dependencies of the company
from such stakeholders, and sustainability related risks to the company
itself, (ii) to manage such sustainability risks, (iii) to incorporate
stakeholders’ interest and sustainability aspects (risks, opportunities,
impacts) in the corporate strategy, and (iv) to engage with stakeholders:
these were proposed with a scope covering all large and all (non-micro) listed
companies, i.e. all companies covered by the proposal for a Corporate
Sustainability Reporting Directive (CSRD), as well as medium-sized high-impact
companies, with a phased in application for SMEs.
 The specific duty to set up and implement due diligence processes and
measures: this was proposed to apply to the same companies as those falling
under the scope of the corporate due diligence obligation (see above).
 The duty to include in the strategy science-based targets regarding the
mitigation of greenhouse gas emissions was proposed to apply only to large
companies with more than 1000 employees.
Finally, the preferred option also included possible measures on directors’
remuneration, namely a general clause applicable to all companies under the scope to
ensure that remuneration schemes facilitate or at least do not hinder compliance
with the due diligence and directors’ duties.
4.5. Material scope of the proposal
The material scope of the revised preferred option (i.e. the content of the obligations) is
structured mainly upon the corporate sustainability due diligence obligation.
It also covers obligations for the companies in Group 1 to combat climate change. For
that purpose 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. Within
the plan they should identify the extent to which climate change is a risk for, or an impact
of, the company’s operations. If this risk or impact are considered principal for the
company, the company should also establish emission reduction objectives in its plan.
Directors’ duties were changed. While most of the duties are closely linked with the due
diligence obligations and necessary for the due diligence to be effective, they 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. The harmonised directors’ duties include the
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following elements:
 complying with the duty of care by also taking into account the human rights,
climate and environmental consequences, including in the short, medium and
long term, of their decisions;
 setting up and overseeing the company’s various due diligence actions and, in
particular, the due diligence policy, duly taking into account relevant input from
stakeholders and civil society organisations. It is spelled out that the directors
shall report to the board of directors on these issues;
 adapting the corporate strategy to take into account the company’s adverse human
rights and environmental impacts and the steps needed to mitigate them.
The specific duty to identify stakeholders’ interests and dependencies of the company on
such stakeholder interests are not specified as a separate duty in the proposal (but are
implicitly included in the clarified duty of care). The broader duty to manage risks to the
company related to stakeholders and their dependencies, as well as the broader duty to
include the management of sustainability risks to the company in the corporate strategy
(going beyond the requirement to specify indicative emission reduction objectives in case
climate change is a principal risk to, or a principal impact of, the company) were not
retained. Similarly, the specific duty to set up and oversee the implementation of
processes related to the management of sustainability risks to the company, and the
mandatory adoption and disclosure of science-based targets were not retained either.
As regards directors’ remuneration, the proposal specifies for the group 1 that the
company’s plan to ensure that its business model and strategy are compatible with the
transition to a sustainable economy and to the EU’s climate commitments is duly taken
into account in directors’ variable remuneration.
The due diligence obligations cover human rights14
and environmental adverse impacts
on the basis of defined provisions of selected international conventions (as universal
legal standards) which include precise and specific rights and obligations that are to
be respected by companies. The due diligence obligations require companies to identify
and take appropriate measures to prevent and mitigate adverse human rights and
environmental impacts. The Annex to the proposal contains details about the content
of selected human rights (Part I Section 1), and clarifies that the violation of a right not
listed there but protected by the human rights agreements listed in the same Annex (Part I
Section 2) is also covered as long as the violation is directly capable of impairing a
protected legal position in a particularly serious manner, and if the impairment of the
protected right is obvious upon reasonable assessment of all circumstances in question.
14
Internationally recognised human rights cover at a minimum the human rights contained in the Universal
Declaration of Human Rights, as codified in the International Covenant on Civil and Political Rights and
the International Covenant on Economic, Social and Cultural Rights and the principles concerning the
fundamental rights in the ILO’s Declaration on Fundamental Principles and Rights at Work and included in
the ILO cores conventions, namely freedom of association and effective recognition of the right to
collective bargaining; elimination of all forms of forced or compulsory labour; effective abolition of child
labour; elimination of discrimination in respect of employment and occupation.
EN 9 EN
As regards environmental adverse impacts, the Annex (Part II) identifies relevant
violations of internationally recognized objectives and prohibitions included in
environmental conventions.
The environmental due diligence obligations were reassessed in view of other EU
regulations in this field and the need to outline obligations for companies in a clear
manner to ensure legal certainty. Only those environmental conventions15 which
create an obligation that is sufficiently precise and implementable for the companies
have been maintained but they have been extended.
Stakeholders’ involvement was limited to what is necessary for the due diligence,
also taking into account the OECD Guidelines and the practice followed by companies
when implementing these Guidelines. Directors should take into account the input
from stakeholders and civil society associations when putting in place and overseeing
the due diligence actions and in particular the due diligence policy, i.e. the company’s
strategy on how to implement due diligence, including in the long-term and its
prevention and correction action plan, where relevant. The company will also be required
to operate a complaints mechanism as part of due diligence which would allow
stakeholder-complainants to bring potential adverse impacts to the attention of the
company. This will further enable the companies to get a knowledge of possible risks of
adverse impacts and of how their impact mitigation strategy works on the ground.
Directors’ duties closely linked to the implementation of due diligence have been
kept, in line with the international voluntary due diligence frameworks and standards that
also cover due diligence governance. It allows due diligence to become strategic and
to infiltrate into relevant corporate functions. A due diligence obligation without a
proper corporate governance backing and without directors’ responsibilities could
become a mere compliance issue of secondary relevance. Regulating directors’ duty of
care was retained.
Voluntary due diligence systems and existing national due diligence laws also
contain directors’ duties, both (1) to ensure a strategic approach on due diligence and
(2) to embed due diligence into corporate management systems. For example:
 The UN Guiding Principles on Business and Human Rights state that “as the
basis for embedding their responsibility to respect human rights, business
enterprises should express their commitment to meet this responsibility through a
statement of policy that: (a) [i]s approved at the most senior level of the business
15
The Minamata Convention on Mercury; the Stockholm Convention on Persistent Organic Pollutants;
Convention on the Prior Informed Consent Procedure for Certain Hazardous Chemicals and Pesticides in
International Trade; the Vienna Convention for the protection of the Ozone Layer and its Montreal
Protocol on substances that deplete the Ozone Layer; the Basel Convention on the Control of
Transboundary Movements of Hazardous Wastes and their Disposal, Convention on Biological Diversity;
Convention on International Trade in Endangered Species of Wild Fauna and Flora.
EN 10 EN
enterprise (…) [and] (e) [i]s reflected in operational policies and procedures
necessary to embed it throughout the business enterprise”16
.
 According to the OECD Due Diligence Guidance for Responsible Business
Conduct (RBC), as step 1 of the due diligence process, companies are
recommended, among others, to “[d]evise, adopt and disseminate a combination
of policies on RBC issues”, “embed the enterprise’s policies on RBC issues into
the enterprise’s oversight bodies” and embed these also “into management
systems so that they are implemented as part of the regular business processes”,
and as practical action, to “assign oversight and responsibility for due diligence to
relevant senior management and assign board level responsibilities for RBC more
broadly”17
.
 The German Act on Due Diligence Obligations in the Supply Chains18
states
that if an enterprise identifies a risk (i.e. of adverse impact) it must issue a policy
statement on its human rights strategy. Senior management must adopt the policy
statement.
 The French Duty of Vigilance Law requires the due diligence plan to be
published as part of the management report of the company, which is the
responsibility of the management. In addition, the French Loi Pacte19
clarifies the
duty of care of directors as follows: “The company is managed in its corporate
interest, taking into consideration the social and environmental issues related to
its activity”.
4.6. Personal scope of the proposal
The personal scope (i.e. which business categories, and the directors of which business
categories are covered) has been revised to better ensure proportionality and
adequate implementation.
On the one hand, the due diligence obligation will remain to be targeted to companies
that have larger operations, or are somewhat smaller in size but operate in sectors where
adverse external impacts were identified to be more frequent or significant. Such
companies are more likely to contribute to potentially significant adverse impacts,
including in their value chains. On the other hand, the turnover criteria is also a proxy for
the influence in the value chains (as used in the EU Directive 2019/633 on unfair trading
practices in the agricultural and food supply chain20
). Furthermore, combined with the
criterion on the number of employees, it can ensure that the due diligence obligation is
targeted well at those companies – operating at the various levels of the value chain –
16
Guiding Principles on Business and Human Rights, Operational principles, policy commitment, point
16., GuidingPrinciplesBusinessHR_EN.pdf (ohchr.org)
17
OECD-Due-Diligence-Guidance-for-Responsible-Business-Conduct.pdf, page 23.
18
Section 6, preventive measures.
19
La loi PACTE : pour la croissance et la transformation des entreprises | economie.gouv.fr
20
Directive (EU) 2019/633 of the European Parliament and of the Council of 17 April 2019 on unfair
trading practices in business-to-business relationships in the agricultural and food supply chain;
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32019L0633
EN 11 EN
that have the required influence and also the corresponding resources to properly
conduct due diligence.
A very recent study on the uptake of corporate social responsibility (CSR) and
sustainability practices among European SMEs21
confirms that SMEs may face
constraints to conduct due diligence in practice because they lack the resources to
monitor their value chains and to investigate beyond their direct suppliers. Furthermore,
this should be looked at in the context of the COVID-19 pandemic which has hit SMEs
particularly hard. Meanwhile, SMEs are also commonly on the receiving end of value
chain policies as they are often part of value chains.
Taking all these considerations into account, it was decided to fully exclude SMEs and
smaller midcap companies from the scope of application of the proposed legislation.
However, it still includes larger midcap companies active in economic sectors where the
risk of significant adverse human rights or environmental impact is particularly high.
The division of the scope into two main groups of EU companies have been
maintained. Group 1 has remained the same as it was in the more restrictive sub-option
of the impact assessment’s preferred option (option 3b) that defined very large
companies combining the number of employees and the worldwide net turnover size
criteria cumulatively (i.e. dropping the other preferred sub-option, option 3a, in which the
two criteria were not used cumulatively). Group 2 has been adapted and better targeted
both in terms of the size and the sector of the companies it comprises. As a result, the
number of companies in this group has been reduced substantially compared to either of
the two preferred sub-options of the impact assessment. Accordingly, the revised and
more targeted preferred option covers:
 Group 1: large EU limited liability companies with more than 500 employees and
more than EUR 150 million worldwide net turnover (“very large companies” as
defined in option 3b of the draft impact assessment), irrespective of the sector in
which they operate, and
 Group 2: large EU limited liability companies that do not simultaneously reach both
thresholds of Group 1 but have more than 250 employees and more than
EUR 40 million worldwide net turnover (“midcap large companies”)22
and that have
the majority of their operations in high-impact sectors (which are now also based on a
narrow definition, as explained hereunder). For these companies, the obligations will
be lighter and phased in (see the next point on proportionality).
Moreover, the approach to selecting high-impact sectors has been changed to focus
on sectors for which relevant OECD guidance already exist. The selection of these
sectors reflects the priority areas of both national and international action aimed at
tackling human rights and environmental issues. These are sectors in particular
21
European Commission, Executive Agency for Small and Medium-sized Enterprises, Uptake of corporate
social responsibility (CSR) by European SMEs and start-ups: final report, Publications Office, 2021,
22
Note that the category of “midcap large companies” is narrower than the “midcaps” of option 3b of the
impact assessment.
EN 12 EN
characterised by high risk of human rights violations (e.g. forced labour, worst forms of
child labour)23
as better explained in Annex 11 of the Impact Assessment. Such guidance
currently covers the minerals supply chains – with additional guidance on the extractive
sector –, the agricultural, and the garment and footwear supply chains. OECD guidance
also exist for companies in the financial sector with respect to their lending and securities
underwriting services and to their activities as institutional investors. However, due to its
specificities, a different approach is followed with regard to this sector: instead of
covering more midcap limited liability companies, the proposal covers more of the very
large companies in this sector, including also those that do not have a legal form with
limited liability (e.g. cooperative credit institutions and insurance companies). Covering
financial sector companies that were established in a different legal form is also in line
with the scope of sustainability reporting rules under the CSRD proposal.
Group 1 consists of 9 400 very large companies (same as in option 3b of the impact
assessment). However, as a consequence of the changed approach to the selection of
high-impact sectors, and due to excluding all SMEs and smaller midcaps from the scope
completely, the estimated number of companies in Group 2 that will be covered only if
they operate in high-impact sectors (i.e. taking into account that about 30% of Group 2
companies are already indirectly covered as subsidiaries of larger companies) is
estimated to be reduced from about 34 600 (in option 3b) to approximately 2 300
companies.24
Given the changes in Groups 1 and 2, the number of companies in the scope of the
Directive which will incur incremental compliance costs is reduced from 44 000 in
the less extensive preferred option (option 3b) to 11 700 in the proposal.
The changes and the estimated number of EU companies covered in the proposal is
summarised in the following table:
23
For instance, the OECD’s guidance “Practical actions for companies to identify and address the worst
forms of child labour in mineral supply chains” points out that, out of the 139 goods on the 2016 List of
Goods Produced with Child Labor or Forced Labor (TVPRA) compiled by the United States Department of
Labor’s (USDOL), 29 goods are in minerals and quarrying.
24
In line with the methodology of the impact assessment, this figure already accounts for the group effects
as it takes into account the assumption – explained in the impact assessment – that about 30% of midcap
companies will already be indirectly under the scope as a subsidiary of a larger parent company in any case
and, as such, their compliance costs are already included in the aggregate cost estimate. The total number
of companies that are directly covered by the scope if operating in a high-impact sector has been reduced
from about 49 500 (in option 3b of the impact assessment) to approximately 3 400, as shown in the table
below.
Our estimate includes limited liability companies involved in the following economic activities: (i)
extraction and mining of natural resources (crude petroleum, natural gas, coal, lignite, metal ores and other,
non-metallic minerals and quarry products), (ii) certain other activities in the upstream minerals supply
chains (in particular the wholesale of metals, ores, construction materials, fuels, chemical and other
intermediate products, and the manufacture of basic metal products, of other non-metallic mineral products
and of fabricated metal products, except machinery and equipment), (iii) agriculture, forestry and fisheries,
the manufacture of food products and beverages, and the wholesale trade of agricultural raw materials and
live animals, wood, food, beverages, as well as (iv) the manufacture of textiles, wearing apparel, leather
and related products (including footwear), and the wholesale trade of textiles, clothing and footwear.
Companies involved in the retail sector are excluded for the purposes of these calculations.
EN 13 EN
Number of companies Option 3a Option 3b Proposal
Group 1 23 300 9 400 9 400
Group 2 (100%) 46 700 49 500 3 400
Total number of EU companies directly
under the scope
70 000 58 900 12 800
Total number of EU companies
incurring incremental compliance costs
(i.e. accounting for group effect)
56 000 44 000 11 700
In addition, the approach and the thresholds to cover third-country companies are
now better aligned with those applied to EU companies. As a result, third-country
companies will be covered if they generate a net turnover in the Union of more than
EUR 150 million, or less than that but more than EUR 40 million in case they have the
majority of their operations in high-impact sectors.
Reflecting on the Board’s opinion, the Commission also estimated the number of third-
country firms that would fall under the scope irrespective of their sector of economic
activities. For this, a simple log-linear model was used calculating the number of firms as
a function of their estimated25
intra-EU27 annual turnover26
. According to the model, if
the threshold is set at EUR 150 million annual EU turnover, the scope covers a little less
than 2 600 non-EU companies. Assuming that the number of midcap large companies in
high-impact sectors compared to their number in all sectors27
would be the same as in the
case of EU companies (about 20%), an additional 1 400 non-EU companies with an EU
turnover of EUR 40 to 150 million will fall under the scope if they are active in high-
impact sectors.28,29
25
The turnover in the model is the sum of the remunerations of factors of production (labour, capital)
augmented by a profit margin that is a proxy for the degree of competitiveness of markets that firms
operate in. Firm-level data from the ORBIS database were used to find comparable values for the labour-
capital shares and profit margins in the EU27.
26
The model is based on the trade figures with the EU’s three major trading partners for which firm-level
data are reported: Switzerland, the UK, and the U.S. It takes the average value of the three estimates based
on the respective trade shares. It uses OECD data (including the Trade by Enterprise Characteristics
database for the UK and Switzerland, which reports the number of trading firms for different size
categories, including by number of employees and trading volumes).
27
In the model, the threshold of EUR 40 million turnover corresponds to 9 600 non-EU companies,
resulting in about 7 000 non-EU midcap large companies in all sectors.
28
These are based on 2017 data. Depending on the data source for the U.S. firm-level data, the model can
be also be estimated for 2019, the results being very similar. If the threshold is decreased to EUR 100
million, almost 4 000 companies would be covered, if it is increased to EUR 250 million, the number of
companies covered would be about 1 500.
Sensitivity analysis: We used the following parameter values: wage share=0.54, profit margin=8%, weight
of job rich industries=0.8. The number of firms increases with respect to the profit margin, and decreases
with respect to the wage share and the weight of job rich industries. Setting the profit margin to 15% and
lowering the share of job rich industries to 50%, the number of firms in scope increases to more than 3 400
for the 150 million threshold. In the other direction, increasing the wage share to 80% and lowering the
profit margin to zero, the number of firms for the same threshold falls below 1 600.
29
The plausibility of this estimation was cross-checked with data reported by the American Business
Chamber and also by using data on foreign direct investment flows and international investment positions.
EN 14 EN
4.7. Enforcement mechanism
The Board considered that policy options not including civil liability regime should have
been assessed as “stakeholders consider administrative supervision as the preferred
option and this seems a solution also introduced at Member State levels”.
In the open public consultation, stakeholders who indicated that they were in favour of
administrative supervision were not necessarily against an accompanying civil liability
regime.30
At the same time, various position papers from business associations and
individual companies where asking to either exclude civil liability or limit it to tier-1.
Existing due diligence laws in two Member States do not exclude civil liability
regimes for corporate due diligence. The French Loi sur le Devoir de Vigilance expressly
stipulates that civil liability rules are applicable, while the German
Lieferkettensorgfaltspflichtengesetz (LkSG) clarifies that violation of the obligations
under that law does not as such give rise to civil liability but also that (generic) civil
liability arising from a damage derived from one of the violations covered by the new
law remains unaffected.31
The German civil law includes generic civil liability rules that
remain applicable in case of the violation of a protected right.
Moreover, access to effective remedy for the victims is a core component of the UN
Guiding Principles on Business and Human Rights (UNGPs). The complementarity
of civil liability and administrative supervision in developing robust enforcement
approaches has recently been identified by the UN Working Group on Business and
Human Rights as one of the priority areas on which States should focus on when
implementing the UNGPs.32
An enforcement mechanism based on administrative law and a complementary civil law
mechanism is used also in other areas of Union law, notably in competition law.
Below are further considerations as to why an enforcement regime with tailored rules
for civil liability significantly increases the effectiveness of enforcement as compared
to a regime without express rules on civil liability.
First, civil liability is an effective tool for ensuring compliance with the corporate due
diligence rules while providing legal certainty for companies. Being independent from
supervisors’ capacities and priorities in pursuing infringements of the due diligence
obligation, it can complement Member State’s supervision in making the enforcement
30
In fact, 320 out of the 555 respondents choosing the option supervision, i.e. 58% of them, also chose the
option judicial enforcement with liability and compensation in case of harm caused.
31
Section 3(3) stipulates that “[a] violation of the obligations under this Act does not give rise to any
liability under civil law. Any liability under civil law arising independently of this Act remains unaffected.”
32
See the “UNGPs 10+” Roadmap for the Next Decade of Business and Human Rights (November 2021,
ohchr.org), a stocktaking by the UN Working Group on Business and Human Rights of the first decade of
implementation of the UNGPs, complemented by forward-looking recommendations (priority goals for
States, businesses and other key stakeholders) for the next decade in key action areas.
EN 15 EN
regime more effective and deterrent. It has been shown that civil liability makes a
difference in positively driving good corporate behaviour.33
Second, a clearly defined and proportionate civil liability regime offers legal certainty34
for both companies and affected persons, and a more effective remedy to victims of
adverse impacts. Companies would know what is expected from them as they may
already be sued before courts for contributing to harm. As regards victims, civil liability
can result in different remedies besides financial compensation. Victims could ask
the court for remedial orders such as clean-up orders, restitution of land, etc.
Furthermore, the proposal requires Member States to ensure that victims of human rights
and environmental harms are not denied the protection that is granted in accordance
with the relevant provisions on due diligence of the Directive where the law applicable to
such claims is not the law of a Member State. For example, victims would benefit from
the protection, under certain conditions, when the relevant damages caused by the
failure by the company to respect the due diligence obligations occur outside of the
Union. Also, if there is a dispute and litigation, this solution would provide legal
certainty and facilitate the work of the Union courts, as they can apply the law of
their own country (i.e. the law of the country in which an action is brought, lex fori)
instead of foreign law.
The provision on civil liability included in the proposal is in line with the existing civil
liability rules in Member State laws whereby a person who has caused harm to
another person has to repair that harm.35
With a view to make clear how civil liability should apply to harm at the level of indirect
relationships, the proposal sets out clearly defined conditions under which companies
may be held liable for such harm. It is clarified that
- civil liability only applies with respect to established business relationships,
which requires an element of duration and intensity;36
and that
- the company can only be held liable if it did not take appropriate measures
required by the proposal,
33
See Steering CSR Through Home State Regulation: A Comparison of the Impact of the UK Bribery Act
and Modern Slavery Act on Global Supply Chain Governance - LeBaron - 2017 - Global Policy - Wiley
Online Library; The importance of civil liability for a corporate human rights duty - (unl.pt); Transnational
Legal Activism in Global Value Chains - The Ali Enterprises Factory Fire and the Struggle for Justice, see
e.g. at p. 155; Wettstein & Schrempf-Stirling, Journal of Business Ethics Oct. 2017, Human Rights
Litigation and its Impact on Corporations’ Human Rights Policies.
34
The proposed civil liability in the legal text concerns only established business relationships with which
a company has regular and frequent cooperation and applies only where the adverse impact could have
been foreseen, prevented, ceased or mitigated with appropriate due diligence measures. As it will in
practice be difficult to prevent all risks through global value chains, liability is limited to harm done in the
value chain under specific conditions especially beyond direct suppliers.
35
For the sake of clarity, the provision on civil liability in the proposal will not give stakeholders the right
to sue competent authorities if they find that enforcement is not sufficiently strict. It aims at establishing
liability of the companies within the scope of the proposal.
36
According to the proposal, established business relationships are direct and indirect business
relationships which are, or which are 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.
EN 16 EN
- at the level of indirect business relationships if it the company used contractual
cascading and assurance as well as measures to verify compliance with it should
not be liable, 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, minimise, bring to an end or mitigate the adverse
impact,
- Furthermore, the proposal clarifies that, when assessing liability and its extent,
due account should 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 as well as any collaboration with other
entities to address adverse impacts in its value chains.
The Directive is not expected to give rise to an affluence of damages claims. First, the
experience with the French Loi de devoir de vigilance has shown that the Law has not
led to a multitude of claims for damages after its entry into force.37
Second, past EU
legislation introducing civil liability regimes or facilitating claims have not led to a
strong increase in frivolous cases before national courts.38
Third, key elements such as
the entity legitimated to bring an action, the burden of proof would not be changed
by this proposal. In addition, bringing an action may require considerable financial
resources, which will be a disincentive against ungrounded claims.
In order to ensure that remedy can be sought effectively, the civil liability regime is
complemented by a provision according to which the liability provided for in provisions
of national law transposing the relevant provision on civil liability must be of overriding
mandatory application in cases where the law applicable to claims to that effect is not
the law of a Member State.
In response to the Board’s comment that the impact assessment should better explain
which national authority would be best placed to act (including with respect to third-
country companies), this section also provides further information on the choice of
supervisory authority. According to the proposal, Member States are free to designate
one or more authorities for the purposes of supervising compliance with the proposed
Directive. It is for the Member States to decide which authority or authorities to
designate, and they may include an authority that is not traditionally supervising
compliance with corporate governance rules. It is possible that such “traditional”
supervisory authorities will not be selected by Member States, although they may choose
them. Where competent authorities under sectoral legislation exist, Member States could
identify those as responsible for the application of this Directive in their areas of
37
https://www.vie-publique.fr/sites/default/files/rapport/pdf/275689.pdf
38
E.g. the Damages Directive for infringements of competition law (Directive 2014/104/EU) or application
of the 2013 Recommendation on the Collective Redress. If there has been increase of justified claims, this
demonstrates that the awareness of victims of their right to effectively claim damages has enhanced, e.g.
see Commission Staff Working Document (2020)338.
EN 17 EN
competence. They could designate authorities for the supervision of regulated financial
undertaking also as supervisory authorities for the purposes of this Directive.39
4. ASSESSMENT OF IMPACTS
This section addresses the comments of the Board that the impact assessment should be
more balanced and should better account for potential negative impacts in third countries
and for potential impacts of the proposal on competition and competitiveness of EU
companies. It also contains the recalculated cost estimates as suggested by the Board,
additional considerations regarding cost, benefits and proportionality (See Annex:
Overview table, General comment 3 and Specific comments 12 to 16).
4.8. Revised cost assessment
As the scope of the proposal is significantly smaller than the scope of the preferred option
in the impact assessment, the aggregated direct compliance costs for EU businesses
implied by this directive were recalculated.
As explained in Annex 4 of the Impact Assessment Report, total direct compliance costs
comprise the incremental substantive compliance costs and the incremental
administrative costs.40
Substantive compliance costs consist of two main elements: (i) the “procedural costs”,
i.e. costs of setting up and operating due diligence processes and procedures and (ii) the
transition costs – the investment needs – of harm mitigation and of transitioning the
company to sustainability. The impact assessment only quantified the procedural costs
(pointing out that the transition costs, on the long run, can even be zero or become
profitable investments). With the new personal scope and using the relevant firm-level
costs estimated in the impact assessment, these costs for all EU businesses covered are
now estimated to amount to EUR 760 million recurrent and 220 million one-off costs
(down from EUR 1.72 billion and 500 million, respectively, in option 3b of the impact
assessment).
As regards administrative costs, these are linked to reporting to the public. While this
is an important element of the due diligence framework, all companies covered under the
new scope will already be required to disclose to the public sustainability and due
diligence-related information in accordance with the Corporate Sustainability Reporting
Directive (which, according to the Commission’s 2021 proposal, will apply to all large
39
For instance, in Germany, the Federal Office for Economic Affairs and Export Control is responsible for
the supervision of the German Act on Corporate Due Diligence in Supply Chains. The Office is not
responsible for tasks related to corporate governance. It is entrusted with administrative tasks in relation to
foreign trade, promotion of economic development and SMEs, energy, auditor oversight, BAFA - Tasks:
https://www.bafa.de/EN/Federal_Office/Tasks/tasks_node.html.
40
Please note that the Impact Assessment was prepared on the basis of the Better Regulation Guidelines
and its toolbox as in force at the time, and this document retains the same methodology used by the impact
assessment for classifying and assessing the various cost elements. Nevertheless, the summary of benefits
and costs of the preferred option is presented here (in Annex 2) according to the recently updated
guidelines and the new template for the table(s), with a separate table prepared for the implementation of
the One In One Out Principle.
EN 18 EN
EU companies and all companies listed in the EU, i.e. a broader scope of EU companies
than this initiative). The CSRD has been taken into account in the dynamic baseline of
this initiative. Thus, companies will already face most of the administrative costs
(namely the cost of reporting, as well as data gathering and analysis underpinning this
reporting)41
under the CSRD. This is why with the reduced scope EU companies will
not incur any substantial additional administrative costs under this directive. This is
reflected in the summary table of the expected benefits and costs presented in Annex 2, in
particular in the table on the “one-in-one-out” principle.
Non-EU companies are estimated to incur EUR 240 million recurrent and 70 million
initial procedural compliance costs (using the newly estimated number of companies
under the scope and the relevant firm-level costs estimated for large EU companies in the
impact assessment).
The following table summarises the total compliance costs for EU and non-EU
businesses (except for transition costs) under the previous two preferred sub-options and
the final proposal:
Aggregated compliance costs
for EU companies
(without transition costs), in EUR
Option 3a Option 3b Proposal
recurrent 2.37 bn 1.72 bn 0.76 bn
one-off 0.68 bn 0.50 bn 0.22 bn
Aggregated compliance costs
for non-EU companies
(without transition costs), in EUR
Option 3a Option 3b Proposal
recurrent Not calc. Not calc. 0.24 bn
one-off Not calc. Not calc. 0.07 bn
In line with the reduced personal scope of the corporate due diligence obligation, the
supervisory costs incurred annually by existing or newly set up public authorities that
will be designated by Member States to monitor and enforce compliance will also be
lower than in the two preferred sub-options of the impact assessment. Following the
calculation method explained in Annex 4 of the impact assessment, the total recurring
supervisory costs in the EU are estimated to reach about EUR 5.55 million a year, and
the initial costs will be about EUR 130 000. The following total annual and initial costs
are estimated:42
41
Note that the impact assessment assumed that about half of the costs of data gathering and analysis that
companies incur in relation to their reporting obligations overlaps with their costs incurred in relation to
their due diligence obligations. On average, such overlapping costs decrease the data gathering and
analysis costs estimated by the impact assessment to be incurred under this initiative by about one third.
42
The impact assessment does not count with additional costs for courts implied by the possibly increased
number of lawsuits: while it is difficult to predict how many cases the courts will have to deal with, the
cost of civil court procedures are anyway paid by the parties involved. Estimating the number or cost of
EN 19 EN
Total supervisory costs in EU,
in EUR
Option 3a Option 3b Proposal
recurrent (EU companies) 11.24 mn 7.86 mn 4.42 mn
recurrent (non-EU companies) Not calc. Not calc. 1.13 mn
one-off 0.13 mn 0.13 mn 0.13 mn
4.9. Proportionality
As explained above, SMEs and smaller midcap companies are not included in the
scope of application of the proposed legislation, resulting in much lower direct
compliance cost for the businesses and lower supervisory costs for the public authorities.
However, SMEs are often involved in the upstream supply chains of larger companies.
Thus, even if they are not required to set up self-standing due diligence mechanisms,
they will be indirectly affected by the due diligence undertaken by larger “buyer”
companies and need to participate in such due diligence steps.43
The Commission has considered carefully how to further support SMEs, in order to
tackle the indirect negative effect of a due diligence legislation on SMEs.44
For example,
large “buyer” companies will be encouraged to provide targeted support, including
financial support for independent on-site checks on suppliers in their value chains and not
to have unfair and disproportionate requirements from their SME business partner.
Furthermore, a strong package of support actions, including e.g. model contractual
clauses, hotlines, trainings and databases, an observatory for supply chain transparency,
development policy projects, alignment methodology for self-assessment of industry
schemes and multi-stakeholder initiatives, and other public support at Member State
and EU level can also play a role in assisting SMEs in the EU and in third countries.
For midcap companies that will be covered by the proposal if they are active mainly in
one of the identified high-impact sectors, the due diligence obligation will be
simplified: they would only have to focus on severe adverse impacts only.
Midcap companies in Group 2 will also have more time to adapt thanks to the phased-in
implementation: they would need to apply the rules only 2 years after the entry into
force of the proposed Directive. This additional time does allow these companies to
smooth out the costs of establishing the necessary processes and procedures. The
delayed application could further alleviate their burden, if industry cooperation
improves in the meantime, or technological developments, standards, etc. become
available or cheaper, which may also be prompted by the earlier implementation date
for larger companies.
court cases initiated by victims whose complaint was not pursued by the supervisory authority and
therefore go to court would be highly hypothetical.
43
The study shows that this can have a positive impact on sustainability uptake in smaller companies, but
can also be perceived as coercion and increase the costs and administrative burden of SMEs.
44
Note that the estimated direct business compliance costs also include the costs incurred by large
companies conducting due diligence also with regard to their value chains.
EN 20 EN
Taking into account the various impacts, the revised preferred option allows for reducing
business’ compliance costs substantially and also for lowering the supervisory costs,
while only decreasing the effectiveness and the beneficial human rights and
environmental impacts of the initiative to a relatively lower extent, making the proposal
more efficient and proportionate.45
With respect to firm-level cost competitiveness
under the revised preferred option, please also see section 4.6.
4.10. Impacts on third countries
The proposal’s scope covers certain non-EU companies directly. In addition, it obliges
companies to cover their global value chains in their due diligence efforts. As the most
salient adverse impacts on human rights and on the environment often occur outside the
EU, the proposed Directive has a strong external dimension and will inevitably
affect companies and other stakeholders in third countries, and could affect the
economies of third countries more broadly. The proposal takes into account that this
requires coherence with the EU’s trade and development policies, and measures to
mitigate potential negative impacts on our partner countries. Moreover, coherence with
international frameworks on Responsible Business Conduct as well on Business and
Human Rights is important as it creates synergies for companies and facilitate
compliance.
One of the main objectives of this initiative is to reduce adverse human rights and
environment impacts also in global value chains46
, and corporate due diligence is an
effective tool to attain such objectives. It has to be stressed that due diligence is
enshrined in international frameworks and it is therefore internationally recognized as the
appropriate tool to mitigate adverse human rights and environmental impacts, including
in value chains. In addition, evidence shows that when companies use due diligence or
comparable corporate impact management tools, these are effective in preventing or
mitigating adverse impacts in their operations and value chains in third countries. It
has been shown that corporate sustainability management tools, when used on the basis
of voluntary individual commitments47
and voluntary industry initiatives48
, can have far-
45
As the aggregate costs estimated for non-EU companies is relatively low, while expected positive
impacts are relatively high, proportionality concerns do not arise in this respect.
46
Examples of EU companies having adverse impacts in third countries can be found in the Impact
Assessment Annex 11.
47
E.g. Nestlé’s Child Labour Monitoring and Remediation System (CLMRS) showed effectiveness in
identifying child labour where it occurs, in supporting families to prevent children performing hazardous
tasks and in providing enhanced education opportunities. Therefore, recently Nestlé has developed a
Human Rights Framework and Roadmap putting due diligence at the core of the approach, with the
objective of scaling positive impact for rights holders on the ground. Furthermore, Philips supplier
sustainability Performance programme achieved to improve the conditions for approximately 302 000
workers, as labour conditions improved, the risk of serious injury was reduced, and the negative
environmental impact of suppliers brought down. Tesco monitors in key sourcing countries that salaries are
paid on time and in full for all hours worked, including overtime premiums, where relevant, and requires
suppliers to pay any missed wages. In 2019/20 they identified 52 cases, affecting 7 060 workers, where
payments had fallen short of what should have been paid, including premiums for overtime, that were
subsequently addressed as a result of Tesco’s intervention. ASOS has worked with NGOs and suppliers in
Turkey to reduce risks to Syrian refugees. By 2019, it had provided 82% of Syrian refugee workers in their
Turkish supply chain with work permits. Unilever ensured living wages for Brazil suppliers, and
EN 21 EN
reaching effects49
in addressing sustainability problems. In addition, relevant legislation
in France and the US has been found to be effective in enhancing due diligence efforts
of companies. The French Duty of Vigilance Law was found to have triggered “internal
mobilisation around due diligence, to encourage cross-departmental cooperation and to
better integrate due diligence into corporate governance”, as well as to “professionalise”
the treatment of due diligence in corporate practices,50
while the US Dodd Frank act
shows concentration of efforts where legislation exists.51
At the same time, to date, it is difficult to fully assess the possible negative impacts of
due diligence implementation on companies in third countries as standards have been
largely voluntary. Those that have been legislated52
are few, and have not been in effect
long enough to adequately assess change on the ground. Based on the available data,
reinforcing the respect of the environment and human rights throughout value
chains can have positive impacts53
but may also have collateral negative impacts.
While negative impacts in third countries may not be excluded in some cases, the
proposal will contain a number of safeguards with a view to mitigating such possible
impacts (as explained later).
It is reasonable to conclude that this initiative will lead to significant beneficial impacts
in those third countries from which the EU imports relatively risky products or
services in relatively large volumes (i.e. where the current risk of adverse impacts
linked to the imported raw materials, products, services, or to the operation of companies
in the given sector in the given country is high). Potential negative effects are also
likely to be highest in these countries and the impact on the ground may be relatively
higher in developing countries.
For instance, the following tables54
show the main trading partners of the Union (with
more than 1% share in total extra-EU imports) with regard to the subgroups of imported
commodities (also called primary goods):
transportation is now being provided to workers. Repsol ensured the protection of indigenous peoples’
rights by conducting a human rights due diligence process that concluded with the company’s decision not
to carry out the exploratory project due to high cultural impact on sacred spaces of the Wayuu ethnic
group, with no possible mitigation measures.
48
In terms of organised responses to the sustainability problems, the Bangladesh Accord resulted in
companies having to participate in a system to identify risks as well as to induce suppliers to comply and
do the necessary renovations in order to prevent risks, while the YESS initiative addressed the risks in
cotton sourcing at fabric mill and spinning level.
49
E.g. Gallup Supplier engagement research describes the benefit of supplier’s engagement such as higher
quality, improved planning and product development, greater supplier support and value and lower costs;
CDP 2018 report on sustainable supply chain practices show that 551 million Tonnes of CO² have been cut
by suppliers and that doing so saved these suppliers 14 billion US$.
50
https://www.e-dh.org/userfiles/Etude%20EDH_Plans_de_vigilance_2019-2020_Decembre2020.pdf
51
Evidence indicated that companies were conducting due diligence in relation to tin, tungsten and
tantalum (3T) and gold, covered by legislation, but not in relation to cobalt which was not covered.
52
E.g. Dodd-Frank Act in the US, Modern Slavery Act in the UK, Duty of Vigilance Law in France,
Conflict Minerals regulation in the EU.
53
E.g. Evaluation de la mise en œuvre de la loi relative au devoir de vigilance, January 2020
54
Source: Eurostat data for 2020, see Extra-EU trade in primary goods - Statistics Explained (europa.eu)
and related sites.
EN 22 EN
Raw materials (54% of all extra-EU imports
of commodities):
non-manufactured goods like oilseeds, cork,
wood, pulp, textile fibres, ores and other
minerals, animal and vegetable oils
Share of imports
by partner (%)
Food, drinks and tobacco
(27% of all extra-EU imports of
commodities)
Share of imports
by partner (%)
United States 12.0 United Kingdom 14.0
Brazil 9.9 Brazil 7.3
Canada 7.2 United States 6.2
Russia 6.2 Norway 5.9
Ukraine 6.2 Turkey 4.2
United Kingdom 4.8 Switzerland 3.8
South Africa 4.5 Argentina 3.5
Indonesia 4.4 Morocco 3.1
Malaysia 2.7 Côte d'Ivoire 3.0
Chile 2.3 Ukraine 2.7
Norway 2.2 Vietnam 2.6
Turkey 2.2 Peru 2.3
Peru 2.0 Ecuador 2.2
Australia 1.8 South Africa 2.0
Switzerland 1.7 Chile 1.9
Mexico 1.4 India 1.8
India 1.3 Russia 1.5
Argentina 1.2 Canada 1.5
Colombia 1.5
Thailand 1.4
Costa Rica 1.3
New Zealand 1.2
Serbia 1.1
Ghana 1.1
Indonesia 1.1
However, in certain sectors or commodities55
there is lower procurement power, and EU
companies may have more limited leverage to bring about change as the product comes
only from few countries and sometimes also from a limited number of suppliers. On the
other hand, because of the limited number of sources, continuous engagement is
paramount and gives strong incentives to contribute to change. About half of imports
of the products identified in Commission analysis on strategic dependencies originate in
China (52%), followed by Vietnam (11%) and Brazil (5%).
There is a certain risk that those suppliers in producing countries will prefer to sell to
other regions where due diligence rules are not in place or less stringent. At the same
time, given the Union market’s size and the safeguards in the proposal requiring that
the EU company engages locally and contributes to the costs of new production
processes, infrastructures if necessary, and shares burden with SMEs, will lower such
risks.
Furthermore, a range of raw materials of relevance for the manufacturing of various
goods can only be sourced from countries with a high risk profile.56
This heightens
the risk of EU companies abandoning certain suppliers, regions and even countries. On
the other hand, this risk of disengagement (termination of the business relationship) is
mitigated through the following factors and safeguards in the initiative:
55
The Commission’s analysis “Strategic dependencies and capacities”, accompanying the updated EU
industrial strategy, has identified 137 products in sensitive sectors on which the EU is highly dependent,
such as raw materials, processed materials, chemicals (these 3 categories cover 99 products out of 137),
active pharma ingredients as well as other products relevant to support the green and digital
transformations (batteries, semiconductors, cloud and edge technologies).
56
Also, as explained above, the risk of certain adverse impacts is higher in specific product groups or raw
materials.
EN 23 EN
- The cost of reorganising value chains may be higher than making it sustainable;
- The proposal does not target specific geographies or products. If it was, the impact
would also be more pronounced for certain territories (see further in the impact
assessment);
- There are safeguards in the proposal to ensure that disengagement is only a last
resort option, such as the following:
(1) measures ensuring that the emphasis is on preventing and mitigating
adverse impacts, rather than banning certain products originating from certain
areas,
(2) prevention and mitigation should include proper investments, where
necessary,
(3) prevention and mitigation should include targeted financial or other support
for the SME trading partner, where necessary,
(4) collaboration with other entities, including, where relevant, to increase the
company’s ability to bring the adverse impact to an end,
(5) termination of the business relationship only if the potential adverse impact is
severe, and where the law governing their relations so entitles companies to do so.
- Collaborative efforts will also be fostered through support measures and through
industry schemes and multi-stakeholder initiatives.
- The proposal is also likely to incentivise third-country governments to strengthen
rule of law, improve legislation, enforcement and good governance practices that
support sustainable development.
Furthermore, it is important to note that any potential negative impact is framed by
reference to the commitments of the EU and international communities, including
developing countries, to promote sustainable development – not just any kind of
economic development. Therefore – even if indirectly – incentivising unsustainable
practices, which may also be illegal according to legislation in developing countries,
and/or go against international commitments of the Union and third countries,57
is
neither in the interest of the Union nor of the developing countries. It can be expected
that most cases where de-risking will result in disengagement with suppliers and
abandoning certain activities will concern illegitimate or illegal business practices, or
other risks and impacts which cannot be mitigated by a company by any other means.
4.11. Contribution of potential soft mitigation measures
While the proposal itself already includes safeguards against unintended consequences,
focused accompanying measures can improve the effectiveness of implementation.
Companies may rely on industry schemes and multi-stakeholder initiatives to support
the implementation of their obligation. The Commission and the Member States may
facilitate the dissemination of information on such schemes or initiatives and their
outcome.
57
e.g. ILO declaration on fundamental rights at work, bill of human rights, SDGs
EN 24 EN
In particular, support provided by Member States and the EU to public authorities
and companies in the framework of development cooperation can foster the creation
of a stronger regulatory environment in third countries, thereby helping tackle the root
causes of systemic issues. It can also help compliance of third-country companies, by
building capacity on the ground, where most needed. For instance, the new
Neighbourhood, Development and International Cooperation Instrument58
and relevant
Team Europe initiatives59
in third countries can provide support to governments for
aligning their legislation and enforcement with international labour standards, and can
provide specific support for suppliers in third countries to adhere to sustainability
standards in their own operations and to exercise due diligence in their value chains.
A comprehensive mapping of existing EU-funded actions that support public authorities
and companies in partner countries to build capacities in addressing a wide range of
human rights and environment-related impacts identified about 75 relevant Commission
actions. These are on-going and have a combined funding volume of approximately
EUR 660 million, the majority of which being funded through EU development
cooperation instruments. Moreover, in the programming of EU development cooperation
instruments for the 2021-2027 Multiannual Financial Framework, about two thirds of
partner countries identified supply chain sustainability among the objectives or results of
proposed priority areas for their development cooperation with the Union.
4.12. Impact on competition
The Board’s opinion also pointed to the need to assess the impacts on competition that
may arise from potentially increased vertical integration or from the exchange of
commercially sensitive information resulting from joint company value chain due
diligence efforts.
In the Commission’s assessment, cooperation on due diligence pursuing a
sustainability objective or the exchange of information limited to what is necessary
for this purpose as such is unlikely to raise concerns of anti-competitive behaviour.
This is being clarified in the ongoing revision of the two Horizontal (Research &
Development and Specialisation) Block Exemption Regulations and the
accompanying Horizontal Guidelines which have a dedicated chapter on sustainability
agreements, possibly relevant in the context of joint industry efforts whereby companies
pool their resources to assess suppliers and vet those that do not meet the required
sustainability standards. The guidelines will contain a safe-harbour for sustainability
standards, based on procedural conditions (voluntary and non-discriminative
participation for companies, transparency, proper mechanism for vetting suppliers etc.).
In the same vein, it is unlikely that mandatory due diligence will result in anti-
competitive behaviour as a result of potentially increased vertical integration. In
sectors with limited number of suppliers, it is also unlikely that companies will
58
https://ec.europa.eu/info/funding-tenders/find-funding/eu-funding-programmes/global-europe-
neighbourhood-development-and-international-cooperation-instrument_en
59
https://europa.eu/capacity4dev/wbt-team-europe
EN 25 EN
attempt to acquire them – leaving their competitors without available independent
suppliers to source from – directly as a result of mandatory due diligence rules because it
remains a relatively costly course of action. Literature on the topic60
suggests that firms
are more likely to increase the supply chain risk management activities, which implies in
particular stronger communication and monitoring activities both upstream and
downstream. The same literature suggests a positive association of increased supply
chain risk management with all forms of supply chain integration; however, in those
increases of supply chain integration, supplier integration is shown to be much less
effective compared to increased control within firms and groups of firms (i.e. within
existing corporate legal entities); similarly, the increase of customer integration can be
expected to be weak as well, hence the risk of anti-competitive effect is lower. In
addition, EU merger control rules, that are triggered once companies realise a certain
turnover on the Union market, will limit the risks of anticompetitive vertical integration
that may lead to input foreclosure or customer foreclosure. Similarly, third countries’
merger control rules (most of the countries in the world have a modern merger control
regime) should address at least part of these risks.
As a result, while there will always be individual cases where supplier integration will
reduce the availability of suppliers to other companies (and this could very well be a
strategic motive of the acquisition of the supplier to begin with), the empirical literature
surveyed does not suggest that stronger due diligence requirements by themselves
(and the related costs) would be a sufficient/material incentive for the acquisition of
a strategic supplier; both the acquiring and the acquired firm risk losing specialization
gains and risk increase in complexity61
.
On the other hand, vertical integration by EU companies, be it by form of acquisition
compliant with competition rules or by a decision to start supplying a certain input
internally, may contribute to EU companies gaining market share, or deciding to
invest more to allow for the development of new products and sustainable technologies
and fostering competition in sustainable products and services, in line with the
market demand.
4.13. Impact on competitiveness
The Board’s opinion recommended to assess in more detail the impact the initiative will
have on the competitiveness of EU companies, especially when companies have less
60
Cigdem Ataseven, Anand Nair, Assessment of supply chain integration and performance relationships:
A meta-analytic investigation of the literature, International Journal of Production Economics, Volume
185, 2017, Pages 252-265, and Manal Munir, Muhammad Shakeel Sadiq Jajja, Kamran Ali Chatha, Sami
Farooq, Supply chain risk management and operational performance: The enabling role of supply chain
integration, International Journal of Production Economics, Volume 227, 2020.
61
For example, in terms of information system requirements external integration remains challenging: as
Ataseven et al (2017), surveying the supply chain integration literature up to 2017 note (on page 262), “(...)
[i]nternal integration should generally precede external integration since it is important for the processes
within an organization to be aligned before engaging in information sharing and collaboration activities
with external supply chain partners.”
EN 26 EN
possibility to diversify their suppliers, and the impact on companies’ innovation capacity,
dynamism and agility, also in the context of possible increase of litigation.
This initiative has been designed so as to limit the possible negative impacts on EU
competitiveness to minimum, including by designing clear criteria for civil liability
and linking it to more stringent conditions when it comes to value chain relationships
beyond first-tier suppliers, by providing supporting measures within the Union and in
producing countries outside the Union, and by making disengagement only as last
resort requirement and only for severe adverse impacts. The dynamic character of
due diligence processes may prove as an additional tool for companies to diversify
suppliers, where available, or actively engage with existing suppliers to mitigate
adverse impacts. Abandoning certain high-risk suppliers could result in European
companies paying higher prices if sourcing possibilities become more limited or more
expensive than those available to non-European suppliers. By covering third-country
company competitors, this risk is also reduced.
While the initial cost of setting up due diligence will affect companies to certain extent,
given their size and economic capacity, and the fact that under the revised scope all of
the companies covered are already subject to non-financial reporting obligations or will
be covered by the new sustainability reporting rules, it is likely that they have or will
have, at least partially, some relevant processes already in place, as regards for
instance impact identification and analysis.
These large companies are likely to be able to absorb the initial costs of establishing –
or topping up existing – processes more easily. They are also more likely to be able to
bear the one-off transition costs, i.e. to invest in the sustainability transition of the
company, and then reap the benefits of this, in particular in the medium to longer run.
Annex 4 of the impact assessment provides a list of available evidence on how
companies can benefit from improving their sustainability performance and specifically
from implementing sustainable corporate governance practices (including due diligence).
While risk management will not be specifically required under the revised preferred
option, the risk identification duty and due diligence will still provide important data for
corporate risk management, which will help the company manage its own sustainability
risks, too, including its dependencies on its employees, suppliers, stakeholders, and on
natural resources. The impact identification and assessment process, as well as
engagement with business partners, can also point to opportunities for the company.
Evidence listed in the impact assessment clearly shows that benefits do not only arise in
the form of improved external impacts but also in the form of concrete financial
benefits for the company itself, via numerous possible channels that increase revenue or
decrease costs.
One of the sources of improved financial performance of companies with sustainable
corporate governance practices is sustainability-linked product and process
innovation. As the impact assessment explains, this initiative has a strong potential to
lead to innovation benefits, which is also backed by the growing demand for sustainable
products, technologies, processes, and investment opportunities, and because
EN 27 EN
sustainability will most likely determine, as a factor, the success and profitability of
companies in the long term. The initiative, including the specific due diligence
requirements, directors’ duties and duty of care, have been designed so as to spur
investment for the benefit of the long-term sustainable development of the company.
It should be also stressed that by abandoning/limiting commercial relationships that
include risks of flagrant violation of human rights (e.g. forced labour, worst forms of
child labour), when such risks cannot be mitigated, companies reduce their legal risks
(most of these practices are illegal) as well as their reputational risks (e.g. customers
may boycott products issued from forced labour) and respond to the expectations of their
customers and of society as large. In fact, not curbing such practices that are often illegal
(child labour, forced labour), but still pursed by some companies, introduces moral
hazard opportunities and distorts the level playing field for the companies who respect
their obligations. When taking an overall picture, an alleged competitive advantage
built not on the merits, but on exploitation and against European values does not
seem very durable and is not something the Union as a society, including both the
private and public sector, should pursue. This proposal may contribute to enhance the
resilience and competitiveness of EU companies by ensuring that also throughout the
value chain, they control better their risks and they offer more sustainable products. The
Commission will nonetheless closely monitor the impact of this legislation on companies
and other affected stakeholders.
As explained in the impact assessment62
, the above-mentioned considerations that
companies can reduce their risk of litigation by conducting due diligence properly seems
to be supported by the actual experience with the French law, which shows that the law
did not lead to an increased number of litigation and thus the potential negative
impact on competitiveness has not materialized. In addition, in the proposal the civil
liability is based on clear conditions, and includes stricter conditions for liability beyond
direct value chain business relationships.
Even if there remains a certain degree of uncertainty that all the benefits mentioned in the
impact assessment or in this document would materialize, and the extent to which they
arise will not be the same for all companies, the above considerations suggest that the
benefits of the requirements of this initiative are expected to outweigh its costs even at
the corporate level, and will bring competitive advantages, at least in the medium to
long-term.
62
Please refer to the annexes of the impact assessment report, p. 63.
EN 28 EN
List of human rights and environmental due diligence obligations
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 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 UN 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
UN 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 UN
Convention on the Rights of the Child, violation of the right to social security and
an adequate standards of living in accordance with Article 26 and 27 of the UN
Convention on the Rights of the Child; violation of the right to education in
accordance with Article 28 of the UN 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, and to be protected from being abducted, sold or
EN 29 EN
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 UN Convention of the
Rights of the Child;
10. Violation of the prohibition of the employment of a child under the age at which
compulsory schooling ends according to the law of the place of employment,
provided that the age of employment 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 Convention No. 138 of the International Labour Organization of
26 June 1973 concerning Minimum Age for Admission to Employment;
11. Violation of the prohibition of the worst forms of child labour for children under 18
years of age; in accordance with Article 3 of Convention No. 182 of the
International Labour Organization of 17 June 1999 concerning the Prohibition and
Immediate Action for the Elimination of the Worst Forms of Child Labour. 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 ILO Forced Labour Convention, 1930
(No. 29) concerning Forced or Compulsory Labour 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, 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 prohibition of disregarding the freedom of assembly and
association in accordance with Article 20 of the Universal Declaration of Human
EN 30 EN
Rights, Articles 21 and 22 of the International Covenant on Civil and Political
Rights and Article 8 of the International Covenant on Economic, Social and
Cultural Rights, ILO-Convention No. 87 concerning Freedom of Association and
Protection of the Right to Organise, ILO-Convention No. 98 concerning the right to
organise and Collective Bargaining, including the following rights:
a) workers are free to form or join trade unions,
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; 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, 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 based
on 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 not covered by points 1 to 20 above but included in the
human rights agreements listed in Section B 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
EN 31 EN
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 32 EN
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 33 EN
PART II
VIOLATION 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) and Annex A of the Stockholm Convention of 23 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 26 May 2019 pp. 45-77), as last
amended by Commission Delegated Regulation (EU) 2021/277 of 16 December
2020 (OJ L 62 of 23 February pp. 1-3);
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 those of the chemicals listed in Annex
III of the Convention on the Prior Informed Consent Procedure for Certain
Hazardous Chemicals and Pesticides in International Trade (UNEP/FAO) (The
PIC Convention) Rotterdam, 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
EN 34 EN
Convention for the protection of 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), as last amended by the
Third Ordinance amending Annexes to the Basel Convention of 22 March 1989
of 6 May 2014, 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)
i. to a party that has prohibited the import of such hazardous and other
wastes (Article 4 (1) (b) of the Basel Convention),
ii. 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),
iii. to a non-party to the Basel Convention (Article 4 (5) of the Basel
Convention),
iv. 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 35 EN
Summary of costs and benefits
Annex 3 of the Impact Assessment Report summarised, in a qualitative manner, the
benefits of the preferred option for the various stakeholder groups impacted by the
initiative. The same annex also gave an overview of the estimated aggregated business
compliance costs and costs incurred by public institutions, and it included a qualitative
summary of other costs that had not been quantified.
The following two tables present an overview of the expected benefits and costs of the
revised preferred option, i.e. taking into account the final content of the Commission’s
proposal. The tables are presented according to the Better Regulation Guidelines as
revised in the meantime, the main implication of which is that administrative costs are
now also presented in an additional table to support the implementation of the “One-In-
One-Out” principle.
Regarding the benefits, the proposal has been carefully calibrated so that the expected
benefits for the company’s stakeholders in terms of less human rights violations and
environmental harm remain high. At the same time, due to the reduced scope, only a
smaller number of companies will directly reap benefits such as those deriving from
improved corporate management systems, long-term operational costs savings, new
marketing opportunities, or attracting talents. Benefits related to the specific obligation to
manage risks – beyond mitigating the adverse corporate impacts in line with the due
diligence obligations – will not manifest themselves fully due to the reduced content of
the proposal, even though the obligation to identify sustainability risks, together with the
duties related to the corporate strategy, has the potential to improve corporate risk
management to a similar extent.
The most significant changes in the impacts nevertheless concern the quantified cost
elements, due to the reduced scope and content of the initiative (which will now only
include due diligence-related cost elements due to the dropping of those directors’ duties
for which the impact assessment calculated with additional compliance costs). In parallel
with this, the non-quantified cost elements, namely the costs of transition to
sustainability, the indirect business compliance costs in relation to the corporate due
diligence obligation, the costs of other directors’ duties, will also be smaller. While some
of the companies that are now out of the direct scope will nevertheless incur some
indirect costs in relation to due diligence now as value chain partners of larger
companies, such indirect costs for SMEs are likely to be smaller now also due to the
provisions that specifically address the trickle-down effect in the proposal. Costs for non-
EU companies were not quantified in the impact assessment but are now quantified
(monetised) and presented separately, and the supervisory costs now include the costs
incurred both with regard to EU and non-EU companies’ supervision.
As explained in the impact assessment, directors’ duties will result in some additional
compliance costs for businesses as internal processes and management systems would
need to be revised to ensure that directors are able to meet their clarified general duty to
EN 36 EN
promote the best interest of the company, and their harmonised specific obligations.
However, as also explained in the impact assessment the duties that were retained in the
proposal are not expected to result in significant cost increases in addition to the (new)
due diligence obligation and the public reporting obligation under the CSRD, due to
overlaps between the impact and risk identification and between the reporting rules and
the substantive duties, as well as due to already existing practices. Accordingly, we will
not calculate with additional recurrent costs (the one-off costs elements for risk
management and science-based target setting will not arise under the revised preferred
option).
As a result of the new rules on directors’ remuneration, companies would need to revise
their remuneration policies and bear the related adjustment costs. These costs should be
very small, in particular for non-listed companies which neither have to publish their
remuneration policy nor to report on it. Therefore, compliance and adjustment costs will
be minor and could even be regarded as part of business as usual.
I. Overview of Benefits (total for all provisions) – Preferred Option
Description of benefit Which stakeholder group is
the recipient of the benefit?
Comments
Direct benefits
Adverse human rights,
health and social
impacts are reduced,
and value creation by
companies becomes
more sustainable,
responsible and fair.
Actual and possible victims of
adverse human rights impact of
companies, including the
employees of the company and
its value chain partners, as
well as local communities will
benefit directly from this.
In addition, the company itself
will also reap benefits directly.
Actual and possible victims will benefit
from the reduction of human rights
violations as a result of two factors: (1) the
corporate due diligence obligation
includes a specific requirement to cease or
minimise actual adverse impacts, and also
has a requirement to prevent potential
adverse impacts to the extent possible, (2)
improved access to justice for victims of
human rights violations via harmonised
civil liability rules will have a preventive
effect.
The company itself will also benefit from
the reduction of its adverse human rights
impact directly, including due to reduced
financial risks related to possible
litigation.
Adverse impacts on
climate, biodiversity,
pollution, and the
environment more
broadly are reduced,
and value creation by
companies becomes
more sustainable,
responsible and “green”.
The environment, as well as
actual and possible victims of
the environmental harm which
companies cause or contribute
to, including people and local
communities along the
company’s value chains and the
company’s other stakeholders,
will directly benefit from such
an impact.
In addition, the company itself
will also reap benefits directly.
Similarly to human rights impacts, benefits
are expected to arise due to both the
requirement to stop harmful activities or
mitigate actual and potential adverse
impacts, and the preventive effect of
victims’ improved access to remedy.
The company itself will also benefit
directly, including due to reduced financial
risks related to possible litigation.
Access to remedy for
victims of human rights
violations and of
environmental harm
improves.
Victims of human rights
violations and of environmental
damage, including those that
take place in the value chains
located in the EU and in third
EN 37 EN
I. Overview of Benefits (total for all provisions) – Preferred Option
Description of benefit Which stakeholder group is
the recipient of the benefit?
Comments
countries will directly benefit
from this.
Medium to long-term
competitiveness,
resilience and viability
of the company
improves (economic
sustainability).
The company itself will benefit
directly, but all other
stakeholders, including owners
(shareholders or members), will
also benefit (indirectly).
This beneficial impact derives from the
due diligence obligation as the identification
of the actual and possible adverse impacts
will directly help companies know their
value chains better, as a result of which the
company can better identify and manage
their dependencies and other financial risks
they face in relation to sustainability
matters. Furthermore, the harm mitigation
obligation can also contribute to long-term
competitiveness and viability by catalysing
investments into more sustainable and
future-proof technologies and into the
workforce etc. Companies with reduced
harmful external impacts are also likely to
have competitive benefits as a more
sustainable (responsible and green)
company in the labour, customer and
suppliers markets (also using the first
movers’ advantages referred to in the next
point).
The benefits can materialise already in the
medium term in the form of improved
financial performance of the company.
Such benefits are also reinforced by the
requirement that directors, when fulfilling
their duty to act in the best interest of the
company and taking decisions in their
capacity as directors, take into account the
human rights, and environmental
consequences of those decisions and their
likely consequences in the long term, which,
among others, involves the proper
management of sustainability-related risks
and dependencies on natural and human
capital.
Better medium to long-
term competitiveness in
global markets (beyond
the EU) due to
benefitting from first
mover’s advantages.
This will directly benefit the
company.
As additional company-level costs per
revenue remain relatively low, no
significant negative distortions for EU
exporters are expected. At the same time,
EU companies could reap the first movers’
competitive advantages. These derive from
being able to grab the opportunities
offered by the sustainability transition
sooner than competitors and increasing
their market shares in global markets due to
growing global demand for sustainable
products. Further first-movers benefits
include: securing access to resources,
technology, gaining economies of scale vis-
à-vis competitors that later market entrants,
etc.
Indirect benefits
Sustained financial The company’s owners These benefits derive form the fact that
EN 38 EN
I. Overview of Benefits (total for all provisions) – Preferred Option
Description of benefit Which stakeholder group is
the recipient of the benefit?
Comments
return on investment
over a longer time
horizon.
(members or shareholders,
including financial investors),
will directly benefit from this.
companies with improved financial
performance, resilience, competitiveness
and viability over the longer run are able
to pay sustained financial returns to their
shareholders over the longer run, too.
Sustained job
opportunities, sustained
demand for suppliers’
products and services,
sustained sourcing
opportunities and
continued access to after-
sales services for
customers etc., problem-
free repayment of loans
(or profitable return on
bonds), etc.
In addition to direct positive
impacts, employees, suppliers
(and their employees),
customers, as well as creditors
(or bond-holders) are also
indirectly benefitting from the
new directive.
In addition, local communities,
and the economy as a whole
will benefit.
This indirect effect is the result of
companies’ longer term competitiveness,
resilience and viability: companies that
remain successful over the medium and
long run are likely to continue employing
the workers, purchasing from their
suppliers, providing their products and
services to their clients, including reparation
etc., service their loans (or bond payments),
etc. Their sustained contribution to
employment, and participation in the
flow of economic activities, has, in turn, a
positive impact on the local communities
and the economy as a whole.
Improved resilience,
and improved medium
to long-term
competitiveness of the
EU economy
The entire EU economy as well
as indirectly impacted third
countries will benefit from this
impact.
The cumulative medium to long-term net
benefits for companies are expected to
result in medium to long-term
competitiveness gains for the economy. A
focus on the long-term interest of the
company, better risks management, lower
dependency on increasingly scarce natural
resources, improved resilience to
sustainability-related shocks, as well as
impact mitigation will all contribute to this
impact.
Better working
conditions and increased
environmental
standards and respect
for human rights
Third countries, in particular
where standards regarding
working conditions and respect
by companies for human rights
the environment are lower,
will, in general, benefit
indirectly.
Faster and more
systematic transition to
a sustainable, i.e. green
and fair economy and
society
On the top of direct benefits,
the entire economy and
society, including current and
future generations of people
in the EU and around the
world will benefit indirectly.
Reduced climate and environmental
footprint, better respect for human rights,
diminishing adverse health and social
impact on workers and other people will
contribute to speeding up the transition to a
greener and fairer society and economy, and
to ensuring better conditions for life for the
future generations.
Administrative cost savings related to the ‘one in, one out’ approach*
(direct/indirect) N/A N/A
EN 39 EN
II. Overview of costs – Preferred option
Citizens /
Consumers
Businesses Administrations
One-
off
Rec. One-off Recurrent One-off Recurrent
Corporate
due
diligence
Direct
adjustment
costs
N/A N/A
EUR 220 million for
EU companies and
EUR 70 million for
non-EU companies
+ Cost of transition
to sustainability (not
quantified, but
qualitative and
quantitative
examples with cost
ranges are given in
the impact
assessment)
EUR 760 million
for EU companies
and
EUR 240 million
for non-EU
companies
No other additional
recurrent cost is
expected.
N/A N/A
Direct
administrative
costs
N/A N/A
No substantial additional administrative
costs will be incurred by EU companies as
all of the companies covered by the scope
of the revised preferred option are also
under the CSRD proposal, and a such their
costs related to reporting and the
necessary data collection, data analysis,
documentation etc. costs have already
been counted as a direct compliance costs
under that proposal.
N/A N/A
Direct
regulatory
fees and
charges
N/A N/A N/A N/A N/A N/A
Direct
enforcement
costs
N/A N/A N/A N/A
EUR 0.13
million
EUR 5.55
million
Indirect costs N/A N/A While part of such indirect costs are
included in the qualitative estimations of
direct costs (which cover the cost of due
diligence through the entire value chain
and in subsidiaries), some compliance
costs could still trickle down to
companies (including SMEs) which are
not under the scope but belong to the
value chain of companies which are
themselves covered. The proposal
includes safeguards to minimise such
impacts on SMEs.
N/A N/A
Directors’
duties
Any direct or
indirect costs
N/A N/A The costs of directors’ duties linked to the
corporate due diligence obligations are
already included in the cost of due
diligence above. Directors or companies
will not incur any substantial other
additional costs as a result of harmonising
other directors’ duties: these costs should
remain minimal and can even be regarded
as part of business as usual.
N/A N/A
EN 40 EN
Directors’
remuneration
Any direct or
indirect costs
N/A N/A Costs related to adjustment of existing
remuneration policies - and, for listed
companies, reporting – have not been
quantified but should remain minimal and
can even be regarded as part of business
as usual.
N/A N/A
Costs related to the ‘one in, one out’ approach
Total
Direct
adjustment
costs
N/A N/A EUR 220 million for
EU companies
+
Cost of transition to
sustainability (not
quantified)
EUR 760 million
for EU companies
Indirect
adjustment
costs
N/A N/A Some indirect compliance costs deriving
from the trickle-down effect for
companies, incl. SMEs, belonging to the
value chains of large companies can occur
in addition to those already included in the
estimated direct costs (not quantified).
Admin. costs
(for
offsetting)
N/A N/A No substantial additional administrative
costs will be incurred by EU companies
under this directive as all of the companies
that are under the scope of the revised
preferred option are also under the CSRD
proposal, and as such their costs related to
reporting and the necessary data
collection, data analysis, documentation
etc. costs have already been counted as a
direct compliance costs under that
proposal.
(1) Estimates are provided with respect to the dynamic baseline (including the CSRD proposal);
(2) Aggregated direct costs for companies are likely to be overestimated because of the cautious
calculation method of calculating firm-level costs;
(3) One-off costs for companies are not immediate costs and can be spread across several years;
EN 41 EN
Overview of how the comments of the Regulatory Scrutiny Board
have been addressed
This comparison table describes how the four general comments and the 19 specific
recommendations for improvements made by the Regulatory Scrutiny Board (RSB) in its
second opinion of 26 November 2021 have been addressed in the amended preferred
option (forming the basis of the legislative proposal) and in this Staff Working Document
(SWD) accompanying the legislative proposal.
General RSB comments
(i.e. summary of main findings)
Description of how the general comments of
the RSB have been addressed
(1)The problem description remains vague
and does not demonstrate the scale and
likely evolution of the problems the
initiative aims to tackle. It does not
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.
This comment has been addressed by
providing additional evidence as regards the
problem description in this accompanying
document.
The following has been added:
- evidence on improving sustainable operation
of companies but insufficient or slow uptake
of value chain due diligence by the majority of
companies;
- more information on the added value of the
initiative with regard to related measures;
- more information on the links with
international obligations, trade policy and
development support measures and impact of
trade and development support measures.
See more details below under the RSB
specific comments No. 1 and 2, notably
regarding the problem definition.
(2)The presented policy options remain too
limited in scope. Key policy choices are
not identified nor fully assessed
The narrative and preferred option put forward
by the impact assessment were reviewed
following the second opinion from the Board.
As a result, the proposal sets out a more
focused and targeted due diligence
obligation for companies. The impact
assessment options have not been revised as
such for the sake of transparency, but the
initiative is now based on a combination of
elements that represents a new preferred
option compared to the impact assessment
report. The narrative emphasises – in addition
to the contribution of the initiative to the
sustainability transition – the need to address
the risk of fragmentation in the Single
Market due to new legal frameworks on due
diligence requirements emerging in Member
States.
The measures selected for inclusion in the
EN 42 EN
General RSB comments
(i.e. summary of main findings)
Description of how the general comments of
the RSB have been addressed
proposed legislative text have been
significantly reviewed and revised, leaving
out part of the directors’ duties and of the
rules on directors’ remuneration (apart
from the obligation to take into account the
emission reduction plan when setting
directors’ variable remuneration). For more
details about directors’ duties not retained,
please see the response to specific comment
No. 3. The legislative proposal now focuses
on external impact mitigation through
value chain due diligence and only covers
the general duty of directors to take into
account the consequences of their decisions
for sustainability matters, including where
applicable, the climate, environmental and
human rights consequences in the short,
medium and long term, and the duty to set up
and oversee the due diligence and integrate it
into the corporate strategy.
The changes as regards due diligence are the
followings:
- first, it has a reduced personal scope (i.e.
who / which business categories are covered)
as compared to the preferred policy option put
forward by the impact assessment. In
particular, SMEs and certain midcaps have
been completely excluded, and the coverage
of high-impact sectors has been shifted to
“midcap” companies only (companies with
more than 250 employees and more than EUR
40 million net turnover but not exceeding the
500 employee and EUR 150 million net
turnover thresholds simultaneously). While
the impact assessment presented in its Annex
11 an indicative “maximum” list and two
scenarios for more limited lists of possible
high-impact sectors for political decision, the
now selected option builds on the most limited
one. The high-impact sectors falling under
this proposal have been limited to sectors and
parts of the value chains that are covered by
existing OECD due diligence guidance. The
changed approach to define high-impact
sectors and the increase of applicable
minimum size thresholds result in a decrease
of the total number of EU companies in the
scope to about 12 000.
The choices made to ensure that the proposal
is more proportionate to the goals of the
initiative (e.g. by excluding SMEs, limiting
the number of high impact sectors, aligning
EN 43 EN
General RSB comments
(i.e. summary of main findings)
Description of how the general comments of
the RSB have been addressed
the scope of third country companies covered
with the one of EU companies, etc.) is
provided in the Explanatory Memorandum.
This accompanying document contains in
section 3 further detailed explanations on the
redesign of the selected options in terms of
scope and enforcement. Please see also the
follow-up to the Boards specific comments No
3 to 11.
(3)The impacts are not assessed in a
sufficiently complete, balanced and
neutral way. Uncertainty related to the
realisation of benefits is not sufficiently
reflected.
Additional assessment and evidence regarding
impacts (on competition, competitiveness,
impact on third countries) is provided in this
accompanying document.
Concerning the uncertainty on the realisation
of benefits for the companies, it is presented
how the design of this initiative makes sure
that possible negative impacts on EU
competitiveness are limited to the minimum
(for instance, by designing clear criteria for
liability, by providing supporting measures
within EU and in producing countries and by
making disengagement from value chain
partners only a last resort to be applied and
only for severe adverse impacts).
For more details on the assessment of
additional impacts please see below as regards
the Board’s specific comments No. 12 to 15.
(4)The report does not sufficiently
demonstrate the proportionality of the
preferred option.
The preferred option has been amended to
make it more proportionate to the goals of the
initiative by:
(1) excluding all SMEs and shielding
them from unfair and disproportionate
requirements from their business
partners in the scope of the proposal,
(2) limiting the number of midcap
companies in high impact sectors by
reducing the range of high impact
sectors and their obligations,
(3) aligning the scope of third-country
companies covered with the one of
EU companies, and
(4) providing specific conditions for civil
liability for damages at the level of
indirect established business
relationships.
The number of companies was very
significantly reduced to about 12 000 EU and
an additional approximately 4 000 non-EU
companies (this latter figure had not been
EN 44 EN
General RSB comments
(i.e. summary of main findings)
Description of how the general comments of
the RSB have been addressed
estimated in the impact assessment).
EN 45 EN
Specific RSB comments How the specific RSB comments have been
addressed
(1) The report continues to provide little
specific evidence on 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 initiative.
While the assessment of benefits provides
ample evidence on the competitive, financial
and reputational advantages that companies
achieve by applying corporate sustainability
practices, the report should identify, and
substantiate with evidence, the obstacles
that may prevent companies from pursuing
sustainable corporate management
practices. It needs to demonstrate more
convincingly why the market and
competitive dynamics together with the
further evolution of companies’ corporate
strategies and risk management systems are
considered insufficient. Moreover, it needs
to substantiate better the assumed causal
link between using corporate sustainability
tools and their practical effect in tackling
the problems
To address this comment additional evidence is
presented in this accompanying document
(section 2) on why the market and competitive
dynamics together with the further evolution of
companies’ corporate strategies and risk
management systems are considered
insufficient.
As regards the recommendation from the
Board to identify, and substantiate with
evidence, the obstacles that may prevent
companies from pursuing sustainable corporate
management practices, the impact assessment
report contains ample analysis and specific
obstacles such as for example cost, knowledge
or limited resources are more likely to arise
with respect to SMEs which have now been
excluded from the scope, therefore this
document does not contain new analysis on
this.
(2) The report should present a sufficiently
developed and more balanced dynamic
baseline scenario that integrates (i) the
increasing trend of take up of corporate
sustainability practices, (ii) the large
number of related measures already
adopted and parallel regulatory measures
being developed (including sectoral and
sustainable product due diligence), (iii) the
comprehensive package of measures to
promote sustainability under the Green Deal
and (iv) the developments expected in third
countries with sustainability sub-standards
resulting from own commitments as well as
substantial EU and international trade and
development support measures.
Additional evidence is presented in this
accompanying document on:
- the description of the dynamic baseline
scenario, in particular the increasing trend of
take up of corporate sustainability practices,
also prompted by transparency requirements
by investors and consumers (section 2.1);
and on
- the possible evolution of the problem within
the context of the European Green Deal and
other EU due diligence measures alone and
in synergy with the proposed initiative
(section 2.2).
(3) The report is not clear about why it is
necessary to regulate directors’ duties on
top of due diligence requirements. It should
better explain and assess the value- added of
regulating directors’ duties, considering that
the due diligence option already requires
risk management and engagement with
stakeholders’ interests. It should justify why
stand-alone options covering directors’
duties or due diligence requirements only
were not identified and subsequently
The proposal differs from the initial preferred
options package in the impact assessment by
significantly focusing the directors’ duties
element to those necessary for the proper
implementation of the due diligence.
As it is crucial that compliance with the due
diligence obligation is integrated in corporate
governance, in light of the existing
international standards (UNGPs, OECD
guidelines), directors’ duties linked to due
diligence have been maintained. This
EN 46 EN
Specific RSB comments How the specific RSB comments have been
addressed
compared with the combination options. encompasses directors’ duties relating to
putting in place and overseeing due
diligence processes and measures, including
integrating due diligence into all their
corporate policies and having in place a due
diligence policy.
Directors’ duties not retained – as compared
to those put forward as part of the preferred
option in the impact assessment – concern
- the duty to manage sustainability risks to the
company and adopt science based targets, i.e.
duty to identify stakeholders’ interests,
dependencies of the company to such
stakeholder interests;
- the directors’ duty to manage risks to the
company related to those stakeholders and
related dependencies, set up and oversee the
implementation of processes related to
management of sustainability risks to the
company;
- the directors’ duty to include the management
of sustainability risks to the company in the
corporate strategy, mandatory adoption and
disclosure of science based targets.
In order to fully reflect directors’ role in light
of the corporate due diligence obligations, the
general directors’ duty of care for the company
which is present in all Member State laws is
being clarified to make clear that directors take
the consequences of their decisions on
sustainability matters into account.
(4) As regards enforcement, the report
discards mandatory due diligence policy
options that do not include a civil liability
regime without providing evidence of their
apparent lack of effectiveness. Given that
stakeholders consider administrative
supervision as the preferred option (and this
seems a solution also introduced at Member
State levels), the report should better assess
and compare all feasible enforcement
options, including a stand-alone
administrative supervision option. The
report should also include more detail on the
functioning, efficiency and effectiveness of
the envisaged sanction regimes (e.g.
withdrawal of products from the market,
exclusion from public procurement), in
particular with respect to non-complying
third country undertakings. It should be
clearer on the feasibility and impacts of
As the impact assessment report was not
revised, no new options have been assessed.
However, to address this observation made by
the Board, additional evidence is presented in
this accompanying document on the
enforcement mechanism, in particular further
expanding on the added value of a two-pillar
enforcement system building on administrative
enforcement and civil liability, also in light
with what is done with other areas of Union
law.
As regards the selected option on civil liability,
the legislative proposal clarifies that civil
liability concerns only established business
relationships which are expected to be lasting,
in view of their intensity or duration non
negligible or non-ancillary character and
applies only where the adverse impact could
have been identified, prevented, mitigated,
EN 47 EN
Specific RSB comments How the specific RSB comments have been
addressed
possible overriding mandatory provisions as
regards applicable law and assess any
unintended consequences.
brought to an end or its extent minimised with
appropriate due diligence measures. As it will
in practice be difficult to prevent all risks
through global value chains, liability is limited
to harm done in the value chain under specific
conditions beyond direct suppliers.
As regards administrative sanctions, the
legislative proposal with recitals and
explanatory memorandum contains
comprehensive details as regards such
sanctions and their functioning.
As regards international private law elements,
in particular as regards applicable law, the
legislative proposal provides details as to the
content of the selected solution for overcoming
problems linked to applicable law. Explanation
is contained in the Explanatory Memorandum
and this accompanying document
(5) The options extending the scope into
medium-sized companies should better
account for the results of the new SME
study, which shows both a significant uptake
already in exposed sectors as well as an
important trickle-down effect through the
value chain of measures adopted for large
companies. The report should better justify
and substantiate with evidence why certain
medium-sized companies operating in ‘high-
impact’ sectors should be included in the
personal scope. It should present clear and
objective criteria that would be used in
determining such sectors. To the extent that
specifying the selection design comes with
policy choices (including on the legislative
technique to be used, as implementing
legislation is mentioned in the annex), these
should be assessed and compared in terms of
costs and benefits. The report needs to be
clearer on the envisaged phasing in of the
requirements for medium-sized companies.
It should also be more specific on the
safeguards it would include to prevent that
large companies impose unjustified
compliance burden on SMEs in their value
chain. If this comes with policy choices, it
should present and analyse alternatives.
As already explained with regard to the
Board’s general comment No. 2 (i.e. coverage
of business categories), the personal scope of
the selected option has been considerably
reduced. SMEs and smaller midcap companies
have been fully excluded.
Also, a new approach has been adopted to
define “high-impact sectors”. Annex 11 of the
impact assessment proposed an indicative
“maximum” list of high-impact sectors
covering almost 50 000 companies (in option
3b) and several alternative or more limited
approaches to determine the list for a political
decision. From among these approaches, the
now selected option builds on the most limited
one and is based now mainly on the relevant
OECD guidance for companies..
The phase-in period for those companies in
high-impact sectors has been set at 2 years and
the expected benefits have been explained.
As regards the trickle-down effect on SMEs in
value chains as referred to by the Board, the
proposal itself will contain such safeguards
(e.g. duty to provide targeted support if
necessary, fair and proportionate treatment of
SME business partner, contractual clauses,
supporting measures) and the Explanatory
Memorandum provides details on other support
to be given to companies by Member States, in
particular to prepare for those effects.
Additional support will be provided through
development projects in producing countries.
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(6) To ensure greater regulatory coherence,
the report should consider aligning the
personal scope better with the scope of
parallel initiatives, such as the Corporate
Sustainability Reporting Directive. It should
also discuss more thoroughly how coherence
will be ensured with the parallel sectoral
and product due diligence initiatives and
whether these could become (partially)
superfluous.
When having recalibrated the preferred option,
the personal scope (i.e. coverage of business
categories) has been better aligned with the
proposed Corporate Sustainability Reporting
Directive (CSRD) while ensuring
proportionality. Therefore, while a larger
number of companies will be subject to
reporting obligations under the CSRD, only
those companies having a certain capacity and
economic power will have a material due
diligence duty. The CSRD proposal does not
cover the third-country companies.
Therefore, full alignment with the scope of
CSRD is not achieved, i.e. for instance this
directive will not cover listed SMEs (as the
new preferred option excludes all SMEs).
However, the legal text envisages an
implementation report, to be provided 7 years
after the transposition period, opening the
possibility to further extend and align the
scope, if necessary.
(7) The report should be more precise which
selected international environmental
conventions should be included in the
material scope of the due diligence
obligations and why. It should ensure that it
does not unduly extend specific EU
commitments (e.g. from the Climate Law) to
third countries.
The legislative proposal and the explanatory
memorandum specify and explain which
violations based on environmental conventions
are included in the retained policy choice (for
example Minamata Convention on mercury,
Stockholm convention on persistent organic
pollutants, etc.). Only those environmental
conventions were retained that can be
translated into clear obligations for businesses.
As regards climate change, companies are
required to 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. The review clause
explicitly provides for an assessment on
whether the Directive should be reviewed to
include climate change in due diligence.
(8) Regarding the inclusion of companies
without an EU establishment, the report
should specify and justify what the
‘adequate turnover’ threshold should be
(the annex mentions EUR 350 million) or
assess alternative options in case the
Commission enjoys discretion on this. It
should make an effort to estimate how many
The net turnover threshold for third-country
companies covered by the scope has been
specified in the legislative proposal (net
turnover of at least EUR 150 million in the EU)
to reflect the criteria of EU companies in the
scope while not discriminating the non-EU
companies. Third-country companies with a
turnover of EUR 40 to 150 million that are
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foreign companies would be affected
respectively, as this is important to assess
the proportionality of the measures in terms
of overall benefits and costs. It should
clarify whether all worldwide activities of
foreign companies would be subject to the
due diligence duty or only activities with a
clear (turnover) link to the EU. Similarly,
for companies established in the EU, the
report should clarify whether all their global
activities under control would be covered
(e.g. products produced in China and sold
exclusively in the US).
operating in high-impact sectors are also now
covered, with the same obligations and phase
in as EU companies of a corresponding size.
The relevant criteria are being explained in the
Explanatory Memorandum and the employee
criterion was not retained as it would make it
difficult to identify such companies.
This accompanying document contains more
explanations of applicability and estimations as
regards the number of third-country companies
covered.
(9) The description of the directors' duties
should clarify how directors need to
incorporate conflicting interests of
stakeholders and sustainability aspects. It
should clarify whether or not there is a long-
term interest of the company that could
supersede particular interests of
stakeholders or beneficiaries or particular
sustainability considerations.
As specified in response to the Board’s specific
comment No. 3, and as opposed to the
preferred package put forward in the impact
assessment, the proposal significantly reduces
the directors’ duties element by linking it only
to the due diligence duty. A number of specific
directors’ duties that were included in the
initial preferred option, has been removed (for
a list of the removed directors’ duties please
see above follow to specific RSB comment No.
3). In the same vein, the clarification of the
directors’ duty of care for the company as
present in Member States laws has been limited
to making clear that directors take into account
the consequences of their decisions on
sustainability matters, including, where
applicable, human rights, climate change and
environmental consequences, including in the
short, medium and long term.
(10) The report should justify and
substantiate with evidence the need for a
mandatory science based target for climate
change mitigation (and potentially also for
biodiversity) as part of the corporate
strategy of very large companies. It should
clarify which gap in climate mitigation
legislation it would fill. It should explain
how these targets would be established and
function and how independent validation
would be ensured. It should justify why the
requirement for science-based targets is
linked to the size of a company and not to
the scale of emissions it is responsible for.
The report should explain why science based
target setting is part of directors’ duties and
not due diligence, which already requires
companies to mitigate adverse effects.
The focus of the selected option has been
readjusted compared to the one put forward by
the impact assessment. As described above,
mandatory science based targets are no longer
part of the chosen policy mix.
As explained in specific comment No. 7, due to
a lack of clear obligations for companies
climate change was excluded from due
diligence obligations. Instead, the largest
companies need to 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.
(11) The report should better explain the
precise role of public authorities in checking
Detailed provisions on the role and powers of
supervisory authorities are put forward in the
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the corporate strategy and the scientific
targets. It should also better explain which
national authority would be best placed to
act with respect to non-compliance of third-
country undertakings. It should also explain
how effective coordination among national
authorities would be ensured, for instance
launching ex-officio procedures or imposing
sanctions and what role a ‘mechanism of EU
cooperation/coordination’ would play.
legislative proposal, including which
supervisor is to act with respect to third
country companies. Article 18 lays down in
detail supervisory authorities’ powers,
including as regards powers to carry out
investigations and checks on companies,
Concerning the supervision of third-country
companies, Member States are free to
designate the national authority they consider
that it has more relevant experience to carry
out the tasks set out in the proposal.
Article 21 stipulates the framework for a
European Network of Supervisory Authorities,
including the possibility to coordinate within
this network in case of doubts which
supervisory authority is competent to carry out
investigations or impose administrative
sanctions vis-à-vis third country companies.
Comprehensive explanations are provided in
the recitals and the Explanatory Memorandum.
(12) The report should be more balanced
and complete in terms of presenting
potential impacts concerning competition,
innovation, agility and litigation risks. While
stricter sustainability requirements may
spur innovation, there is also a risk that due
diligence will make companies less dynamic
and agile – and more dependent on a set of
fixed providers, in particular in highly
concentrated sectors, with only a very
limited number of suppliers. The report
should assess to what extent the measures
envisaged will make it more difficult for
certain industry sectors to diversify their
suppliers and to improve the resilience of
their supply chain. It should assess impacts
on competition that may arise from
potential increased vertical integration by
businesses as well as from the exchange of
commercially sensitive information resulting
from joint company value chain due
diligence efforts. It should assess more
thoroughly whether the potentially
increased risk of (unsuccessful) litigation
could also make EU companies less dynamic
and agile.
This accompanying document provides more
explanations as regards the expected impacts of
the proposed intervention on competition and
competitiveness (sections 4.5 and 4.6). In
particular, explanations are provided to dispel
concerns that the proposed measures would
lead to anti-competitive behaviour, as a result
of cooperation on due diligence pursuing a
sustainability objective or the exchange of
information, or as a result of vertical
integration.
As explained under point 3 of the general RSB
comments, impacts on competitiveness were
further assessed taking into account possible
dependencies of EU companies and the risk of
litigations, as well as possible impacts on
companies’ innovation capacity. While there is
certain degree of uncertainty about the
materialization of all benefits projected in the
impact assessment for EU companies, the
design of this initiative is such to reduce the
possibly negative ones to the minimum. This
document includes an explanation about what
safeguards have been used in the proposal to
make sure that companies continue engaging
with suppliers while mitigating adverse
impacts, instead of disengagement and
diversification of suppliers.
(13) The report should better account for
potential negative impacts in third
countries, notably in developing countries,
The details about the risks relating to
unintended impacts on third countries are
presented in this accompanying document
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by being more realistic on risks and costs
and the contribution of potential soft
mitigation measures. It should better assess
the risk of ‘sustainability leakage’. If EU
companies will ultimately have to withdraw
from certain suppliers due to sustainability
issues, third-country companies (if out of the
personal scope) could take over these
suppliers and thereby gain a competitive
advantage and supply chain control, while
leaving no improvement in overall human
rights and environmental performance.
(section 4.3), as well as the safeguards in the
proposal against such impacts. Such safeguards
include:
(1) measures ensuring that the emphasis is on
preventing and mitigating adverse impacts,
rather than banning certain products
originating from certain areas,
(2) prevention and mitigation should include
proper investments, where necessary,
(3) prevention and mitigation should include
targeted financial or other support for the
SME trading partner, where necessary.
(4) collaboration with other entities, including,
where relevant, to increase the company’s
ability to bring the adverse impact to an
end
(5) termination of the business relationship
only if the potential adverse impact is
severe, and where the law governing their
relations so entitles companies to do so.
Collaborative efforts will also be fostered
through support measures.
Those third countries that are main EU trading
partners and where the standards linked to
sustainability are generally lower will be
impacted the most by this initiative.
Sustainability leakage is present in few
industry sectors but doesn’t seem to be a
widespread practice so far. As explained, the
safeguards aim to ensure continuous
engagement and disengagement is only likely
for severe adverse impacts such as in case of
State imposed forced labour .
(14) Based on a clarification of the personal
scope, the report should assess more
thoroughly the impacts of the options on the
global level playing field and
competitiveness of EU companies, in
particular for SMEs in scope. While a large
number of EU SMEs active in ‘high impact’
sectors would be covered (e.g. turnover
higher than EUR 8 million), this is not the
case for their ‘SME competitors’ established
in (neighbouring) third countries (as they
are very unlikely to be above the indicated
much higher EU turnover threshold of EUR
350 million). The report needs to assess the
potential competitive disadvantage for the
affected EU SMEs. Similarly, as directors’
duties obligations would apply only to EU
established companies, the report should
assess more thoroughly the impacts on their
As explained in reaction to the Board’s general
comment No. 1 and specific comment No. 5,
SMEs are no longer covered by due diligence
obligations under the new policy mix
underlying the proposal. The concerns raised
by the Board would therefore not arise in this
new scenario. As regards directors’ duties, as
explained, these have also been reduced in the
proposal, linking them to due diligence. This
implies that the two items that were explained
in the impact assessment (section 6.2.1.3) to
possibly raise one-off costs for a limited
number of companies (EUR 5 000 for the risk
management system and EUR 5 000 for the
external validation of science based targets)
have not been retained now for the legislative
proposal put forward.
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competitiveness, including the risk that EU
companies may relocate their headquarters
to (neighbouring) third countries.
(15) The report should assess how the
proposed EU corporate sustainability
governance rules would fit with the different
national corporate governance models
existing in the EU, given the national focus
of company law.
Explanations as to how the proposed rules fit
with the different national corporate
governance models have been provided in the
Explanatory Memorandum. Overall, as
company law is to a large extent harmonised
already, corporate governance models are
gradually converging.
(16) While the report provides greater
clarity on the substantial costs of the
initiative, it still does not sufficiently reflect
the high uncertainty that the estimated
benefits will actually materialise on a scale
to outweigh the costs. The report should
therefore further improve the
proportionality assessment of the
(preferred) option(s) by reconsidering the
arguments for the inclusion of medium-sized
EU companies operating in high impact
sectors and the broad scope of mandatory
measures.
As explained above, the personal scope of the
initial preferred option was considerably
reviewed (exclusion of SMEs and smaller
midcaps, reducing the number of high-impact
sectors) particularly to improve further the
proportionality, based on the additional
evidence and considerations following the
Board’s second opinion. The material scope of
the revised preferred option is also more
focused on the due diligence obligation of
companies, while directors’ duties were
significantly reduced (keeping only those that
are linked to the corporate due diligence
obligation). In addition, this accompanying
document includes more assessment of the
impact on firm-level competitiveness. This
shows that as a consequence of including only
larger companies in the scope, it is more likely
under the revised preferred option all
companies will be able to bear the initial costs
and also enjoy the benefits of sustainable
corporate governance practices, which are
expected to outweigh the costs even at the
company’s level, in particular in the medium or
long run.
(17) The comparison of options in terms of
effectiveness should analyse the expected
achievement of the specific objectives
identified in the objectives section.
The comment of the Board concerns the quality
of the impact assessment. It was decided to
provide utmost transparency and publish the
initial impact assessment report without
changes. However, additional evidence and
explanations are presented in this
accompanying document.
(18) The report should present more
systematically the views of different
stakeholder categories. It should find a
better balance between supportive and
critical views expressed. The views of SMEs
should be singled out to support the
discussion on scope and options.
This comment of the Board mainly concerns
the quality of the impact assessment.
The presentation of the consultation results in
the Explanatory Memorandum has been
reviewed by adding the SME views. Overall,
the views of SMEs and SME associations as
collected in the consultative activities
correspond largely to overall companies’
views.
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It is recalled that SMEs have been excluded
from the options.
(19) The report would benefit from a more
precise summary of the final preferred
option, including in terms of the variation in
scope across elements.
This comment of the Board concerns the
quality of the impact assessment. As it has
been decided, to provide utmost transparency,
and not to revise the Impact Assessment
Report, the proposed changes to the
presentation of the impact assessment could
therefore not been made. The initial preferred
option has been revised, as explained above,
and additional explanations provided in this
accompanying document and the Explanatory
Memorandum.