On February 23, 2024, the European Commission adopted the proposal for a Directive on mandatory sustainability assessment of businesses. The aim of this Directive is to promote sustainable and responsible business conduct, as well as to integrate human rights and environmental protection into corporate governance.
Who does this Directive apply to?
- To individuals, regarding:
Better protection of human rights and workers’ rights
Healthier environment for present and future generations
Increased trust in employers
Greater transparency in decision-making information
More transparent justice enforcement in case of victims.
2. To companies, regarding:
Harmonized legal framework in the EU providing legal certainty and equal conditions for all
Increased trust of customers and greater commitment of employees
Better understanding of human rights and negative impacts of companies on the environment
Improved risk management and adaptability
Increased attention to sustainability-oriented investors
Increased attention to innovation-oriented investors
Better access to finances.
3. To developing countries, regarding:
Better protection of human rights and the environment.
Increased stakeholder awareness of key sustainability issues.
Sustainable investments
Enhanced sustainability-related practices
Increased adoption of international standards
Improved living conditions for the population.
This Directive establishes the obligation to assess the operations of corporations, focusing on documenting the negative impacts on human rights and the environment in the core operations of the company, its subsidiaries, and value chains.
In addition, certain large companies must have a plan to ensure that their business strategy is in line with limiting global warming to 1.5°C, in accordance with the Paris Agreement.
The Directive also introduces obligations for integrating these rules into their own strategy and monitoring the implementation of the business assessment process. When conducting their activities, companies are checked to see if they take into account human rights, climate change, and environmental consequences of their decisions.
Which companies will the new EU regulations apply to?
Large companies with limited liability in the EU:
Group 1: +/- 9,400 companies with 500+ employees and net revenue of €150 million+ worldwide.
Group 2: +/- 3,400 companies in high-impact sectors with 250+ employees and net revenue of €40+ million worldwide, operating in defined high-impact sectors such as textiles, agriculture, mineral extraction.
For this group, the rules start to apply two years later than for Group 1.
Non-European companies: +/- 2,600 companies in Group 1 and +/- 1,400 in Group 2.
Third-country companies active in the EU with revenue thresholds aligned with Group 1 and 2, generated in the EU.
Micro-enterprises and small and medium-sized enterprises (SMEs) are not covered by the proposed rules. However, this proposal provides support measures for SMEs, so some may be indirectly affected.
What are the next steps?
The proposal will go to the approval of the European Parliament and the Council. After adoption, member states will have two years to transpose the Directive into national legislation.
