Human Rights and the Environment – What Brazil-Based Companies Need to Know About the EU’s Draft Corporate Sustainability Due Diligence Directive | Insights and Events
On February 23, 2022, the European Commission published its long-awaited draft Directive on Sustainability and Corporate Due Diligence (the Draft Directive). The draft directive establishes a proposed European standard on human rights and environmental due diligence (HREDD) which, above all, would apply to any company based in Brazil and its subsidiaries if these companies of the group have a cumulative annual net turnover in the EU of:
- more than 150 million euros (Group 1); or
- more than 40 million euros with at least 50% of global net turnover generated in a “high risk” sector which includes textiles, clothing and footwear, agriculture, forestry, fishing, food and extractive industries (Group 2).1
Notably, the HRSD applies even if the Brazil-based companies and their subsidiaries do not have a physical presence in the EU, if the above net turnover threshold is met.
The draft directive requires Group 1 and Group 2 companies to take appropriate steps to identify and mitigate actual and potential adverse impacts on human rights and the environment resulting from their own operations anywhere in the world. world (not only in the EU) and, where applicable, to their value chains, from their “established business relationships”.
EU member states are required by the draft directive to:
- designate a supervisory authority responsible for overseeing compliance with due diligence and climate change obligations, with the necessary powers and resources to request information, conduct investigations, order corrective measures and impose fines;2 and
- ensuring that individuals and entities can bring civil actions.3
The draft directive provides for the responsibility and accountability of administrators with regard to the HREDD programs of EU companies.4 Group companies that reach the turnover threshold will also be required to appoint an EU-based representative to liaise with EU supervisory authorities.
While the draft directive remains subject to further legislative review and approval, it provides the most detailed overview yet of the scope and form of future HRDD obligations, and it provides a useful template for that companies continue to develop their due diligence policies and procedures designed to identify, assess and mitigate adverse human rights and environmental impacts – both in their operations and in their value chains.
In addition, the draft directive will have implications for banks, insurers and other financial institutions based in Brazil that meet the EU net turnover threshold. They will need to undertake additional due diligence on customers and their affiliates to whom they provide loans, credits and other financial services5 in accordance with the requirements of the draft directive.
Growing HREDD trend globally
The general message is clear: the mandatory HRDD is coming, and companies based in Brazil should already anticipate the next legal obligations of the HRDD and prepare for the growing expectations of stakeholders in this area. Although HRD laws initially focused on child labor and slavery (UK, Australia, California), the trend is towards a broader and more comprehensive view of human rights and the environment. We see this with recent laws passed last year in Norway, Germany and the Netherlands (see our past blogs on national HRD movements in Germany and the Netherlands). Japan is also expected to release human rights guidelines for businesses later this year. In addition, some stock exchanges in Brazil have adopted or proposed ESG-related disclosure requirements that are broad enough to cover the disclosure of information relating to certain social issues, including human rights.
Highlights of the Draft Directive
DUE DILIGENCE OBLIGATIONS
Take away key: Basically, the draft directive would require Group 1 and Group 2 companies to implement HRDD measures that cover their entire value chains, looking beyond Tier 1 suppliers to include “business relationships”. established” throughout the value chain. This includes contractors, subcontractors and other supply chain entities. This will further complicate supply chain risk assessments and ongoing supply chain risk management in practice.
DUTIES OF DIRECTORS
Take away key: The draft directive provides that directors of EU-based subsidiaries of Brazil-based companies must take into account “human rights, climate and environmental consequences” when acting in the best interest of a company . This includes the obligation to ensure that a company’s business model and strategy is compatible with the Paris Agreement’s 1.5°C target. This seems to be more extensive than the existing and planned national laws on HRD.
Take away key: The draft directive provides that member states must implement rules on penalties for non-compliance, ensure that these penalties are “effective, proportionate and dissuasive” and may include financial penalties based on the figure of business of a company.
NEW CIVIL LIABILITY REGIME
Take away key: A new civil liability regime could pave the way for an increase in litigation related to human rights and the environment (for example, brought by civil society organisations). In addition, this regime will have implications for existing national due diligence laws that do not currently provide for such a regime (e.g. German Supply Chain Law).
STANDARD CLAUSES AND GUIDELINES
Take away key: It is expected that the European Commission will publish guidance and a set of voluntary model clauses to help companies comply with their obligations under the draft directive. Our previous blog on ABA model clauses provides an overview of the types of voluntary model clauses that are already available in a supply chain context.
Timing and implementation
The draft directive will now be presented to the European Parliament and the Council for approval. Once adopted, member states will have two years to transpose the directive into national law.
How can your organization prepare for the requirements of the draft directive?
The outline of the due diligence obligations in the draft guideline gives a good indication of the likely scope and expectations of the design and implementation of a human rights and environmental due diligence program. ‘environment. Brazil-based groups that may be affected should begin mapping, aligning, and leveraging their existing policies and procedures with the requirements of the draft directive (particularly those set out in Articles 5-11) to identify gaps. and areas for improvement and improvement. improvement before the adoption of the draft directive. For many large enterprises, designing and implementing appropriate systems and controls and integrating them into “business as usual” could, in many cases, be a multi-year, multi-party exercise, and it is therefore imperative that enterprises prepare for these new obligations. rapidly.
More generally, companies can position themselves for the draft directive and other mandatory DDRH laws emerging at the national level by:
- Integrate human rights into group policies and strategic planning processes;
- Disclose how human rights considerations are integrated into strategies, policies and procedures;
- Carry out a human rights impact assessment and take proportionate countermeasures, as well as communicate internally and externally on the measures that have been taken;
- Review and strengthen complaints mechanisms and speaking out programs;
- Ensure that the company is well equipped to deal with “crises”;
- Review how well equipped their board is to deal with supply chain risks; and
- Review the role, resources and expertise of the legal and compliance functions, which must play a key role in meeting these new challenges.
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1 Group 1 companies are subject to less due diligence (they are only required to focus on serious adverse impacts relevant to their sector) and have, for example, no specific obligations to address climate change as prescribed for Group 2 companies.
2 The Supervisory Authority may initiate an investigation on its own initiative or following “well-founded concerns” communicated to it. In the event of a breach, the supervisory authority shall grant the company concerned an appropriate period of time to take corrective measures to the extent possible. Failing rectification, it may impose pecuniary penalties (Article 18).
3 Member States must allow individuals/entities to raise ‘well-founded concerns’ and ensure that they have access to a court or other impartial body to raise their concerns (Article 19).
4 This would apply to directors of subsidiaries based in the EU but not, for example, to directors of the parent company based in Brazil.
5 “Other financial services” are not expressly defined in the draft directive.