Joint position on the Proposal for a Directive on Corporate Sustainability Due Diligence

En date du 23 février 2022, la Commission européenne a publié une proposition de directive sur le devoir de vigilance des entreprises en matière de durabilité. Cette proposition vise à favoriser un comportement responsable des entreprises qui devront évaluer les risques d’atteintes graves à l’environnement, à la santé et aux droits de l’Homme tout au long de leurs chaînes de valeur et prendre toute mesure pour les prévenir.

Si nous comprenons évidemment le rôle important de la diligence raisonnable pour assurer la durabilité et le respect des droits de l’Homme et de l’environnement dans les affaires et soutenons la mise en place d’un cadre légal harmonisé, le monde économique émet toutefois un certain nombre de réserves quant aux nouvelles règles proposées. Ces inquiétudes des acteurs économiques s’inscrivent dans un contexte conjoncturel extrêmement tendu et incertain, marqué par une crise énergétique, des défaillances dans les chaînes d’approvisionnement, une inflation galopante et, plus généralement, un carcan règlementaire construit au fil des décennies qui pèse de plus en plus lourd. Dès lors, il ne faudrait pas que de nouvelles obligations disproportionnées viennent mettre en péril la compétitivité des entreprises européennes déjà lourdement affectées.

Dans ce contexte, la Chambre de Commerce du Luxembourg et la FEDIL ont élaboré une position commune sur la proposition de directive. Vous en trouverez ci-après le résumé des messages clés. Le document complet comprenant l’évaluation juridique détaillée pourra être consulté sur notre site internet.

Champ d’application

D’après la proposition de directive, les nouvelles règles relatives au devoir de vigilance s’appliqueront aux entreprises et secteurs suivants :

• Entreprises de l’UE :
  • Groupe 1 : toutes les sociétés à responsabilité limitée de l’UE de grande taille et ayant un pouvoir économique important (employant plus de 500 personnes et réalisant un chiffre d’affaires net supérieur à 150 millions d’euros à l’échelle mondiale).
  • Groupe 2 : d’autres sociétés à responsabilité limitée exerçant des activités dans des secteurs à fort impact définis, qui n’atteignent pas les deux seuils du groupe 1, mais emploient plus de 250 personnes et réalisent un chiffre d’affaires net de 40 millions d’euros et plus à l’échelle mondiale. Pour ces entreprises, les règles commenceront à s’appliquer deux ans plus tard que pour le groupe 1.
• Entreprises de pays tiers actives dans l’UE dont le seuil de chiffre d’affaires est aligné sur celui des groupes 1 et 2 et dont le chiffre d’affaires est réalisé dans l’UE.

Les petites et moyennes entreprises (PME) ne relèvent pas directement du champ d’application de cette proposition.

Further to the position papers and declaration statements of their respective European associations ¹, this document constitutes the Luxembourg Chamber of Commerce’s and FEDIL’s additional contribution to the proposal for a Directive of the European parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937 (hereafter referred to as the “Proposal” or the “Directive”).

I. Introduction

On 23 February 2022, the European Commission (hereafter the “Commission”) published its Proposal of a Corporate Sustainability Due Diligence. The Proposal imposes upon in-scope EU and non-EU companies far-reaching obligations to set up and implement due diligence policies to identify, prevent or mitigate, and ultimately end, adverse impacts of their activities on human rights and the environment. The Proposal also introduces a specific obligation relating to climate change as well as a revised duty of care for directors regarding sustainability matters, along with a personal liability regime for directors of in-scope EU companies, actionable by stakeholders (as defined under the Directive).

The Chamber of Commerce of Luxembourg and FEDIL – The Voice of Luxembourg’s Industry, together with their members, understand the important role of due diligence in ensuring sustainability and respect of human rights and environment in business. We therefore welcome the initiative of the Commission to legislate at EU level for the purpose of establishing a harmonised legal framework.

However, the Proposal raises significant concerns, especially under the current conjuncture. Luxembourg industry and businesses managed to remain active during the years of the Covid pandemic, though not without struggles and slowdowns, where demand was low and so were profits. On top of that, the increasingly rising price of energy further aggravated the situation across various sectors of the economy. As if that was not challenging enough, the vile aggression of Russia against Ukraine and its consequences on the supply of energy, food and other materials weakened the economy more and more. In such a tense and unpredictable context, it the commendable legislative initiatives the EU has tabled under its Fit-for-55 package, and which businesses support, should also be considered as they are certainly posing harsh and expensive challenges to them. All these factors should be considered together. In light of this, it is clear that production as well as supply and logistics, have become fragile and costly and we therefore envisage that the implementation of the Directive, should it be adopted as proposed, would cause (or contribute to cause) the following consequences:

• difficulties to find raw materials, especially those mostly or exclusively located in third countries, and to have access to energy sources, hence disruption of production and interruptions of supply chain which could ultimately result in shortages of related products and continuing price inflation;
• inconsistent application between and within EU Member States (hereafter “MS”) and absence of sufficient level playing field between EU companies and with regard to non-EU companies, due to unclarity and inconsistency of many key provisions and unjustified discrepancies between rules applicable to EU and non-EU companies;
• additional administrative, compliance and staff related costs for companies, due to the very broad span of obligations and the complexity of the rules proposed as well as due to the absence of uniform standards and support schemes;
• real negative impact on companies’ competitiveness, considering that out-of-scope non-EU companies, including competitors, will be significantly less affected – if not at all – by the Directive and may very likely benefit from the probable disengagement of EU companies from certain “problematic” non-EU jurisdictions, where violations of human rights and environment protection standards are continuing;
• high compliance costs and negative impact on companies’ competitiveness are expected to have important social costs, such as unemployment in the EU; and
• finally, it cannot be completely excluded that in-scope companies decide to relocate their business outside of the EU and stop providing goods and services in the EU. That would be merely the result of non-availability or lack of raw materials and energy sources within the EU, and of an effort to avoid the significant costs that implementation of the Directive’s unfeasible due diligence obligations may entail, especially regarding certain “problematic” non-EU jurisdictions.

We therefore consider essential that the ongoing legislative procedure should aim at:

• avoiding additional fragmentation of internal market rules;
• ensuring uniform rules in all MS and adequate standardisation tailored to the specific sectors as well as consistency with existing frameworks;
• imposing proportionate, workable and enforceable rules on companies to effectively contribute to sustainable business conduct;
• mitigating any elevated risks associated with the implementation of the Proposal, such as price inflation, serious disruptions in certain supply chains and resulting critical shortages.

In addition to the current legislative action at EU level, we invite the EU Institutions and the MS to continue and increase their efforts at global level as well, in order to successfully associate all relevant actors, both European and non-European, in that same endeavour.

The Chamber of Commerce of Luxembourg and FEDIL – The Voice of Luxembourg’s Industry have drafted this joint position paper which contains an executive summary of our key messages on the Proposal (section II.) and a legal assessment of the main provisions of the text which have, or are likely to have, a significant impact for our members and their organisations, together with our key messages elaborated in detail (section III.).

II. Executive summary of key messages

Our key messages on the Proposal can be summarised as follows:

Introducing proportionate, workable, and more targeted rules for companies:

In practice, it is very challenging, if not impossible, for companies to control their whole value chain i.e., in addition to their own operations and the operations of their controlled subsidiaries, also the operations of entities with whom companies have an established (direct or indirect) business relationship. The proposed obligations are therefore not reasonable nor workable and companies should not be held responsible for events that are out of their control. Considering the far-reaching obligations (and associated liability) imposed upon companies, it should be expected that their operations will be impacted, leading to serious impairment of their competitiveness. For example, EU companies will have to withdraw from third-country “problematic” jurisdictions where it is already proven impossible – for various political and social reasons – to impose EU protection standards. Due diligence obligations should thus be feasible and workable and should only cover the first-tier direct supplier(s) of in-scope companies.

The Proposal makes no distinction between operations in the EU and operations outside of the EU, although in the EU territory there is already a very high standard regarding human rights and environment protection. Hence, it is not proportionate to impose on companies the same obligations in both their intra-EU operations and to extra-EU operations. The Directive should differentiate the obligations within the EU and outside the EU. In the same vein, a more targeted due diligence regime should be introduced, based on the most relevant adverse impacts, in respect of certain products and not any activity of the in-scope companies without any further distinction whatsoever as regards the actual risks for human rights and the environment involved.

In addition to the above, the introduction of a prioritisation system of suppliers based on country or industry-specific risks should be envisaged. Such a prioritisation system could be either factored-in the material scope of the Directive or provided for thereunder as an implementation measure for companies. The exclusion of small and medium-sized enterprises (hereafter “SMEs”) is welcome. However, they will be indirectly affected as suppliers in the supply chain and will face challenges and contractual constraints. This will imply costs of implementation and unnecessary bureaucracy and burdens for SMEs, which should be avoided or, at least, mitigated with appropriate accompanying measures.

Moreover, competitiveness of EU companies active in third-country markets needs to be preserved. Otherwise, it is expected that non-EU competitor companies, which are not subject to such stringent rules, will probably take over those market shares, with negative consequences on employment as well as on prices and availability of products.

Ensuring an adequate level playing field and avoiding further fragmentation of EU internal market rules:

1. The Proposal creates an imbalanced situation as regards non-EU companies and does not to deliver the requisite level playing field. The turnover thresholds for non-EU companies in scope are much higher than for EU companies, considering that only their net turnover “generated” within the EU is to be accounted for. This implies that EU companies ultimately falling within the scope of the Directive will be smaller in size than in-scope non-EU companies. The turnover criteria should be the same for both EU and non-EU companies, i.e. the reference turnover should be that generated within the EU.
2. The Proposal leaves too much discretion to MS to legislate when transposing the Directive into national law. Such an important leeway left for MS may lead to further fragmentation of rules within the EU internal market. The Directive should ensure full harmonisation of key provisions to deliver an adequate level playing field among MS and to ensure uniform rules and standardisation within the single market. At least key provisions, especially those imposing obligations and requirements related to due diligence plans, reporting and information sharing obligations and liability, should be fully harmonised and coherent.
3. On the face of it, the due diligence obligations established are set at company level and not at group level. Whilst we understand the reasons for this choice, the challenges for groups of companies de facto exposed to different national rules within the single market must be addressed. Groups of companies should have the flexibility to organise their due diligence plans according to their business model, thereby avoiding fragmentation of approaches and enhancing the effectiveness of due diligence strategies and actions within groups.

Important definitions should be revised and clarified:

In addition to the notion of “value chains”, the following definitions should be revisited, i.e.:

1. The terms “adverse environmental impact” and “adverse human rights impact” should be more precisely defined in order to allow for clearly defined obligations for in-scope companies and grant predictability to all stakeholders.
2. The definitions of “business relationship” and “established business relationship” are very broad and unclear and do not cover certain “grey areas” of the supply chain. These concepts need to be clearly defined and should be -in any case- limited to direct suppliers only.
3. The definition of “stakeholders” is extremely broad, considering that the obligations imposed upon companies concerning “stakeholders” are many and significant. This definition should be narrowed down. For example, “stakeholders” could be defined as those having specific attributes peculiar to them or by reason of circumstances that differentiate them from all other persons and having a specific and actual (or soon to occur) injury that is causally connected to the conduct concerned.
4. “Appropriate measures”: the Proposal does not provide sufficient guidance to companies as to what is “reasonable” or not. Considering that the company’s “influence” is to be taken into account when assessing whether a measure is “appropriate” or not, it still remains unclear which measures allow companies to comply with their due diligence obligations. Companies need legal certainty as to whether the measures they have taken allow them to be compliant or not.

Need for legal certainty, effectiveness and enforceability of due diligence obligations and the importance of standardisation:

The vague nature of the due diligence obligations and the absence of concrete criteria measuring companies’ sustainability render the Directive theoretical in scope and do not provide companies with the necessary certainty as to whether they are compliant or not. The measures to be taken and the actions to be undertaken by in-scope companies clearly overlooked important practical issues affecting the effectiveness and enforceability of the Proposal’s obligations.

The provisions on due diligence obligations need to be redrafted in a practice-oriented way to further provide companies with practical guidance as to how to carry out their due diligence exercise and prove their compliance.

In addition to Commission’s guidelines, companies should be allowed to have recourse to standardisation schemes, such as unified labelling or certification systems, based on common standards and delivered by certified bodies. Moreover, standardisation should be tailored to the different sectors of activities. To this end, standards should be elaborated following consultation with business operators.

Model contractual clauses should be developed together with business, including SMEs:

They should be available as soon as possible to leave time to companies to implement them.

In this respect, it should be also considered that it is not always possible or feasible to negotiate their insertion into existing contracts with business partners or impose them upon more powerful third-country partners, and therefore their value might be limited in practice. As a consequence, the co-legislators need to take this into account and provide for more practice-oriented solutions that could in fact alleviate companies’ burden.

Guidelines to companies and precise accompanying measures are needed:

The accompanying measures to support the Directive’s implementation by companies are neither sufficient nor appropriate. The Directive, if adopted as proposed, might not facilitate in any way the introduction of these measures. Common EU rules should be introduced to provide precise accompanying measures. Moreover, specific accompanying measures should also be introduced taking into account sectoral standards and needs. Lastly, the Commission should have a prominent and centralised role in granting companies the needed information and support.

In order to provide support to companies or to MS authorities on how companies should fulfil their due diligence obligations, the Commission should issue additional and appropriate guidelines covering the activities concerned.

Obligations on climate change should not be included in the Directive:

The provision on climate change, if adopted as proposed, would only create inconsistencies with already existing legislation, while adding further obligations that are not related to the main purpose of the Proposal, which concerns due diligence and not climate change. Furthermore, this provision leaves too much room for MS to interfere with well-established and functioning corporate governance models and will fragmentate even further the rules adopted within the EU. This provision should be deleted, so that this issue can be properly dealt with by the other legislative instruments dedicated to it. In the alternative, this provision should be either deleted or – alternatively – revised to provide precise rules and enforceable obligations, and not generic and inconsistent requirements further burdening EU companies without having any real added value.

Sanctions and enforcement are not proportionate and lack guarantees:

1. The proposed provisions on public enforcement are too intrusive, disproportionate and not appropriately counter-balanced with due process and appeal rights. They should be revised as to ensure the proportionality and due process safeguards.
2. The concept of “public support” is vague, it could therefore lead to legal uncertainty and to fragmentation of rules within the single market. Moreover, this provision could violate fundamental principles of law insofar as it might lead to double punishment for the same facts, it does not contain any time limitation, it does not refer to the severity or nature of the breach. This provision should thus be redefined considering the above considerations or deleted.
3. Public enforcement powers should be harmonised across MS to avoid fragmentation of rules and to ensure a level playing field within the EU. The Directive should therefore provide for more detailed rules regarding the set-up of supervisory authorities and their powers.
4. Furthermore, it is necessary that the Directive ensures coordination among the different MS supervisory authorities, especially in the case where more than one companies from the same group are established in different MS. To this end, the Directive could provide for the establishment of a central authority overseeing its implementation across MS.
5. Lastly, the competence granted to national supervisory authorities concerning substantiated concerns appear unlimited as they refer to any breach of the Directive’s obligations. In addition, any stakeholder could bring a case before a supervisory authority. Only directly affected parties or entities with legitimate interest should have the right to file substantiated complaints, which should only refer to breaches of companies’ due diligence obligations.

The proposed civil liability regime is in principle inadequate and needs considerable redrafting in line with EU civil law principles:

The civil liability regime for in-scope companies does not fully respect EU civil law principles, since it does not refer to the rules of civil liability which could give right to compensation, i.e. an unlawful (intentional or grossly negligent) conduct by the company in breach of the failure to comply with the due diligence requirements, an actual and real damage occurred and a causal link between them. Also, companies should not be exposed to liability risks when they could only have identified the potential for an adverse impact but could not have prevented the resulting adverse impact or damages. Companies should not be held liable for the conducts of non-controlled subsidiaries. This provision should be redrafted as to be in line with civil law principles and to not expose companies to unjustified excessive litigation.

Rules on directors’ duties need to be revised or deleted:

Provisions on directors’ duty of care are not clear and impose overarching general policy objectives upon directors, actionable (in principle) by any “stakeholder”. They will have a negative impact on companies’ competitiveness, by creating risk aversion, slowing down decision-making processes, increasing legal and administrative costs and impairing recruitment of skilled individuals. These provisions should be therefore deleted or revised.

Contacts: