EU Imposes ESG Compliance Requirements for Companies' Supply Chains

The European Parliament has now approved the “Corporate Sustainability Due Diligence Directive,” which will apply to both EU companies and to non-EU companies doing business in the European Union.  (There is a phased implementation of this law, depending upon the size of the company involved, but any company doing more than 450 million euros of business in the EU will be subject to its provisions within five years, and the law will also apply to any companies with franchising or licensing agreements in the EU that generate more than 80 million euros in turnover in the EU and earn at least 22.5 million euros in royalties within the EU.)  The requirements imposed by this law are significant, including the adoption of a climate transition plan in accordance with the Paris Agreement (limiting global warming to 1.5 degrees Celsius) as well as achieving net zero emissions by 2050.  Additionally, with certain limited exceptions, companies will be compelled to minimize and remediate adverse environmental impacts at each point in their supply chain--both upstream and downstream activities. 

The significance of this far-reaching law is self-evident.  Effectively, any company conducting a significant amount of business within the European Union will have to bring its internal policies into alignment with the EU's sustainability goals and take steps to implement the same, and, moreover, undertake extensive actions to audit its supply chain and bring the companies featured there into compliance with the EU's directives.  As such, many non-EU companies that do not conduct business within the EU will nonetheless essentially be brought within the scope of this law because those companies enter into business arrangements with companies that are subject to its provisions.  

While companies still have a significant amount of time to implement the necessary steps to achieve compliance--and to avoid the possibility of enforcement actions, as the law provides for fines of up to 5% of a company's net worldwide turnover--the extensive and rigorous requirements imposed by the law will necessitate steps in the near future to prepare for its impact.