By Milena Soarez de Souza & María Josee Reyes
EUROPE
The Corporate Sustainability Due Diligence Directive (CSDDD): A Path Towards Responsible Business Practices
In a significant move towards corporate accountability and sustainability, the European Parliament has taken a decisive step to integrate human rights and environmental impact into companies’ governance. On June 1st, 2023, the European Parliament adopted its position on the Directive on corporate sustainability due diligence (CSDDD).
The main objective of the CSDDD is to compel large companies to conduct thorough due diligence not only on their own activities but also on those of their suppliers. This means identifying and taking appropriate measures to prevent, mitigate, or end any actual or potential adverse impacts on human rights and the environment caused by their operations.
The new regulations will necessitate companies, including financial services, with more than 250 employees and a worldwide turnover exceeding 40 million euros, to identify, prevent, and mitigate the adverse effects of their activities on human rights and the environment. This includes issues such as child labour, slavery, labour exploitation, pollution, environmental degradation, and biodiversity loss. Companies will be required to monitor and assess the impact of their entire value chain, including suppliers, sales, distribution, transport, storage, and waste management. Even non-EU companies generating at least 40 million euros in the EU and with a global turnover higher than 150 million euros will be subject to these rules. This demonstrates the commitment of the European Parliament to hold all companies accountable for their actions within the EU’s jurisdiction.
To enhance transparency and engage stakeholders, the new rules also require companies to interact with those impacted by their activities, including human rights and environmental activists. Companies will be expected to introduce a grievance mechanism to address concerns raised by stakeholders, and regularly monitor the effectiveness of their due diligence policies.
To enforce compliance, the legislation introduces various sanctions and a supervisory mechanism. Non-compliant companies can be liable for damages and may face measures such as “naming and shaming,” removal of their goods from the market, or fines amounting to at least 5% of their net worldwide turnover. Moreover, non-EU companies failing to comply with the regulations will be banned from participating in public procurement activities within the EU.
The new obligations are set to be implemented after 3 or 4 years, depending on the size of the company. Smaller companies will have the option to delay applying the rules for one additional year, allowing them more time to adapt and prepare for the changes.
With the CSDDD expected to be formally adopted and implemented into national legislation by Member States by 2024, companies operating within the EU or doing business with EU-based entities should closely monitor the progress of the directive. The CSDDD represents a significant step forward in fostering sustainable and responsible corporate behaviour, promoting a more ethical and sustainable business landscape for the future.
New rules on corporate sustainability reporting: The Corporate Sustainability Reporting Directive
On 5 January 2023, the Corporate Sustainability Reporting Directive (CSRD) entered into force. This new directive modernises and strengthens the rules concerning the social and environmental information that companies have to report. A broader set of large companies, as well as listed SMEs, will now be required to report on sustainability – approximately 50 000 companies in total.
The new rules will ensure that investors and other stakeholders have access to the information they need to assess investment risks arising from climate change and other sustainability issues. They will also create a culture of transparency about the impact of companies on people and the environment. Finally, reporting costs will be reduced for companies over the medium to long term by harmonising the information to be provided.
The first companies will have to apply the new rules for the first time in the 2024 financial year, for reports published in 2025.
Companies subject to the CSRD will have to report according to European Sustainability Reporting Standards (ESRS). The draft standards are developed by the EFRAG, previously known as the European Financial Reporting Advisory Group, an independent body bringing together various different stakeholders. The standards will be tailored to EU policies, while building on and contributing to international standardisation initiatives.
On 6 June the Commission opened a four-week public feedback period on a first set of sustainability reporting standards for companies. These draft standards take account of technical advice from EFRAG in November 2022.
Following the feedback period, the Commission will consider the feedback received before finalising the standards as delegated acts and submitting them to the European Parliament and Council for scrutiny.
The CSRD also makes it mandatory for companies to have an audit of the sustainability information that they report. In addition, it provides for the digitalisation of sustainability information.
Rules introduced by the Non-Financial Reporting Directive
The rules introduced by the Non-Financial Reporting Directive (NFRD) remain in force until companies have to apply the new rules of the CSRD. Under the NFRD, large companies have to publish information related to
- environmental matters
- social matters and treatment of employees
- respect for human rights
- anti-corruption and bribery
- diversity on company boards (in terms of age, gender, educational and professional background)
These reporting rules apply to large public-interest companies with more than 500 employees. This covers approximately 11 700 large companies and groups across the EU, including
- listed companies
- banks
- insurance companies
- other companies designated by national authorities as public-interest entities
The United States of America
Three new U.S. employment regulations 2023
The Federal Trade Commission’s proposed ban on non compete clauses in employment contracts, pay transparency legislation in many local jurisdictions, and new human capital disclosures mandated by the Securities and Exchange Commission.
- A ban of non-compete clauses
The FTC’s proposed rule would ban the use of non compete clauses as “an unfair method of competition.” The agency’s rationale for the proposed ban — which it estimates will increase workers’ earnings by $250 billion to $296 billion per year — is that these clauses are unfair both to workers, who are prevented from pursuing other opportunities, and employers, who can’t hire the workers bound by non-competes.
The FTC Notice of Proposed Rulemaking was issued on January 5, 2023, and the 60-day period for public comment closed on March 10, 2023. Once a final rule is published in the Federal Register, companies will have 180 days to comply.
- Pay Equity Legislation
Colorado (2019), New York state (2023), California (2023), Washington (2023), and a handful of municipalities like New York City (2022), have passed laws requiring that employers list salary ranges for both external candidates and internal promotion opportunities. The rationale for increased pay transparency is to enhance employee bargaining and to help address gender wage inequality.
- Proposed Human Capital Rules
The Securities and Exchange Commission has adopted rules to require public companies to disclose within four days all cybersecurity breaches that could affect their bottom lines.
References:
- Comission, E. (2023). Retrieved from Finance European Comission: https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_en#:~:text=New%20rules%20on%20corporate%20sustainability%20reporting%3A%20The%20Corporate,and%20en
- Report, U. N. (2023, July 26). Political News. Retrieved from U.S News: https://www.usnews.com/news/business/articles/2023-07-26/new-sec-rule-requires-public-companies-to-disclose-cybersecurity-breaches-in-4-days
- Tarp, C. (2023, April 18). Harvard Business Review. Retrieved from Human Resource Management: https://hbr.org/2023/04/3-new-u-s-employment-regulations-that-companies-should-prepare-for-now
