In last month’s Fashion Focus, we highlighted the adoption by the European Parliament of the Corporate Sustainability Due Diligence Directive.
The Directive will require businesses to consider and combat the effects their business activities have on human rights and the environment. As such the Directive will have a substantial impact on fashion businesses and businesses within the wider supply chains in which they operate.
Who will the Directive apply to?
- UK and other non-EU companies which generated a net turnover of more than EUR 150m in the EU in the last financial year; and
- UK and non-EU companies which generated a net turnover of EUR 40m – 150m in the EU in the last financial year, provided that 50% of the net turnover was generated in one or more of a number of business sectors, including those involved with manufacturing textiles, engaging in agricultural activities and the extraction of natural resources (“Relevant Sectors”).
Irrespective of this, the Directive will also apply to:
(i) EU companies with more than 500 employees and a net worldwide turnover of more than EUR 150 million in the last financial year; or
(ii) EU companies with more than 250 employees and an average net worldwide turnover of more than EUR 40m in the last financial year, provided that 50% of the net turnover was generated in one of the Relevant Sectors.
UK businesses supplying EU companies which come within either (i) or (ii) can be expected to be required by these EU companies to comply with the Directive, even though the Directive does not directly apply to the UK businesses.
When will the Directive come into effect?
The Directive is expected to come into force by 2025, following which each of the 27 EU Member States will have two years in which to implement the Directive into their national legislation.
What will businesses be required to do under the Directive?
The general aim of the Directive is to encourage businesses to play an active role in considering the impact which their businesses, subsidiaries, and the wider value chain in which they operate, has on human rights and the environment.
In order to achieve this aim, directors of businesses will be required to play an active role in conducting due diligence to identify key areas of risk which their business and the supply chain in which may have with respect to human rights and the environment. Having identified and considered such risks, they will be required to establish processes to prevent, mitigate, and account for the impact of those risks. Large businesses (with a turnover of more than EUR 150m) will also be required to ensure that their business practices are compatible with the ambitious target set by the signatories of the Paris Agreement to limit the increase of global warming to 1.5°C above pre-industrial levels.
The draft Directive has been criticised for the generality of the obligations which companies are expected to meet. For example, the Directive does not set quantifiable targets against which companies can demonstrate or measure their performance. This is understandable given the wide range and varying size of the businesses targeted by the Directive. However, it is also therefore likely that the Directive will be interpreted differently by Member States adding to businesses’ compliance obligations.
How will compliance with the Directive be monitored and how will the Directive be enforced?
Currently the Directive envisages that it will be enforced by the supervisory authorities of each Member State. Companies which fail to comply with the Directive may face civil liability in the form of damages and directors may be held personally liable for their failure to comply with their fiduciary duties. You can read more about directors’ duties insofar as they relate to the Directive here. At present the Directive also envisages that, where a director’s remuneration is liked to company performance, their overall contribution to sustainability should be considered when deciding their total remuneration package.
Are similar provisions already in force?
France and Germany have already taken the initiative to adopt national sustainability laws which are similar (and in some cases go further) than what is proposed under the Directive. For example, since the adoption of the French Anti-waste and Circular Economy Law, it is now forbidden to destroy unsold goods in France. Further, retailers which sell into France are now required to disclose details on product labels regarding the impact which products have on the environment.
Similarly, in Germany, a complaint was recently made against the German-headquartered car manufacturer Volkswagen under the equivalent German sustainability legislation. VW has been accused of using forced Uyghur labour in its factory in Xinjiang, China, which has prompted VW to engage independent auditors to examine VW’s labour practices throughout its entire supply chain. This highlights the fact that it is not enough for businesses to get away with meeting sustainability requirements on their home turf. The Directive is likely to bring similar consequences for non-compliant businesses with multi-national operations and demonstrates the need to consider the impact which a business and its entire supply chain has on human rights and the environment.
What can you do to prepare for the Directive?
Whilst 2025 seems like a way off, all UK fashion businesses selling into the EU should consider the Directive and its affects as soon as possible. Here is what you can do to prepare:
- Familiarise yourself with the requirements of the Directive. In particular, ensure that your directors are aware of what will be required of them under the new rules.
- Discuss the Directive with your customers and suppliers. Make sure that they are also aware of the requirements and that they too are putting in place appropriate processes in order to comply with the Directive.
- Put in place processes to assess the impact which your business has on the environment and human rights sooner rather than later. Record this information and make sure that it is easily accessible.
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