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ESG TAKING OVER IN EU

New EU ESG directive on businesses

The European Union (EU) is now leading the way in environmental, social, and governance (ESG) policies. Two developments in particular are anticipated to have far-reaching consequences for businesses: recently enacted ESG disclosure obligations and the impending mandated human rights, environmental, and governance due diligence. These proposals include both new disclosure standards and, possibly, substantial responsibilities to address ESG concerns related to corporations' operations. Their implementation is anticipated to have a substantial impact on both EU-domiciled enterprises and those operating within the EU. Importantly, in addition to compliance problems, firms must evaluate the legal consequences of publicly disclosing human rights and environmental hazards in their business operations and supply chain.

Initiative of the European Parliament

The proposal from the European Parliament includes both a need to do due diligence and a liability provision for corporations who fail to do so. The Parliament has recommended that the ESG due diligence duty apply to all big corporations operating in the EU, as well as any publicly traded or high-risk small and medium-sized organisations. This would specifically target enterprises with a global presence. In addition to the obligation to carry out due diligence, these companies would be required to develop a due diligence strategy and publish a mapping of their entire value chain, which may include names, locations, types of products and services supplied, and other relevant information concerning subsidiaries, suppliers, and business partners in its value chain (while maintaining commercial confidentiality).

Value chains encompass all company operations as well as direct or indirect business relationships, upstream and downstream, making this a comprehensive exercise, especially given that it needs to be performed periodically and is only one component of the due diligence plan. Other components include requirements to guarantee that human rights norms and policies are in place in firms' commercial interactions, including throughout their linked supply chains. Companies are also expected to establish internal grievance procedures under the Initiative (consistent with current obligations under the UN Guiding Principles).

The EU Directive's Impact

Although many specifics of a European due diligence law remain unknown, the Parliament's proposal is the most recent hint of the possible stringency of these standards. Unlike past human rights in supply chain legislation, such as the United Kingdom's Modern Slavery Act, which focused on transparency, the attitude in Europe is obviously toward a rather stringent due diligence rule. European due diligence legislation, on the other hand, is likely to mandate detailed reporting as well as specific action to address risks within companies. In addition to rising investor interest in ESG risks, firms will need to engage substantively on ESG concerns in their own operations, as well as have a thorough grasp of risks in their wider supplier networks.

As an example of the increased focus on ESG issues, one investor group recently published guidelines on its approach to engaging with companies on their human rights impacts, identifying these human rights impacts as potential investment issues and establishing clear expectations for compliance with the UN Guiding Principles. Aside from the large number of firms that may be directly controlled by the EU, such initiatives by significant investors show that ESG risk should be prioritised in company decision-making and long-term planning.

Conclusion

Sustainability reporting, or the disclosure of a company's environmental, social, and governance factors, has become a key area of change for corporations all over the world. Calls for ESG report openness, as well as the dependability and comparability of corporations' ESG reports, are converted into tangible regulatory initiatives. Initially, these appeals originated from non-governmental organisations (NGOs) and activists, but they are now increasingly coming from investors and regulators. One of the primary motivators is the need for high-quality ESG data to feed into green financing solutions, prevent (un)intentional greenwashing, and guarantee that the sustainable finance push leads to economic decarbonisation.

European ESG due diligence regulations are anticipated to have a substantial impact on how firms tackle ESG concerns. Rather than mandating corporations to modify their business methods, the goal of the transparency responsibilities is to encourage improvements in business practises and responsibility (for sustainability claims in particular). These disclosures are anticipated to raise scrutiny of organisations' ESG decision-making, with consequences for both legal and reputational risk. The best approach for firms to address these issues and to future-proof themselves against potential due diligence regulations is to take action to address ESG concerns and to follow recommendations such as the UN Guiding Principles on Business and Human Rights.

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