On 23 February 2022, the European Commission issued a proposal for a directive on corporate sustainability due diligence. The proposal is currently under review by the European legislator and focuses on the introduction of an EU-wide framework on corporate due diligence regarding environmental, social and governance (“ESG”) matters (“Proposed Directive”).
The Proposed Directive − through positive obligations that aim to change the current regulatory framework on ESG matters that to date has mainly concerned, at European level, obligations regarding the disclosure of information − proposes introducing a regulation likely to impact the strategic, dynamic and business choices not only of economic operators on the European continent but also of companies that do business with the companies targeted by the Proposed Directive, with a potential global impact on business models and competitive logics.
Although the Proposed Directive will directly apply only to large companies that operate in the EU, it will also have significant and inevitable indirect repercussions for all companies (EU and non-EU alike) that fall within the value chains of the targeted companies.
Indeed, the Proposed Directive adopts an innovative approach in requiring targeted companies to adopt measures not only internally but also with respect to their established business partners that fall within their “value chain”, which means the “activities related to the production of goods or the provision of services by a company, including the development of the product or the service and the use and disposal of the product as well as the related activities of upstream and downstream established business relationships of the company”.
Therefore, companies from the African continent that are part of the value chains of targeted companies (either as suppliers or as recipients of goods/services) will be indirectly required to comply with the requirements imposed by the Proposed Directive – despite not being its direct targets – to ensure their business relationships with the given targeted companies remain in place.
In terms of the aspects likely to most heavily impact African companies, Art. 4 of the Proposed Directive requires EU member states to ensure that targeted companies conduct ‘human rights and environmental due diligence’ that includes the following actions (among others):
identifying actual or potential adverse impacts;
preventing and mitigating potential adverse impacts; and
bringing actual adverse impacts to an end and minimising their extent.
With regard to the obligation to identify actual or potential adverse impacts on human rights or the environment, recipient companies will have to take appropriate measures to identify impacts caused not only by their/their subsidiaries’ operations but, where related to their value chains, by their established business relationships.
The Proposed Directive sets out a phased approach for companies to follow if they identify (or should have identified) actual or potential adverse impacts on human rights or the environment. In the most significant and difficult-to-resolve cases, this might entail having to terminate the business relationship in question (disengagement).
Between the preventive and remedial measures provided by the Proposed Directive, one that will assume particular relevance in business relations between African companies and companies targeted by the Proposed Directive is the obligation to implement ‘contractual cascading’, i.e., require that each direct business partner: (a) issue appropriate contractual assurances regarding compliance with the company’s code of conduct and, as the case may be, its prevention/corrective action plan; and (b) seek corresponding contractual assurances from its own business partners to the extent that their activities are part of the company’s value chain.
If the envisaged measures prove ineffective, under the Proposed Directive recipient companies must refrain from entering into new relationships or extending existing ones with the partner in connection with which or in whose value chain the impact arose and, if the law governing their relationships so entitles them, take the following actions:
temporarily suspend commercial relations with the partner in question, while pursuing: (i) prevention and minimisation efforts if it is reasonable to expect a positive outcome in the short term; or (ii) efforts to bring to an end or minimise the extent of the adverse impact; or
terminate the business relationship with respect to the activities concerned if the potential adverse impact is considered severe.
Although a detailed analysis of the consequences on individual companies’ operations can be conducted only once the Proposed Directive is approved, it appears that the directive will produce multiple disruptive effects on the economic and contractual relationships of African companies that operate in the value chains of the targeted companies.
To avoid disruption to business operations (whether upstream or downstream of companies targeted by the Proposed Directive), affected African companies will need to comply with the principles of prevention of adverse impacts on human rights and the environment set out under the Proposed Directive and, consequently, take into account social, environmental and ethical aspects and human rights when choosing their business strategy.
Francesca Secondari, Cairo-based partner, member of Africa Team and ESG Practice of Bonelli Erede.