On February 23, 2022, after many long discussions, the European Commission (the “EC”) published its directive on “Corporate Sustainability Due Diligence” (the “Directive”), which will have a significant impact on the business activities of European companies, foreign companies operating in Europe, and global companies dealing with such companies. The Directive will take effect once approved by the European Parliament and the EU Council, and within two years of approval, EU Member States must incorporate the requirements of the Directive into their domestic laws.

If the Directive comes into effect, it is expected that a significant number of Korean companies will be affected, directly and indirectly, by the Directive. Therefore, it is necessary to prepare for such situation. In particular, as the Directive is a comprehensive legislation dealing with ESG management, a subject that has been gaining popularity globally, Korean companies – whether or not affected by the Directive – may use the Directive as very important reference when analyzing global trends in ESG management and exploring specific action plans.

The purpose of the Directive is to ensure that companies, their subsidiaries, and their value chains all take actions to identify, prevent, and mitigate the adverse impacts on both human rights and the environment arising from their respective business activities. To this end, the Directive obligates companies to establish a governance structure, management system, and a set of procedures to manage and mitigate negative risks to human rights and the environment that may arise during the entire process of business activities, including the value chain.
 

• Companies covered by the Directive (Article 2)

The Directive applies to EU companies of certain size as well as foreign companies with a certain amount of turnover generated in Europe.  Even though most of the companies directly covered by the Directive are large corporations, companies around the world that are part of the value chain of these large companies will also be indirectly affected.

• Duties of companies (Article 4)

Large companies covered by the Directive should conduct due diligence to identify and respond to any adverse impact on human rights and the environment that may arise from the company's business activities of the companies, their subsidiaries, and their value chains. 

However, as it could be unrealistic to conduct due diligence on all companies included in the value chain of large companies, the Directive imposes certain limitations. Among companies that belong to the value chain of large companies, only companies that have, or are expected to have, continuous relationships with these large companies – in terms of the strength and duration of their business relationships – will be subject to due diligence, while companies that constitute incidental parts of the value chain will be excluded (Articles 1 and 3).

The detailed due diligence methods and steps required by the Directive are as follows:

In particular, in addition to the due diligence obligations mentioned above, companies that fall under “Group 1” category will have an additional obligation to ensure that their business models and strategies are consistent with the Paris Agreement (limiting global temperature rise to 1.5 degrees Celsius above pre-industrial levels).
 

• Directors’ duties (Articles 25 and 26)

Directors of companies in EU Member States that are subject to the Directive should consider how their decisions may affect human rights, climate change, and the environment over the short, medium, and long term. They are also responsible for overseeing their company’s due diligence policy regarding human rights and the environment while considering input from various stakeholders. In addition, they must ensure that measures to identify and respond to adverse impacts on human rights and the environment are properly reflected in their company’s corporate strategy.
 

• Sanctions for violation (Article 20) and civil liability (Article 22)

EU Member States must establish sanctions that are “effective, proportionate and dissuasive” for companies that are not in compliance with the requirements of the Directive. In addition, if actual damage occurs due to a company’s failure to comply with the obligation to prevent and mitigate adverse impacts on human rights and the environment (Articles 7 and 8), such company will be subject to civil liability.
 

• Response measures for Korean companies

In order for the Directive to come into force, the Directive needs to be approved by the European Parliament and the EU Council and needs to be integrated into the domestic laws of EU member states through legislation. As such, it is unlikely that the Directive will immediately affect Korean companies. However, a number of European countries, including France, Germany, and the Netherlands, have already enacted due diligence laws, which are similar to the Directive. Additionally, due to long discussions regarding the Directive, European companies' awareness of the importance of human rights and environmental due diligence has increased considerably. Therefore, Korean companies that transact with or export products to Europe need to review the purpose and due diligence methods of the Directive and seek responsive measures accordingly.

The due diligence methods set forth in the Directive are based on the UN Principles on Business and Human Rights (2011) and the OECD Due Diligence Guidance for Responsible Business Conduct (2018), both of which are already global standards. Based on such global standards, the Korean Ministry of Justice published a standard guideline on human rights management ("Guideline on Business and Human Rights, 2021"), focusing on human rights due diligence with the aim of encouraging companies to engage in human rights management. Therefore, it is necessary for Korean companies (including those who do not engage in transactions with European companies) to review the Directive, check the specific global and domestic requirements for environment and human rights management, and prepare responsive measures.

In particular, the ultimate purpose of the Directive is to have all companies establish a management system (G) under which such companies can manage risks relating to the environment (E) and human rights (S). Such management system is also strongly demanded from global investors. Therefore, the need to establish an ESG management system appears to be growing.

[Korean version]