ESG Due Diligence Isn’t Just For Mergers And Acquisitions Anymore | Vinson & Elkins LLP

A few weeks ago, when most North American nations were debating whether to turn their clocks forward or backward, the European Parliament proposed a rule aimed at increasing the accountability and transparency of EU companies (as well as certain non-EU companies that sell, increase) goods or services in the EU) whose business operations may have an impact on human rights, the environment and governance.

The proposed rule would prescribe mandatory due diligence and risk assessments for companies that must serve to “identify, assess, prevent, cease, mitigate, monitor, communicate potential and / or actual adverse human rights, environmental and environmental problems, to consider, address and eliminate Good governance affects this [an entity’s] own activities and those of their value chains and business relationships can arise. “Companies would have to evaluate these due diligence strategies and risk assessments annually.

The rule also sets out certain disclosure requirements. If, after completing a risk assessment, a company determines that it has no or potentially no negative impact on human rights, the environment or good governance, the company must publish a statement to that effect. This declaration must be accompanied by supporting data, information and methods. If the opposite is the case (that is, a company is having a negative impact), the company must, among other things, identify that potential or actual impact and establish policies aimed at stopping, limiting, or preventing that impact.

Failure to comply with the proposed rule, if implemented, could have significant consequences, including substantial fines, temporary cessation of business, and even criminal penalties for recurring, deliberate violations.

There is still a long way to go before the proposed rule becomes law. After the European Parliament has adopted the report, it will ask the European Commission to present a legislative proposal based on the proposed rule. The Commission is free to accept the proposed rule in full, to amend it or even to create its own rule. Should the EU accept the proposed rule, the rule would have to be implemented in the laws of the individual EU member states before it becomes enforceable.

Regardless, the proposed rule continues the recent trend of implementing meaningful and ongoing human rights, environmental and good governance due diligence, with real ramifications for non-compliance.

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