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ESG Due Diligence Isn’t Just for Mergers and Acquisitions Anymore

ESG Due Diligence Isn’t Just for Mergers and Acquisitions Anymore Background Image

A couple weeks ago, while most of North America debated whether they were supposed to turn their clocks forwards or backwards, the European Parliament proposed a rule aimed at increasing the accountability and transparency of EU businesses (as well as certain non-EU businesses that sell goods or services in the EU) whose operations may impact human rights, the environment, and governance.

The proposed rule would impose mandatory corporate due diligence and risk assessments, which must act to “identify, assess, prevent, cease, mitigate, monitor, communicate, account for, address and remediate the potential and/or actual adverse human rights, environmental and good governance impact that [an entity’s] own activities and those of their value chains and business relationships may pose.” Companies would be required to evaluate these due diligence strategies and risk assessments annually.

The rule also imposes certain disclosure requirements. If, at the conclusion of a risk assessment, a business determines that it does not have, or potentially have, a negative effect on human rights, the environment or good governance, the business would be required to publish a statement to that effect. This statement must be accompanied with supporting data, information, and methodology. If the opposite is true (i.e., that an entity does have an adverse effect), the business must, amongst other things, specify those potential or actual effects and adopt policies geared towards stopping, limiting, or preventing those effects.

Failure to comply with the proposed rule, if it is implemented, could carry significant consequences, including substantial monetary penalties, temporary suspension of business operations, and even criminal penalties for recurrent, intentional violations.

There is still a long way to go before the proposed rule becomes law. Now that the European Parliament has adopted the report, they will issue a request to the European Commission to submit a legislative proposal based on the proposed rule. The Commission is free to accept the proposed rule in whole, amend it, or even create its own rule. Should the EU adopt the proposed rule, the rule would still need to be implemented into the laws of the individual EU member states prior to becoming enforceable.

Regardless, the proposed rule continues the recent trend towards the implementation of meaningful and ongoing due diligence obligations regarding human rights, the environment, and good governance, with real consequences for non-compliance.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.