M&A: ESG due diligence more important than ever

The European Parliament has asked the EU Commission to introduce urgently new laws that will ensure companies are held accountable and liable when they harm - or contribute to harming - human rights, the environment and good governance (Press release).

Companies would need to prove compliance before being able to access the EU internal market.

The laws should:

• require companies to conduct due diligence throughout their value chains (including all operation, direct or indirect business relations and investment chains);
• in that due diligence, oblige companies to identify, address and remedy aspects of their value chain which could infringe on:
  • human rights (including social, trade union and labour rights);
  • the environment (including contributing to climate change); or
  • good governance.
• hold companies liable for their actions and fine them for causing harm or contributing to it - unless they can prove that they have acted in line with the due diligence obligations and taken measures to prevent the harm;
• provide better protection for the rights of victims or stakeholders in third countries (who are especially vulnerable);
• require companies to prove that they comply with the environmental and human rights due diligence obligations before they can gain access to the EU internal market; and
• introduce a ban on importing products linked to severe human rights violations such as forced or child labour.

The rules should apply to:

• all large undertakings in the EU (including those providing financial services); and
• publicly listed SMEs and high-risk SMEs, which should receive technical assistance to comply with the requirements.

Whilst this is still very early-stage, and it is not clear how matters may proceed or what (or whether) requirements will ultimately apply, this is clearly the direction of travel.  

It all forms part of the EU's continuing focus on a human rights due diligence obligation and, more generally, how ESG considerations are affecting supply chains and their increasing materiality in M&A transactions.