EU sustainability law will impact South African businesses

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Does your company have strong due diligence and sustainability policies? Are your previous standard agreements suitable for a world in which sustainability is at the center of attention?

Otherwise, be warned, as the European Commission last month adopted a proposal allowing the European Union (EU) to indirectly regulate the affairs of non-EU companies doing business in the EU up to specified thresholds.

Crucially, this also includes businesses throughout the value chain of a regulated business, wherever they are in the world.

Although this Corporate Sustainability Due Diligence Directive is not yet binding with legal obligations, affected companies in South Africa exporting to the EU should take urgent note of the developments as changes are coming. loom on the horizon.

who will be impacted?

The South African companies most affected by the directive will be those generating either a net turnover of more than €150 million in the EU or a net turnover of more than €40 million in the EU and at least 50% of its worldwide net turnover in one of the following sectors:

  1. manufacture of textiles, leather and related products (including footwear) and wholesale trade in textiles, clothing and footwear;
  2. agriculture, forestry, fishing (including aquaculture), food manufacturing and wholesale trade in agricultural raw materials, live animals, timber, food and beverages;
  3. the extraction of mineral resources regardless of their place of extraction (including crude oil, natural gas, coal, lignite, metals and metallic ores, as well as all other non-metallic minerals and quarry products) , manufacture of basic metal products, other non-metallic mineral products and fabricated metal products (except machinery and equipment), and wholesaling of mineral resources, basic and intermediate mineral products (including metals and metal ores, construction materials, fuels, chemicals and other intermediate products).

what should you do?

If your company meets these criteria, then you will need to carry out human rights and environmental due diligence that meets the requirements of the directive.

an important caveat

Be aware that even if these thresholds are not met directly, companies that have business relationships with EU companies subject to the due diligence obligations of the directive could also be indirectly affected.

Indeed, operations throughout the value chain of the regulated company will be examined in cascade, regardless of the country in which they are located.

sustainability clauses at your fingertips

As the world becomes aware of all the possible legal implications of sustainability risks, including physical, liability and transition risks, many previous standard terms will need to be rewritten with sustainability in mind.

The European Commission will publish guidance on voluntary standard contractual clauses to help companies comply with their due diligence requirements throughout their value chains. In the meantime, the directive recognizes the need to develop and make available to banks contractual precedents to enable early transition.

One of these previous banks is The Chancery Lane Project (TCLP)which launched in London in 2019 and has since expanded to other jurisdictions including Australia, China, Ireland, Japan and the United States, as well as parts of Asia- Pacific, Europe and Latin America.

This formidable open source bank of sustainability clauses is a collaborative effort of over 2,000 legal professionals from around the world whose goal is to support parties in the transaction industry with contracts that reduce risk and solve problems. sustainability, such as climate change.

Almost 300 organizations are part of it, including the UK’s top 25 law firms and many of the top 25 US law firms with offices in the UK.

More than 100 clauses published on the TCLP site have been consulted and downloaded in more than 100 countries. This enthusiastic adoption of its clauses globally is a clear indicator of the contractual shift underway to incorporate sustainability considerations into corporate precedents.

TCLP’s clauses undergo a thorough process of peer-reviewed quality control before publication on their website. We at ENSafrica are starting to use TCLP clauses and we have also participated in TCLP drafting workshops.

TCLP clauses are generally written for the UK market. We therefore bring added value to our local customers by adapting the clauses taking into account the specific legislation of each country and the unique context of each customer.

what about ESG clauses in the supply chain?

As the momentum builds towards the 27thand At the United Nations climate change conference in Egypt later this year, many companies showed their support for the “race to net zero” by committing to net zero. In fact, nearly 70% of organizations worldwide have publicly committed to achieving net zero in their value chains by 2050.

Crucially, many of these organizations have supply chains and business partners that contribute to their emissions and therefore determine whether or not they meet their net zero goal.

The TCLP provides helpful clauses that “back-to-back” or align a company’s net zero goal with its supply chain and trading partners, enabling the company to achieve its net zero goal.

What about carbon tax clauses?

Where appropriate, it is important to have contractual provisions in supply chain agreements to ensure that carbon taxes down the supply chain are reduced as much as possible using available rebates or reduction measures shows.

This prevents the costs imposed by the carbon tax law from being accepted without mitigation and passed on up the value chain.

Standard contractual price adjustment clauses that are triggered by changes in legislation or tax rates do not normally oblige suppliers to make full use of allowances to reduce their carbon taxes and therefore the amounts that are passed on to customers. .

Useful precedents in this regard are available from the TCLP, whose supply chain cascade clauses are amended by our ESG legal experts to take into account local carbon tax considerations.


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