In March 2021, the European Parliament adopted the Legal Affairs Committee (JURI) report on corporate due diligence and accountability that would oblige companies operating on the EU internal market to conduct environmental and human rights due diligence along their value chains. Guest author Dr. Chris Bayer, Principal Investigator at Development International, discusses highlights along this evolving legislative push as well as ramifications for corporate actors.
A hard law regime for responsible business conduct
In the face of severe corporate impacts to people and the planet, and in an environment of near corporate impunity, a broad political coalition in Europe now favours a binding duty of care regulation. With 504 votes in favour, 79 against, and 112 abstentions, the European Parliament adopted a legislative report (the “Report”) on corporate due diligence and corporate accountability on March 10, 2021. Not only does the Report set forth a progressive legislative agenda, it also offers proposed language for the EU Commission in their drafting of a suitable EU directive.
By putting in place mandatory rules on responsible business conduct, the EU is effectively calling for an end to business as usual. “The time for voluntary standards is now over,” stated Lara Wolters, along with a hat tip to the valiant but voluntary UN Guiding Principles on Business and Human Rights and the OECD Due Diligence Guidance for Responsible Business Conduct frameworks. Patience is apparently running out in light of the generally lacklustre corporate performance under this “soft law” regime, in place since 2011. In short: what was once a voluntary exercise will soon become hard law.
This legislative push is as much about reducing harm as it is about leveling the playing field, on multiple levels, as a matter of fairness and creating an enabling environment for performers. The proposed directive sets out to even things out: (1) between EU- and non-EU-headquartered undertakings, (2) between EU countries, (3) between sectors, and (4) between EU and non-EU regions.
According to Lara Wolters, we’re dealing with “a lack of commonly enforced rules for responsible business conduct and the absence of a framework for supply-chain liability.” Certain sectors are already exposed to due diligence requirements, including the Conflict Minerals Regulation, the Timber Regulation, the Forest Law Enforcement, Governance and Trade Regulation, and the Anti-Torture Regulation.
Further cause for leveling are national differences within the EU: certain due diligence laws already on the books in some EU member states – namely France and the Netherlands – with other EU member states, including Germany, planning similar legislation. In the proposed directive language, Article 10 specifies: “The insufficient harmonisation of laws can have an adverse impact on the freedom of establishment. Further harmonisation is therefore essential to prevent unfair competitive advantages being created. To create a level playing field, it is important that the rules apply to all undertakings – be they Union or non-Union – operating in the internal market.”
Extending basic environmental and labor standards to exporting countries is a further objective. In interfacing with foreign trade partners, standards reciprocity is also self-serving in that, at the very least, the internal market is not being undermined by external markets that lack basic standards. For example, the Report seeks to “boost EU companies’ international competitiveness and protect EU workers and businesses from unfair competition from third countries,” e.g., by ensuring that the negotiated free trade agreements “include clauses requiring the partner states to lay down comparable obligations for their companies, with a view to avoiding any new means of distorting competition.”
Specifications of the proposed directive
While this legislative push would provide for powers to hold accountable corporate entities, it is keener on codifying rules for undertakings to prevent harm by requiring them to think ahead and actively manage risk. In the Report’s draft directive, lawmakers envision key specifications:
Due Diligence Strategy:
Front and center in the Report is the concept of a due diligence strategy, which includes items such as embedding a culture of due diligence from very top to bottom, stakeholder engagement, and the exercise of leverage as well as grievance mechanisms.
Supply chain mapping:
The proposed directive foresees that: “Undertakings should set up an internal value chain-mapping process that involves making all proportionate and commensurate efforts in order to identify their business relationships in their value chain.” (Article 32)
Supply chain duty-of-care scope:
A subject company will apply its risk-based duty of care to its full value chains. In their Op Ed piece, the rapporteurs call for “extending liability for harm throughout the value chain; more fairly distributing the burden of proof; and ensuring reasonable time limits for bringing such claims.”
Taking a page from the French Devoir de Vigilance law, Article 58 articulates that undertakings can “be held liable for any harm arising out of adverse impacts on human rights, the environment and governance that they, or entities they control, have caused or contributed to by acts or omissions, unless the undertaking can prove it took all due care in line with this Directive to avoid the harm in question, or that the harm would have occurred even if all due care had been taken.”
The requirements will apply to all large companies operating on the EU internal market, regardless of their economic sector. Thus, they would apply also to foreign businesses operating within the EU. Whether SMEs that have a proportionally high adverse impact will be exempted, remains to be seen.
Expanded role for the Board of Directors:
Sustainability will become an explicit Board responsibility: “For due diligence to be embedded in the culture and structure of an undertaking, the members of the administrative, management and supervisory bodies of the undertaking should be responsible for the adoption and implementation of its sustainability and due diligence strategies.” (Article 45)
Continuous stakeholder engagement:
Discussions are to occur with – and involvement from – stakeholders at all stages of the due diligence process, especially with trade unions. Furthermore, the due diligence strategy is to be communicated to the potentially affected stakeholders.
The Commission intends to present its legislative proposal on the matter later this year, which would then need to be approved by the European Parliament and the Council of the European Union. Given the promise by European Commissioner for Justice, Didier Reynders, to develop a legislative proposal by 2021, the next step will be the Commission and Parliament agreeing upon the specific directive provisions.
How can companies prepare for the planned EU legislation?
In order to be prepared for this and similar impending laws, companies need to be aware of the fact that acting sustainably and responsibly will render them increasingly competitive. Once the mandated information symmetry goes into effect, the gap between businesses who have taken environmental, social, and governance (ESG) measures – versus those who have not – will become ever more apparent. As such, the former group then stands to be “rewarded” by investors, employees, and consumers – unlike peers that have not made similar investments.
One key take away is that a near-consensus among lawmakers is being forged that views corporate human rights and environmental due diligence are imperative to ensure sustainable value chains and to hopefully prevent future crises. In order to comply with this set of regulations, most companies would do well to expand their due diligence compliance programs and processes, and then publicly demonstrate how they identify and respond to human rights and environmental matters and risks.
iPoint’s software and services
iPoint can support the key stages of your risk management and due diligence process and help you keep track of the human rights- and environment-related measures your company takes and discloses, e.g. with the iPoint Supply Chain Survey.