The European Union plans to introduce legislation requiring companies to undertake human rights and environmental due diligence in 2021. On which legal predecessors would such a law be based? And how could the planned EU legislation avoid some of the limitations of existing laws? In this guest contribution, Dr. Chris N. Bayer and Juan Ignacio Ibañez from Development International e.V. discuss these and other questions.
On April 29, 2020, the European Union announced plans to introduce legislation establishing mandatory corporate due diligence in human rights and the environment in 2021 as part of the European Green Deal and the EU’s COVID-19 recovery package. This would constitute the first example of supranational legislation continuing the path started by the French Devoir de Vigilance law (DdV) and the Dutch Child Labor Due Diligence Act (CDDA), which require the implementation of specific due diligence measures.
Duty to report: Precursors to the impending EU legislation
As such, these laws have evolved from precursors such as the UK Modern Slavery Act (MSA) and the EU Non-Financial Reporting Directive (NFRD), which impose a duty to report on relevant due diligence measures the company has undertaken. The rationale behind the latter instruments is that the required disclosure would increase awareness about action – or inaction – of companies. In a competitive context, such required “signalling” would shape a company’s reputation and be rewarded or punished by disclosure “consumers.” Internally and externally reinforcing behavior, such legislation could nudge, in theory, responsible practice. However, some observers argue that their legislative intent has not yet been achieved: in spite of increased awareness, significant symmetry of information gaps remain since companies notably report more about their risks than impact. In addition, there is also variation between countries: As the iPoint-funded NFRD country case studies showed, Swedish companies were more transparent on their adverse footprint than their German or Austrian counterparts.
Duty to be diligent: Obligating corporate responsibility
The DdV and the CDDA follow a different, stricter approach: on top of the duty to report, they establish a substantial duty of diligence (or care / vigilance). In other words, companies are required not only to disclose the measures that they take, but also to take those measures. This shoulders an increased responsibility and heavier burden on subject companies – which has in turn sparked criticism. Further, enhanced disclosure on adverse impacts could potentiate its own liability risks. Indeed, a requirement to self-incriminate, drawing further liability, would not necessarily serve the ends of driving responsibility and transparency.
In fact, DdV requires companies to walk a tightrope: While one must disclose measures taken regarding human rights and environmental impacts, deficient Vigilance Plans also become a liability down the road if the plaintiff can prove that the “company has not complied with its Vigilance obligation, either by proposing non-adequate measures to the risk or the context, or by failing to monitor their implementation” (Lavite, 2020). For now, companies generally err on the side of being terse: An iPoint-funded study assessing corporate DdV compliance found that also in France, companies tended to report on potential impacts (risks) rather than actual impacts. We also observe that the full momentum of the DdV has yet to play out, as the law not only obligates companies to take all reasonable vigilance measures to identify and prevent adverse impacts, but it allows any affected party with standing to seek recourse if damage occurs that the faithful execution of its Vigilance Plan could have prevented.
Can the EU legislation avoid some of the shortcomings of existing laws?
In light of these legal precedents, one should ask: What lessons could the EU draw? In a briefing commissioned by the European Parliament’s subcommittee on Human Rights, the authors suggested that in light of deficient reporting on impact, one could establish a “requirement of diligence and reporting for both risks and impacts.” Furthermore, the briefing recommended not restricting “the diligence & reporting requirement to a special category of impacts”, since companies were “less willing to truthfully report impacts if they have to admit that they are ‘severe’ or ‘material.’”
In crafting mandatory corporate due diligence legislation, the EU Commission faces the challenge of finding a sweet spot that will nudge and prod companies towards responsibility and transparency, all while staying clear of unintended consequences.
How can companies prepare for the planned EU legislation?
Details of the planned EU legislation remain to be determined, but it is likely that it will be mandatory for all EU-based companies, regardless of their size (with a possible special treatment of SMEs), and apply horizontally in all sectors. The legislation will also have a significant impact on non-EU companies, either directly due to their EU operations, or indirectly due to their supply chain position vis-à-vis affected EU companies.
In order to be prepared for this and similar impending laws, such as the planned German mandatory human rights supply chain Due Diligence Act (“Sorgfaltspflichtengesetz”), 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 – versus those who have not – taken environmental, social, and governance (ESG) measures 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.
Corporate human rights and environmental due diligence are necessary to ensure sustainable value chains and to mitigate as well as prevent future crises. In order to comply with this set of regulations, most companies will likely need to expand their due diligence compliance programs and processes, and, once required, increase transparency regarding 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 iPoint Supply Chain Survey.