EU lawmakers have spoken: the responsibility to conduct environmental and human rights due diligence in supply chains will transform into a legal duty for companies

Anna Triponel and Maddie Wolberg | 12 March 2021

Everyone is talking about what happened on Wednesday.

Indeed, it’s a big deal. On Wednesday, the European Parliament voted, by an overwhelming majority (504 votes to 79, with 112 abstaining), to request that companies by law conduct environmental and human rights due diligence along their full value chain.

Enhanced civil liability and fines – comparable in magnitude to fines currently provided for in competition law and data protection law – would be in store for companies that don’t take their impacts on the environment and human rights across their supply chains seriously. We are seeing the responsibility for companies to undertake human rights due diligence (which has existed since 2011 under soft law) transforming into a legal duty under EU law – and bringing environmental due diligence along with it.

EU lawmakers are concerned that the voluntary standards we have (including expectations captured in the UN Guiding Principles on Business and Human Rights) are not working. They are concerned that companies doing the right thing are placed at a competitive disadvantage. And they are concerned that those harmed by business activities overseas do not have access to justice and remedies.

The European Parliament wants to change that.

We reference the key elements of the proposed directive below. (For the full version including all articles and clauses, you can read the EP’s report here).

A brief 101 on how the EU works: this is not the proposed law per se. The European Parliament is not the body responsible for drawing up proposals for new European legislation – that is the job of the executive branch of the EU (the European Commission). However, the European Commission already said last year that it was going to publish (probably in June 2021) a proposal for a directive on sustainable corporate governance – including mandatory human rights and environmental due diligence with respect to impacts in company supply chains. So essentially, the European Parliament’s draft is about EU lawmakers conveying to the executive what they would envision this law containing.

We’re sure you’re eager to jump right into the European Parliament’s proposed law so let’s delve right in. (We detail at the end of this article a summary of the recent journey within the EU for those who are newer to the discussions.)

Who would be covered?

The new law would apply to all large companies governed by the law of an EU Member State, established in the territory of the EU or operating in the internal market, regardless of whether they are private or state-owned and of the economic sector they are active in, including the financial sector. The directive would also apply to publicly listed and high-risk SMEs (this was a topic of discussion).

What would be expected?

In short, the directive would set an EU due diligence standard for responsible business conduct. The directive would seek to ensure that companies are subject to mandatory harmonised due diligence requirements – which would cover human rights, the environment and good governance. Lawmakers specifically note that the responsibility to respect human rights under international standards would be transformed into a legal duty at the EU level.

How is due diligence defined?

Due diligence is defined as the obligation of a company “to take all proportionate and commensurate measures and make efforts within their means to prevent adverse impacts on human rights, the environment or good governance from occurring in their value chains, and to address such impacts when they occur.”

“In practice, due diligence consists in a process put in place by [a company] in order to identify, assess, prevent, mitigate, cease, monitor, communicate, account for, address and remedy the potential and/or actual adverse impacts on human rights, including social, trade union and labour rights, on the environment, including the contribution to climate change, and on good governance, in its own operations and its business relationships in the value chain.”

What is included in the due diligence strategy?

The directive refers to conducting “sound due diligence” and echoes a number of the expectations of the UNGPs when it comes to human rights due diligence. The lawmakers speak about:

• The need for due diligence to be embedded in the culture and structure of a company, which means that members of administrative, management and supervisory bodies should be responsible for the adoption and implementation of its sustainability and due diligence strategies.
• The expectation the companies seek to address and solve a potential or actual impact on human rights, the environment or good governance in discussion with stakeholders.
• The need to build and exercise leverage to prevent or mitigate adverse impacts from occurring
• Discussion with and involvement of stakeholders at all stages of the due diligence process, with a particular focus on trade unions. Of particular note, lawmakers state that the directive “should grant relevant stakeholders the right to safe and meaningful discussions as regards the [company’s] due diligence strategy, and should ensure the appropriate involvement of trade unions or of workers’ representatives.”
• The need for grievance mechanisms to act both as an early-warning mechanism as well as a mediation system
• The need to publish the due diligence strategy and communicate information on the due diligence strategy to potentially affected stakeholders

What is the relationship between due diligence, third-party certification schemes and voluntary collaborative actions?

The lawmakers state that due diligence should not become a ‘box-ticking’ exercise. They emphasize the need for ongoing and dynamic assessments, which are adapted to how risks evolve in practice.

When it comes to third-party certification schemes in particular, they can only complement due diligence strategies if they are “adequate in terms of scope and meet appropriate levels of transparency, impartiality, accessibility and reliability.” Specifically, the lawmakers state that “third-party certification should not constitute grounds for justifying a derogation from the obligations set out in this directive or affect [a company’s] potential liability in any way.”

When it comes to voluntary collaborative initiatives, the lawmakers find that these “could enhance the consistency and effectiveness of … due diligence strategies”, but that participation in the development of sectoral due diligence action plans “should in no way absolve the [company] of its individual responsibility to perform due diligence or prevent it from being held liable for harm it caused or contributed to in accordance with national law.”

What is the connection between environmental and human rights due diligence?

The lawmakers reference the fact that environmental adverse impacts are often closely linked to human rights adverse impacts, and refer to statements by The United Nations Special Rapporteur on human rights and the environment regarding the rights to life, health, food, water and development, as well as the right to a safe, clean, healthy and sustainable environment, as necessary for the full enjoyment of human rights.

How would this connect with existing EU due diligence standards on timber and minerals?

Lawmakers recognise that the EU already has mandatory due diligence frameworks in specific areas – in particular the 2010 regulation related to traceability of timber and timber products (No. 995/2010) and the 2017 regulation related to supply chain due diligence on tin, tantalum and tungsten, their ores, and gold (No. 2017/821). These would still apply – but the due diligence requirements in this new law would prevail if they provide for more thorough due diligence with regard to human rights, the environment or good governance.

And last, but not least, how would companies be held accountable for this new legal duty?

• New national competent authorities and sanctions: Member States would be expected to designate one or more national authorities to monitor the correct implementation companies of their due diligence obligations and ensure the proper enforcement of the directive. These authorities would have the power to carry out investigations of companies, including through interviews with potentially affected stakeholders or their representatives. These authorities would be able to impose sanctions on companies – including “proportionate fines calculated on the basis of [a company’s] turnover, temporarily or indefinitely exclude [companies] from public procurement, from state aid, from public support schemes including schemes relying on Export Credit Agencies and loans, resort to the seizure of commodities and other appropriate administrative sanctions.” The lawmakers state that administrative fines should be comparable in magnitude to fines currently provided for in competition law and data protection law.
• Civil liability regime: Member States would be able to “use existing liability regimes or, if necessary, introduce further legislation to ensure that [companies] can, in accordance with national law, 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 [company] 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.” Specifically, this liability regime should allow the burden of proof to be shifted from a plaintiff to a company.
• OECD NCPs and NHRIs: the role of the OECD National Contact Points (NCPs) and National Human Rights Institutions (NHRIs) would be amplified, with governments encouraged to cooperate and share information with these entities

Of course, this development is the latest in a string of developments on mandatory due diligence – but is it particularly significant because of its scope and scale. The lawmakers state themselves the potential for this directive to become the “global standard for responsible business conduct.” Taking actions to enhance positive impacts on people and planet is the growing expectation of business, and legal due diligence seeking to manage human rights and environmental supply chain risks will be how lawmakers see companies getting there.

“This new law on corporate due diligence will set the standard for responsible business conduct in Europe and beyond. We refuse to accept that deforestation or forced labour are part of global supply chains. Companies will have to avoid and address harm done to people and planet in their supply chains. The new rules will give victims a legal right to access support and to seek reparations, and will ensure fairness, a level playing field and legal clarity for all businesses, workers and consumers.”

Lara Wolters, Rapporteur and Member of the European Parliament, The Netherlands, Press release: MEPs: Companies must no longer cause harm to people and planet with impunity (10 March 2021)

“The private and public sector should both contribute to achieve this common goal. In addition, it is important that we respect our values both within and outside the union we want to incentivise outside of Europe good practises that protect the environment in line with our international commitments and our efforts on climate change and environmental protection. Similarly, EU companies should make all reasonable efforts to make sure that practises against human rights, labour and social rights that are not tolerated within the union do not take place in their supply chain.”

Didier Reynders, European Commissioner for Justice, Excerpts from European Parliament plenary session (8-11 March 2021)

Background: We won’t go back to the history of the UN Guiding Principles and their development – but highlight some of the recent history here:

In April 2020, EU Commissioner for Justice, Didier Reynders, announced that the European Commission will introduce a legislative initiative in 2021 on an EU-wide mandatory human rights and environmental due diligence legislation. The announcement built on aEuropean Commission-commissioned study where 70% of business survey respondents agreed that EU-level rules on human rights and environmental due diligence may provide benefits for business. It also builds on investor and civil society calls for such a legislative initiative.

Since then, a number of policymakers, NGOs and business organisations have weighed in on the scope and substance of the proposed legislation (note: for more detail on these perspectives, take a look at our past coverage of insights and recommendations from the European Parliament Committee on Legal Affairs, the European Parliament’s Subcommittee on Human Rights, European Commission Directorate-General for Justice and Consumers, the UN Working Group on Business and Human Rights, John Ruggie on the proposed expansion of directors’ duties in the law, Shift’s six ‘signals of seriousness’ to assess mHRDD compliance, and Shift’s examination of accountability in the context of mHRDD.

In early September 2020, the European Parliament Committee on Legal Affairs—the committee responsible for drafting the legislation—issued a draft report to the EU Commission with recommendations on adopting such legislation for mandatory corporate due diligence and corporate accountability.