EU Parliament proposes text for the corporate due diligence and corporate accountability directive

Anna Triponel

September 21, 2020

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 a European 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.

In response to Commissioner Reynders’ announcement, 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.  In its report, the Committee made a motion for a European Parliament resolution requesting “that the Commission submit without undue delay a legislative proposal on mandatory supply chain due diligence, following the recommendations set out in the Annex hereto.”

Other European Parliament committees also submitted draft opinions to the Committee on Legal Affairs, including a submission by the Subcommittee on Human Rights (Committee on Foreign Affairs) and a submission by the Committee on Development. Input was also shared by the European Economic and Social Committee, a consultative EU body representing European civil society organisations. We provide below the key recommendations put forward by the Committee on Legal Affairs.

Subject matter: The directive would cover human rights, as well as environment and good governance. The definition of due diligence the directive suggests is “the process put in place by an undertaking in order to identify, cease, prevent, mitigate, monitor, disclose, account for, address and remedy the risks posed to human rights, including social and labour rights, the environment, including climate change, and to governance, both by its own operations and its business relationships.” (Compare this with UNGP 15 which defines human rights due diligence as the “process to identify, prevent, mitigate and account for how [business enterprises] address their impacts on human rights”).

Objective: These due diligence requirements are aimed at “improving the functioning of the internal market” as well as to “ensure that undertakings can be held accountable for their adverse human rights, environmental and governance impacts throughout their value chain.”

Scope: The directive would apply to:

  • “all undertakings governed by the law of a Member State or established in the territory of the Union”; as well as
  • non-EU-headquartered companies who “operate in the internal market selling goods or providing services.”

Requirement for companies to develop a due diligence strategy: Companies would be asked to “in an ongoing manner identify and assess by means of an appropriate monitoring methodology whether their operations and business relationships cause or contribute to any human rights, environmental or governance risks.” Where the company determines there are no risks, it will publish its risk assessment and review it regularly. Where the company identifies risks, “it shall establish a due diligence strategy.”  This due diligence strategy would:

“(i) specify the risks that the undertaking has identified as likely to be present in its operations and business relationships and the level of severity and urgency thereof;

(ii) publicly disclose detailed, relevant and meaningful information about the undertaking’s value chain, including names, locations, and other relevant information concerning subsidiaries, suppliers and business partners in its value chain;

(iii) indicate the policies and measures that the undertaking intends to adopt with a view to ceasing, preventing or mitigating those risks;

(iv) set up a prioritisation policy for cases in which the undertaking is not in a position to deal with all the risks at the same time. Undertakings shall consider the level of severity and urgency of the different risks present, the scope of the risks, their scale and how irremediable they might be, and if necessary, use the prioritisation policy in dealing with these;

(v) indicate the methodology followed for the definition of the strategy, including the stakeholders consulted.”

(There are a number of other expectations detailed, including that companies “make all reasonable efforts to identify subcontractors and suppliers in their entire value chain” and “indicate how their due diligence strategy relates to and integrates with their business strategy, their policies, including purchase policies, and procedure.”)

Involvement of trade unions and consultation of stakeholders:

  • Sound due diligence requires that all stakeholders be consulted effectively and meaningfully, and that trade unions in particular be appropriately involved. The consultation and involvement of stakeholders can help companies to identify risks more precisely and to set up a more effective due diligence strategy. This Directive therefore requires the consultation and involvement of stakeholders in all stages of the due diligence process. Furthermore, their involvement and consultation may help to push back against pressure from financial markets and short-term investors and give voice to those with a strong interest in the long-term sustainability of the company.”
  • “The concept of stakeholder should be broadly interpreted and include all persons whose rights and interests may be affected by the decisions of the company, which includes, but is not limited to, workers, local communities, indigenous peoples, citizens’ associations and shareholders, and organisations whose statutory purpose is to ensure that human and social rights, environmental and good governance standards are respected, such as trade unions and civil society organisations.”
  • “To avoid the risk of critical stakeholder voices remaining unheard or marginalised in the due diligence process, the Directive grants stakeholders the right to safe and meaningful consultation as regards the company’s due diligence strategy, and ensure the appropriate involvement of trade unions.”
  • “Member States shall ensure that where an undertaking refuses to carry out consultations with stakeholders, fails to involve trade unions in good faith, or does not adequately inform and consult workers or their representatives, stakeholders and trade unions may refer the matter to the competent national authority.”

Grievance mechanisms and remedy:

  • Companies must set up a grievance mechanism, “both as an early-warning risk-awareness and as a remediation system, allowing any stakeholder to voice concerns regarding the existence of a human rights, environmental or governance risks.”
  • The draft refers to the criteria for effective grievance mechanisms set out in UN Guiding Principle 31 and requests that “[g]rievance mechanisms shall be legitimate, accessible, predictable, safe, equitable, transparent, rights-compatible and adaptable.”
  • “Grievance mechanisms shall be developed in partnership with stakeholders, in particular workers representatives, and be managed in cooperation with them. Workers representatives shall be given the necessary resources to carry out their responsibilities in this area.”
  • Member States shall ensure that when an undertaking identifies, in particular through its grievance mechanism, that it has caused or contributed to harm, it provides for or cooperates with remediation. The remedy may be proposed via the grievance mechanism …. The remedy shall be determined in consultation with the affected stakeholders and may consist of one or more of the following non-exhaustive list of remedies: financial or non- financial compensation, reinstatement, public apologies, restitution, rehabilitation or contribution to investigation.”

Senior-level responsibility and expertise:

  • For due diligence to be embedded in the culture and structure of a company, it is necessary that the members of the administrative, management and supervisory bodies of the company be responsible for the adoption and implementation of the due diligence strategy. The board of directors should have the appropriate knowledge, training and experience in due diligence matters.
  • “The Directive requires that large companies have an advisory committee from whose expertise on due diligence matters the undertaking should benefit. This Directive also requires that remuneration policies be brought in line with the objectives of this Directive.”

State supervision, penalties and criminal offence:

  • “Member States should designate one or more national authorities to supervise the correct implementation by undertakings of their due diligence obligations and ensure the proper enforcement of this Directive. Those national authorities should be entitled to carry out appropriate checks, on their own initiative or based on complaints received from stakeholders and third parties, and impose penalties, in order to ensure that undertakings comply with the obligations set out in the legislation; at Union level, a European committee of competent authorities should be set up by the European Commission.”
  • “Repeated infringements by an undertaking of the national provisions adopted in accordance with this Directive, intentionally or with serious negligence, should constitute a criminal offence.”

New liability regimes:

  • Member States should introduce further legislation to ensure that undertakings can be held liable for damage caused by undertakings under their control where they have, in the course of business, committed violations of internationally recognized human rights or international environmental standards.”
  • Companies “should not be held liable however if they can prove that they took all due care to avoid the loss or damage, or that the damage would have occurred even if all due care had been taken. When introducing liability regimes, Member States should consider adopting appropriate limitation periods and introducing the loser pays principle.”
  • “The fact that an undertaking has carried out due diligence in compliance with the requirements set out in this Directive shall not absolve the undertaking of any civil liability which it may incur pursuant to national law.”

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