The 2018 European Commission Action Plan on Financing Sustainable Growth discusses looking into “the possible need to require corporate boards to develop and disclose a sustainability strategy, including appropriate due diligence throughout the supply chain” and the 2018 European Parliament Report on Sustainable Finance calls for a “legislative proposal” for “an overarching, mandatory due diligence framework including a duty of care.” In response, the the European Commission DG Justice and Consumers commissioned a study on due diligence through the supply chain. The resulting study, undertaken by the British Institute of International and Comparative Law (BIICL) in partnership with Civic Consulting and LSE Consulting, was released on 24 February.
The views reported are based on 334 business survey respondents (from all sectors and sizes), as well as 297 general survey respondents (including business associations and industry organisations, civil society, worker representations or trade unions, legal practitioners and government bodies).
Key points (taken from the study itself) are as follows:
- One-third of business respondents indicated that their companies undertake due diligence which takes into account all human rights and environmental impacts, and a further one-third undertake due diligence limited to certain areas
- The majority of companies are limiting their due diligence to first tier suppliers only
- Although the vast majority of business stakeholders cover environmental impacts, including climate change, in their due diligence, it was reported that human rights and climate change processes often take place in “silos”
- Common due diligence actions referenced include contractual clauses, codes of conduct and audits
- The three primary incentives for undertaking due diligence were (1) reputational risks, (2) investors requiring a high standard and (3) consumers requiring a high standard. In contrast, general stakeholders and civil society respondents viewed regulatory incentives as the top incentive for due diligence. (The authors note that this difference in view is presumably because of the existing lack of regulatory or legal requirements on companies to undertake due diligence)
Companies were asked how they would like the EU to proceed when it comes to environmental and human rights due diligence.
- Do they prefer the status quo with no policy change at the EU level (option 1)?
- Would they like new voluntary guidelines at EU level for companies on undertaking due diligence through the supply chain (option 2)?
- Would they prefer new regulation at EU level requiring due diligence reporting (option 3)? or
- Would they prefer new mandatory due diligence requirement at EU level which would require companies to carry out human rights and environmental due diligence as a legal duty or standard of care (option 4)?
Here are the responses:
- Company respondents didn’t like option one. They noted that the current legal landscape at the EU level does not provide companies with legal certainty about their human rights and environmental due diligence obligations, and is not perceived as efficient, coherent and effective
- Company respondents didn’t like option two either. They felt that there was already enough voluntary guidance. (The authors remark here on a marked difference between company responses and business associations, with business associations expressing a preference for this option 2)
- Company respondents were open to considering option three, since they noted that reporting requirements in this area had had a positive impact in raising awareness. At the same time, they noted that reporting requirements do not usually provide for effective sanctions for non-compliance, and do not substantively require appropriate due diligence for compliance with the regulatory obligation
- The majority of stakeholders (company respondents and other stakeholders) indicated option four could provide potential benefits to business. In particular, companies pointed to the advantage option 4 would bring of harmonization, legal certainty, and the creation of a level playing field, as well as increasing leverage in their business relationships throughout the supply chain through a non-negotiable standard. Almost all interviewees were in principle in favour of a policy change to introduce a general standard at the EU level, although they differed on aspects of liability and methods of enforcement.
These are important findings that will hold significant sway during the EU discussions this year. We already have seen responses from MEP Anna Cavazzini and MEP Heidi Hautala (members of the European Parliament’s International Trade Committee) as well as a large number of civil society organisations (e.g. a joint civil society response as well as a Global Witness briefing).