The EU Corporate Sustainability Directive's (Non-)Alignment with International Standards

Our key takeaway: EU Justice Commissioner Reynders has made clear that the EU CSDD Directive is a baseline, and that Member States can choose to go beyond. But wouldn’t this lead to the exact fragmentation and lack of legal certainty for companies that this directive was intended to tackle? Our view is that the closer this directive can be to the international standards it seeks to build on, i.e., the UN Guiding Principles on Business and Human Rights and the OECD Guidelines on Multinational Enterprises, the better it will be for business since this will become a meaningful EU standard and Member States won’t need to go beyond. Plus this will be more impactful for those people companies could impact – the people intended to be at the heart of the directive. So alignment is win-win. In addition, we are in a world striving for net zero. The directive should enable business to tackle the intersection of environmental, climate and human rights issues in a meaningful and holistic way. 2022 is the year of negotiations, so we encourage all companies to add their voice to alignment and meaningful due diligence. A brief overview of the directive is here, and we have covered a list of commentary in the past here. Today we highlight two additional commentaries for you.

The Danish Institute for Human Rights has released ‘Legislating for Impact: Analysis of the proposed EU Corporate Sustainability Due Diligence Directive’. The Institute for Human Rights and Business (John Morrison) and the Business & Human Rights Resource Centre (Phil Bloomer and Johannes Blankenbach) have released ‘Human Rights Due Diligence and Corporate Boards: Reflections on European Commission Proposals Relating to Director Duties and Board Oversight’.

• Deviations from key international frameworks: The DIHR observes that “[w]hilst, in principle the proposal has solid anchorage in key international frameworks, in practice it contains a number of deviations from these standards. Such deviations need to be assessed not just in terms of how well they work from a hard law perspective or their ability to create legal certainty for companies, but also for their likelihood in driving respect for human rights by business.” The DIHR’s commentary delves into a number of places where the directive differs from what is expected. For instance, defining ‘adverse human right’ as a violation of a right or prohibition could “inadvertently rais[e] the threshold for when an impact would be covered by the proposal and thereby should be part of a company’s due diligence obligation.” The delimitation of due diligence to established business relationships risks “creating a perverse incentive for companies to remain at arms-length with their business partners rather than engaging with them to improve human rights and environmental performance” at the same time as leading to a failure for companies “to address severe impacts in the value chain which are not in connection with an established business relationship.” The due diligence approach grounded on contracts and audits does not sit well. “Today, companies with a more mature approach to engaging with their human rights impacts have adopted a range of strategies to address root causes of human rights abuses and work more collaboratively with their business partners. … This could mean that the law perversely encourages a step back from best practice as well as weakens current efforts to move beyond audit regimes to address systemic impacts.” And when it comes to remedy, the proposal misses the “larger role for companies” captured in the UNGPs.
• Focus on the importance of the Board: The IHRB and BHRRC highlight that the call on directors to take into account the consequences of their decisions for sustainability matters, “including in the short, medium and long term” will help companies operating in sectors “that seem allergic to long-term planning, whether on sustainability issues or otherwise.” However, when it comes to the climate and environment in particular, “the Commission needs to clarify whether it wishes business to encompass inter-generational considerations.” The text of the directive seems to suggest that engagement of directors with stakeholders “is optional where it should be central.” The authors point to ongoing work by the World Economic Forum that confirms that “ensuring effective mechanisms are in place is a key component of board oversight.” In particular, when it comes to “ongoing and meaningful dialogues with human rights and environmental defenders, workers, communities, consumers and other affected stakeholders”: “Board members need not be directly involved (although occasionally they should be) but they do need to ensure that they happen and happen effectively.”
• The opportunity for systemic transformation of business models: The IHRB and BHRRC underscore “the opportunity for systemic transformation of business models through consideration, together, of environmental, climate and human rights issues at the board-level as ‘ESG’ approaches demand.” It is at the intersection of environmental, climate and human rights issues “that some of the greatest challenges for boards’ duty of care will be found. For example, the issues of climate justice and the just transition sit at the human rights-climate change intersection and are amongst the biggest challenges for society and business alike.” For instance, the climate plan envisioned in the draft (Article 15) “would sit better at board level in our view.” At the same time, the draft should make clear that due diligence encompasses climate impacts, and due diligence should capture “not just global commitments but also local expectations” since just transition “is only material … in specific contexts (rooted in time and place).”