The European Commission’s Corporate Sustainability Due Diligence Directive

Our key takeaway: The European Commission’s proposed environmental and human rights due diligence duty obviously does not come out of thin air. It is grounded on the UN Guiding Principles on Business and Human Rights and other relevant international and regional legal standards. It has been the subject of other EU texts, including texts adopted by the Foreign Affairs Committee (AFET/DROI) in its opinion for the Legal Affairs Committee as well as the European Parliament. So how does the European Commission’s draft compare? Authors of a paper commissioned by European Parliament’s Subcommittee on Human Rights, focused on the human rights perspective of the directive, find a number of issues with the draft. Not only does the proposed directive fall short in a number of places, it also contains provisions that will complicate implementation and enforcement. The good news is that we already have ideas of provisions that would strengthen the effectiveness and impact of the directive. And so the dialogue continues and must continue. Onwards and upwards for a duty diligence duty that works for people and for companies!

The European Parliament’s Subcommittee on Human Rights has commissioned an analysis of the European Commission’s (EC) corporate sustainability due diligence directive. The resulting paper, authored by Claire Mevthen O’Brien and Olga Martin-Ortega, is: ‘Commission proposal on corporate sustainability due diligence: analysis from a human rights perspective’ (May 2022):

• More to be done to align the draft with expectations and existing legal obligations: The paper compares the EC’s draft directive with the position adopted by the Foreign Affairs Committee (AFET/DROI) in its opinion for the Legal Affairs Committee (November 2020), the European Parliament’s position (March 2021), the UN Guiding Principles on Business and Human Rights and other relevant international and regional legal standards. The authors find that “on some important parameters the draft Directive falls short of the expectations of the UNGPs, and existing EU legal obligations as well as policy commitments, while aspects of its overall scheme may entail implementation and enforcement challenges. In certain other respects the draft Directive fails to carry forward elements of the AFET/DROI opinion and EP final position that could plausibly strengthen its effectiveness and impact, directly and indirectly, in relation to EU human rights and sustainable development commitments.” The authors state that “further dialogue is now warranted to consider how such shortcomings can be addressed.”
• Scope, depth and content of due diligence: When it comes to the scope of companies covered by due diligence duty, which is smaller in the EC draft Directive when compared with other standards, the paper finds that “[g]iven that the EC draft Directive already describes a differentiated scheme of duties for companies of different sizes and characteristics, it would seem possible to integrate at least some smaller enterprises within its framework.” When it comes to the depth of the due diligence requirement, the paper discusses the restriction of the corporate due diligence duty in the EU draft to established business relationships. The authors observe that this “potentially undermines its relevance, in terms of detecting salient risks, particularly given the likelihood that covered companies may lack business relationships, or that such relationships are not ‘established’, at lower tiers of the supply chain, while they many nonetheless be integral to a company’s business activity or model.” In addition, “a duty restricted to specific levels of the supply chain may be open to gaming”, and the risk identification measures are already “qualified by the restriction that these need only be ‘appropriate’”, so further limitations of the depth of the duty to maintain proportionality are not needed. When it comes to the content of the due diligence requirement, the paper finds that “certain elements may attract concern.” For instance, “the role afforded to contractual assurances may be viewed as problematic, given: the risks of burden-shifting by lead companies onto suppliers; the possibilities of superficial legal compliance measures substituting for authentic risk management; and well-documented limitations of currently prevailing approaches to third-party compliance verification via ‘social audit’.”
• Remediation, stakeholder engagement and civil liability: When it comes to remediation of harm, the draft lacks “a general commitment to remediation and redress for victims”, and “financial compensation may not be sufficient to redress harm to human rights.” Although the draft provides for “a more specific and demanding articulation of company-level remedial action”, how this will apply in practice depends on how a number of the draft’s provisions are interpreted so that this action can be viewed as expected by a company. The draft expects companies to establish a complaints procedure, which “is positive as such procedures may serve as an early warning or alert mechanism, as well as providing a pathway to remediation in some cases”, but also lacks specificity on “procedural safeguards as well as the manner of complainants’ involvement and entitlement to information on their complaints.” When it comes to stakeholder engagement, the authors contrast the approach taken by other drafts and international standards, with the draft directive, which “qualifies the role of stakeholders in identification, prevention, mitigation and cessation of harm (‘where relevant’ and ‘where necessary’), leaving the identity and manner of stakeholder involvement largely to the discretion of” companies. When it comes to how civil liability is envisioned, “due to the use of qualifying language there is an apparent risk that [the proposed formulations] may not fulfil either the expectations of legal certainty for companies or of an expansion of access to remediation for victims associated with them.” Further, “the proposed scope of liability … appears ambiguous.”