EU Developments

EU mandatory human rights due diligence

By Ella Bailey

Readers passionate about human rights may be familiar with that sinking feeling when they open their inbox to find a new petition about another abuse committed, another person facing the death penalty, another innocent imprisoned on unfounded charges, another pipeline, another dirty deal. When will Nazanin Zaghari-Ratcliffe  get home? When will we stop investing in destructive industries? Emails pour in every week from Amnesty, Reprieve, SumOfUs – the list goes on. But sometimes, just often enough to keep from losing heart, there is a silver lining.

In October 2020 the European Commission launched a public consultation on sustainable corporate governance seeking responses from NGOs and other stakeholders on a possible EU sustainable corporate governance initiative. Consequently, in January of this year I received an email from Avaaz asking me to sign the Commission’s public consultation to encourage the EU to pass historic due diligence legislation. If the approval of the European Parliament’s due diligence report on March 10th is anything to go by, the consultation was a success. The annex of the report contained a proposed directive drafted by JURI (European Parliament Committee on Legal Affairs) introducing mandatory human rights and environmental due diligence obligations for undertakings. The Commission is expected to table a binding due diligence directive for all companies operating on the EU market by the end of June. The approved report from Parliament lays the groundwork for the upcoming directive.

Why is the directive necessary, and why now? While international due diligence frameworks are already in place, for example the non-binding UN Guiding Principles on Business and Human Rights (‘Ruggie Principles’) and the OECD Guidelines for Multinational Enterprises, such ‘principles’ and ‘guidelines’ have proven to be insufficient when it comes to addressing the harmful impact of international business activities. A study conducted by the European Commission last year found that only one in three companies in the EU is currently taking due diligence measures, supporting the evidence that voluntary frameworks are inadequate. This is in spite of the fact that approximately 70% of European businesses surveyed support EU-wide due diligence rules. Furthermore, while national legislation concerning due diligence already exists in a number of European countries, it fails to comprehensively tackle the issue as such laws often only apply to large companies (as is the case in France), or focus on specific abuses and neglect to address others, for example in the Netherlands where the rules are aimed at combatting child labour. Binding due diligence legislation that applies to large companies and SMEs alike would constitute a significant step forward in filling the lacuna left by national legislation and voluntary frameworks. Introducing comprehensive EU-wide due diligence rules that are binding would require companies to identify, address and remedy all aspects of their value chain that infringe or could infringe on human rights (e.g. social, trade union and labour rights), the environment (contributing to climate change or deforestation, for example) and good governance (such as corruption and bribery). Companies which contribute to climate change by supporting deforestation projects would be held liable under such rules.

The proposed new EU directive annexed to the European Parliament’s approved report acknowledges the need for large as well as small and medium-sized undertakings to accept individual responsibility by assessing themselves whether their conduct has an adverse impact on the environment, human rights, and good governance. Since Article 2(3) of the proposed directive states that it will apply extra-territorially to non-EU entities offering goods and services on the single market, i.e. to undertakings located in the UK and elsewhere, Brexit will not provide a loophole for companies to avoid their impending due diligence obligations. Under Article 4 of the proposed directive, each EU Member State would be required to lay down rules ensuring that undertakings carry out effective due diligence with respect to actual or potential detrimental effects on human rights, the environment and good governance both in their operations and business relationships. Undertakings would be obliged to ‘make all efforts within their means’ to determine whether their activities ‘cause or contribute’ to adverse impacts in any of those three areas by carrying out risk assessments on an ongoing basis which take into account the ‘likelihood, severity and urgency’ of any such impacts. Should an undertaking conclude that its activities have no such negative effect, it would be obliged to issue a well-informed statement explaining the methodology and relevant data which led to this conclusion. Such a conclusion may be drawn if, for example, the undertaking’s risk assessment determined that all of its direct suppliers performed due diligence in line with the directive [Article 4(2)]. Of note is the fact that any statement to this effect would not be definitive but rather would be subject to continuous review as new business partnerships are made and new risks emerge. The continuous review provision would consequently prevent undertakings from making a one-time in depth review and avoiding accountability for possible future infringements of human rights as their operations expand. The proposed directive stipulates that undertakings which are unable to issue such a statement that their activities do not cause or contribute to potential or actual adverse impacts on human rights, the environment or good governance following their risk assessment must implement an extensive due diligence strategy. The proposed directive outlines the elements of this strategy, stating under Article 4(4) that undertakings must:

• specify the potential or actual adverse impacts on human rights, the environment and good governance identified that are likely to be present in their operations and business relationships, and the level of their severity, likelihood and urgency;
• map their value chain (all operations, direct or indirect business relations, investment chains) and publicly disclose relevant information about their value chain e.g. names, locations, types of products and services supplied, information concerning subsidiaries, suppliers and business partners;
• adopt and indicate all proportionate policies and measures with a view to ceasing, preventing or mitigating the specified actual or potential adverse impacts; and
• establish a prioritisation strategy on the basis of Principle 17 [Human Rights Due Diligence] of the UN Guiding Principles on Business and Human Rights in the event that they are not in a position to deal with all the potential or actual adverse impacts at the same time.

Under the proposed directive, not only would undertakings be obliged to make sure that their business strategies and policies conform with their due diligence strategy as outlined above, but they would equally need to ensure that – in their business relationships with other parties – human rights, environmental and good governance policies are implemented that are in line with their due diligence strategy (via codes of conduct or framework agreements, for example).  Articles 5 and 8 stipulate that undertakings must consult with stakeholders such as trade unions when establishing, implementing and reviewing their due diligence strategy, and Article 9 of the proposed directive obliges Member States to provide a grievance mechanism whereby any stakeholder may anonymously or confidentially voice their concerns regarding the existence of a potential or actual adverse impact on human rights, the environment or good governance.

In order for undertakings to fulfil their due diligence obligations, the proposed directive allows for the Commission – in consultation with the Member States and the OECD and with the assistance of the European Union Agency for Fundamental Rights, the European Environment Agency and the Executive Agency for Small and Medium-sized Enterprises – to publish general non-binding guidelines to aid the undertakings by providing ‘practical guidance on how proportionality and prioritisation, in terms of impacts, sectors and geographical areas, may be applied to due diligence obligations depending on the size and sector of the undertaking.’ While the proposed directive does not provide for EU-level sanctions, it stipulates that Member States must take all measures necessary to impose proportionate sanctions on undertakings for infringements of the national legislation adopted pursuant to the directive. Such sanctions by the national authorities may include fines; the exclusion of undertakings from state aid, support schemes or loans; and the seizure of an infringing undertaking’s commodities. In addition, under Article 19 undertakings would also face civil liability for any harm resulting from actual or potential negative impacts on the environment, human rights or good governance that the undertaking or its subsidiaries caused or contributed to. The European Parliament has furthermore called for additional measures, including a ban on the import of products linked to severe human rights violations such as forced labour or child labour. It has asked the Commission to thoroughly review whether companies based in Xinjiang exporting to the EU are involved in human rights breaches, in particular regarding the repression of Uighurs. The Parliament is also in favour of granting legal support to the victims of the negative impacts on the environment, human rights and good governance in third countries.

While the proposed directive has been criticized for its “unclear definitions” and “vague norms”, socialist MEP Lara Wolters who acted as rapporteur for the due diligence report defended its wording, saying that this was done deliberately in order to encourage “proactiveness from companies”. The extent to which the Parliament’s draft text will be incorporated into the Commission’s directive and whether such criticisms will be taken on board remains to be seen. The coming weeks will hopefully provide clarity on the Commission’s position.

For Wolters (Partij van de Arbeid (NL); Group of the Progressive Alliance of Socialists and Democrats in the European Parliament) and many others, including the 504 MEPs who voted in its favour – the value of the proposed directive is undeniable: “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.”

European Commissioner for Justice Didier Reynders has promised that the due diligence legislation will be an integral part of the European Green Deal and the European Recovery Plan. The Commission has a crucial opportunity, and arguably a moral obligation, to stand by the words of its own president, Ursula von der Leyen, who highlighted in her speech last May at the European Parliament Plenary on the EU Recovery Package that: “Europe is in a unique position to be able to invest in a collective recovery and a common future…in our Union, we know that the boldest measures truly are the safest for our future.”

The introduction of binding due diligence rules is undoubtedly a bold move, and their enforcement will not be simple, but if ever there was a right time to take this step, that time is now. Failure to do so will not simply mean sacrificing a “common” or “safe” future – contempt for due diligence rules and the climate breakdown they aim to prevent will jeopardise any kind of future at all.