A first step towards EU-wide legislation on mandatory human rights due diligence
29 October 2020
The concept of mandatory supply chain due diligence has been under consideration at the EU level in 2020. The European Commission published a study on the subject in February 2020, announced that it expected to propose a directive on the subject in due course in April 2020 and covered the subject in its study of sustainable corporate governance in July 2020.
As we discuss here, on 26 October 2020, the European Commission launched a public consultation to gather further data and the views of stakeholders with regard to a possible initiative on sustainable corporate governance. The consultation asks for views as to whether companies should be required, as part of any new initiative, to conduct due diligence with respect to sustainability impacts in their own operations and value chains.
The launch of the Commission’s consultation comes several weeks after the European Parliament Committee on Legal Affairs developed its own recommendation for a new EU Directive on “Corporate Due Diligence and Corporate Accountability” (the EP Draft Directive). The EP Draft Directive may be an indicator of the position that the European Parliament will adopt in response to the Commission’s eventual proposal on this topic, which is expected in Q2 2021.
The EP Draft Directive would require EU companies to implement human rights due diligence processes like those recommended by the 2011 United Nations Guiding Principles on Business and Human Rights (the UNGPs). Under the EP Draft Directive, these processes also should extend to environmental and governance risks in addition to human rights. This bulletin addresses the main aspects of the EP Draft Directive.
Subject matter and scope of application
Article 1 of the EP Draft Directive states that it aims to ensure that undertakings operating in the internal market fulfil their duty to respect human rights, the environment and good governance, and that they may be held accountable for any adverse impacts of their failure to do so throughout their value chain (Article 1).
Article 2 states that the Directive shall apply to “all undertakings governed by the law of a Member State or established in the territory of the Union” as well as to “limited liability undertakings governed by the law of a non-Member State when they operate in the internal market selling goods or providing services”.
This essentially includes all business enterprises incorporated, established or domiciled in the EU, as well as non-EU incorporated enterprises operating in the EU through the sale of goods or services. This provision reflects the European Parliament Committee on Legal Affairs’ stated desire that any future mandatory EU due diligence legislation should cover all types of undertakings, including those providing financial products and services, regardless of their size, sector or activity, and regardless of whether they are publicly owned or controlled (see Recital 5).
It is noteworthy that the European Parliament Committee on Legal Affairs has chosen to refer to an undertaking’s ‘value chain’ rather than its ‘supply chain’. Article 3 of the EP Draft Directive defines a ‘value chain’ as encompassing all “entities with which the undertaking has a direct or indirect business relationship, upstream and downstream, and which either (a) supply products or services that contribute to the undertaking’s own products or services, or (b) receive products or services from the undertaking”. The term ‘value chain’ therefore covers a much broader group of business entities than ‘supply chain’.
According to the study published by the European Commission in February 2020, downstream activities within the value chain can include “operations that relate to processing the materials into a finished product and delivering it to the end user, including transportation, distribution, consumption and disposal/recycling”.
Due diligence obligations
Pursuant to Article 4 of the EP Draft Directive, Member States must adopt rules to ensure that undertakings comply with their due diligence obligations under the EP Draft Directive. These obligations include the ongoing identification and assessment of any risks to human rights, the environment or good governance. For these purposes, 'risk' is defined in Article 3 as a potential or actual adverse impact on individuals, groups of individuals and other organisations in relation to human rights, the environment or good governance.
If no risks are identified as a result of a risk assessment, the undertaking must publish a statement confirming this fact, including its risk assessment, which must be updated if new potential risks arise. If, on the contrary, the undertaking identifies some risks, it must establish a due diligence strategy that must:
i) stipulate the risks identified and their level of severity and urgency;
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 it seeks to adopt to cease, prevent or mitigate the identified risks;
iv) set up a prioritisation policy in the event that the undertaking does not have the capacity to deal with all the risks simultaneously; and
v) specify the methodology used for setting up the due diligence strategy, including details on the stakeholders consulted throughout the process.
In addition, as part of their corporate due diligence strategy, all businesses must adopt contractual clauses to make their codes of conduct binding and enforceable on entities with whom they maintain business relationships, and regularly verify compliance.
Article 8 provides that the undertaking must review the effectiveness and appropriateness of its due diligence strategy at least once a year.
Consultations and public reporting
Article 5 of the EP Draft Directive provides that enterprises shall consult with stakeholders, including trade unions when establishing, implementing and reviewing their due diligence strategy.
Article 6 of the EP Draft Directive states that undertakings must make their due diligence strategy publicly available (e.g., on the undertaking’s website), and must communicate this strategy to their workers and entities with which they maintain business relationships, as well as to one of the designated national competent authorities (see Article 14).
The EP Draft Directive also requires Member States to establish a centralised platform and to ensure that the undertakings upload their due diligence strategy and their statements of non-identification of risks as a result of their risk assessment to this platform (see section above on ‘Due diligence obligations’).
Article 9 of the EP Draft Directive further requires that undertakings publish concerns raised via their grievance mechanisms, as well as remediation efforts, and regularly report on any progress made in this respect.
Grievance mechanisms and remedies
Article 9 of the EP Draft Directive requires the establishment of grievance mechanisms to allow stakeholders to voice any concerns they might have regarding potential risks to human rights, the environment and good governance, including through anonymous complaints. Such mechanisms must meet the effectiveness criteria set out in Principle 31 of the UNGPs.
Pursuant to Article 10 of the EP Draft Directive, when an undertaking has identified that it has caused or contributed to harm, Members States must ensure that the undertaking provides for or cooperates with remediation. The EP Draft Directive includes a non-exhaustive list of remedies, which include financial or non-financial compensation, reinstatement, public apologies, restitution, rehabilitation or contribution to an investigation.
Responsibility for the due diligence process
Article 11 of the EP Draft Directive states that Member States must ensure that the members of the administrative, management and supervisory bodies of an undertaking have collective responsibility for guaranteeing compliance with the due diligence obligations of the undertaking under the EP Draft Directive.
Supervision and investigations
Article 14 of the EP Draft Directive requires Member States to designate one or more competent authorities to supervise the application of the EP Draft Directive and to share best practices. Such national authorities must also have the power, under Article 15, to carry out investigations to ensure an undertaking’s compliance with the EP Draft Directive.
Under Article 19 of the EP Draft Directive, Member States must establish effective, proportionate and dissuasive penalties for infringements of the national rules transposing the EP Draft Directive. Member States must further ensure that such penalties are enforced in practice. Repeated infringements committed intentionally or with serious negligence must qualify as criminal offences.
While some had speculated that the EU would make any failure to conduct human rights due diligence properly subject to civil sanctions, Article 20 of the EP Draft Directive only states that compliance with the EP Draft Directive will not relieve the undertaking from any civil liability that it may incur under national law.
Interestingly, the European Parliament Committee on Legal Affairs has expressed its willingness, in Recital 14, to extend the jurisdiction of the EU courts to business-related civil claims brought against EU undertakings on account of violations of human rights caused by their subsidiaries or suppliers in third countries. The European Parliament Committee on Legal Affairs has included provisions to that effect in its proposal to modify the Brussels I Regulation, in addition to its proposal for the EP Draft Directive.
It is relatively unusual for the European Parliament to publish a draft text and recommendations to the European Commission before the Commission has published its own proposal. The Commission is the only EU institution with a mandate to initiate legislative action. The proactive approach by the Parliament may suggests a degree of consensus on the need for mandatory due diligence legislation across the EU and about the broad scope of such legislation. Didier Reynders, the European Commissioner for Justice confirmed in October 2020 that he wants due diligence obligations to apply to all different sectors and to create a level playing field across the Union.
The publication of the EP Draft Directive, which was followed closely by the launch of the Commission’s broader consultation on a sustainable governance initiative, marks an important step in the EU’s sustainability policy programme. It signals to those business enterprises operating in the EU that have not yet implemented human rights due diligence processes in accordance with the UNGPs that they are likely to be required to do so in the not too distant future and face penalties if they do not. It also may give further impetus to governments around the European Union that are already considering their own mandatory due diligence legislation. The German government is expected to publish the terms of its own law in the coming weeks, for example.
For more information on sustainable corporate governance, due diligence, human rights or sustainability/ESG more broadly, please contact Matt Townsend, Suzanne Spears, Jonathan Benson, Kelly Sporn or your usual Allen & Overy contacts.