Background

In April 2020, the EU Commissioner for Justice Didier Reynders announced that the EU Commission would introduce legislation in relation to mandatory environmental and human rights due diligence. His announcement came soon after the publication of a study commissioned by the EU that revealed widespread support for mandatory due diligence.  The announcement has also been backed by institutional investors[1] and businesses.

It was recognised that voluntary initiatives taken by companies over the past 20 years have not achieved significant progress in preventing harms to the environment and human rights.

On the 27th of January 2021, the EP Committee on Legal Affairs (JURI) voted in favour of a report (21 votes in favour, 1 against and 1 abstention), including recommendations to the Commission on mandatory corporate due diligence and accountability^[2].  A resolution was adopted by the EU Parliament on the 10th of March 2021 with 504 votes in favour and only 79 against the proposal (as well as 112 abstentions).

The resolution[3] sets out recommendations for corporate due diligence and corporate accountability. It draws on a wide range of existing standards including EU regulations, the Paris Agreement 2015, the UN Sustainable Development Goals (SDGs), the UN Guiding Principles on Business and Human Rights (UNGPs), the International Labour Organization’s conventions, the OECD due diligence guidance, the Dutch and French reporting laws, the resolutions on sustainable finance and children’s rights.

Failings of self regulation

Voluntary due diligence standards have failed to achieve significant progress in preventing human rights and environmental harms and have failed to achieve access to justice. In light of this, the report highlights that the EU should urgently adopt binding obligations to address potential and actual adverse impacts on human rights and the environment. A draft directive is also attached to the report. The resolution also highlights that the COVID-19 crisis has exposed some of the drawbacks of global value chains, especially the ease with which undertakings were able to shift negative impacts of their business activities to jurisdictions where they were being held less accountable.

Key principles underpinning the approach

Numerous principles underpin the European Parliament’s approach, including:

• The need to strengthen supply chain traceability;
• Due diligence strategies should be aligned with the SDGs;
• Due diligence obligations should be dynamic and not a ‘tick box’ exercise;
• Due diligence necessitates the effectiveness of processes;
• Stakeholder engagement should ensure meaningful and informed discussions;
• The future legislation is expected to have extraterritorial effect;
• Due diligence should be based on a ‘do no harm’ principle.

Organisations should bear these principles in mind when developing their commitment and approach to due diligence.

The resolution’s aim is to ensure that undertakings within the scope of the legislation fulfil their duty to respect human rights, the environment and good governance. The broader aim of the proposal is to underpin the EU’s aims embodied in Articles 3 and 21 of the Treaty on European Union – these include upholding and promoting the rule of law, protecting human rights and contributing to the sustainable development of the Earth.

20 Key Points for business to consider 

Here are 20 key points, drawn from the text of the draft directive, that businesses will need to consider to ensure that they can meet the requirements of the proposed directive:

1. Does the organisation come within the scope of the directive? It will apply to large organisations, all publicly listed small and medium undertakings, as well as high-risk small and medium sized undertakings. The scope also extends to undertakings in high risk sectors governed by laws outside the EU where they sell goods or provide services to the EU’s internal market.
2. Can the organisation demonstrate that it can carry out effective due diligence with respect to actual and potential adverse impacts on human rights and the environment?
3. Does the organisation have a due diligence strategy that includes a risk-based monitoring methodology that takes into account the likelihood, severity and urgency of potential and actual impacts on human rights or the environment? An organisation will need to make all efforts to identify and assess whether their operations or business relationships cause, contribute or are linked to any adverse impact.
4. Does the organisation have a system (such as a legal compliance register) to monitor new risks to update the statement that has to be published?
5. Has the organisation mapped its value chain?
6. Will the organisation be in a position to publish a statement that it has not caused, contributed or is not directly linked to a potential or actual adverse impact on human rights or the environment (including its risk assessment containing relevant data)?
7. Does the organisation have policies in place that indicate measures that are being taken to prevent or mitigate potential or actual adverse impacts? Does this include framework agreements, contractual clauses, the adoption of codes of conduct or referencing certified audits?
8. Can the organisation ensure that its business strategy is in line with its due diligence strategy? Can they provide an explanation in this regard?
9. Can the organisation verify that subcontractors and suppliers comply with their obligations?
10. Can the organisation plan to undertake effective and informed discussions with relevant stakeholders and ensure that stakeholders are not put at risk due to participating in discussions?
11. Does the organisation have a strategy on how to inform worker representatives about the due diligence strategy to enable them to contribute to it?
12. Does the organisation have a communication strategy to provide information on the due diligence strategy to its workers, business partners and trade union representatives?
13. Be aware that the proposed obligations do not affect the legal disclosure requirements in relation to non-financial and diversity issues.
14. How will the organisation evaluate effectiveness and appropriateness of their due diligence strategy and implementation on an annual basis, including stakeholder engagement?
15. Does the organisation have a grievance mechanism that encompasses an early warning mechanism for risk awareness and also serves as a mediation system?
16. Can the organisation guarantee that any grievance mechanism is legitimate, accessible, transparent, safe and developed with the input of stakeholders?
17. Is the organisation able to co-operate with the remediation process where it is directly linked to an adverse impact on human rights or the environment? Will it be able to fulfil the requirement to prevent any additional harm being caused by providing guarantees that the harm in question will not be repeated?
18. Are there any voluntary sectoral or cross-sectoral due diligence action plans available for the organisation to participate in?
19. Is the organisation aware of the potential for fines to be imposed (calculated on the basis of turnover)?
20. Is the organisation aware of the defence that they have taken all due care in line with the provisions in the directive?

Enforcement and Supervision Under the Draft Directive

The draft directive provides that each member state should designate one or more competent authorities to be responsible for the supervision of the directive. The competent authorities will have the power to carry out investigations to ensure that undertakings comply with their obligations. The competent authority will be authorised to carry out checks on undertakings and interviews with affected or potentially affected stakeholders or their representatives.

Competent national authorities are required to put in place proportionate sanctions and are given the authority to impose proportionate fines calculated on the basis of an undertaking’s turnover.

Member states are to ensure that they have a liability regime in place under which undertakings can be held liable and remediation can be provided for any harm arising out of potential or adverse impacts on human rights, the environment or good governance where they have caused or contributed to the harm. This responsibility extends to undertakings under the control of member states.

Liability is prevented if the undertaking can prove that they took all due care in line with the directive.

Conclusions

According to the Commission’s study, only 37% of business respondents currently conduct environmental and human rights due diligence. Consequently, the implementation of this draft directive is likely to cause a sea change in the approach that organisations take in relation to identifying and managing their impacts. It’s particularly interesting to see the approach that is being taken to enforcement measures. In the context of environmental law, we have seen the positive impact of linking fines to turnover. This is also true of the UK Gender Pay Gap Regulations. We are also used to a ‘due diligence’ defence under environmental law. Introducing a ‘duty of care’ to undertake due diligence was proposed in the earlier study provided to the EU and has been met with support.

There is also a recognition that smaller organisations will need support through guidance and the creation of specific portals in order to meet their obligations.

How can Ardea International help?

We harness our legal expertise to provide commercial solutions for organisations. Drawing on our combined experience of environmental law and human rights law, we can help organisations to develop their human rights and environmental due diligence frameworks.

Consultancy

Ardea can support your organisation to develop a human rights and environmental due diligence framework to ensure that your ‘duty of care ‘ under the proposed directive will be met.

Training and Toolkits

• We provide training on this issue – sign up to our masterclass on ‘Developing an environmental and human rights mandatory due diligence framework’.
• We have a modern slavery toolkit that will help you to manage risk and carry out due diligence in relation to modern slavery. This complements our training.

Finally, keep an eye out for our FREE webinar series for 2021, which focuses on respecting human rights – this will coming soon on our website!

[1] https://investorsforhumanrights.org/sites/default/files/attachments/2020-04/The%20Investor%20Case%20for%20mHRDD%20-%20FINAL_0.pdf

[2] https://www.business-humanrights.org/en/latest-news/european-parliament-committee-on-legal-affairs-publishes-report-with-recommendations-to-eu-commission-on-mandatory-due-diligence/

[3] https://www.europarl.europa.eu/doceo/document/TA-9-2021-0073_EN.html