On Wednesday, March 10, 2021, the European Parliament (Parliament) adopted, with a very large majority,1 a resolution requesting that the European Commission (Commission) submit without undue delay a legislative proposal on mandatory supply chain due diligence, to be based upon a proposed directive (Directive) annexed to the Parliament resolution.2 The Directive draws heavily on the principles of human rights due diligence formulated in the UN Guiding Principles on Business and Human Rights (UN Guiding Principles).
The Parliament vote follows a number of important developments at the European level concerning future legislation governing businesses’ human rights obligations. In April 2020, the Justice Commissioner announced that the Commission (the EU body with executive powers to propose new laws) intends to present draft legislation requiring businesses to conduct human rights and environmental due diligence by early 2021.
Then, in September 2020, the Parliament’s Committee on Legal Affairs (JURI) published a draft report recommending that the Commission develop mandatory human rights and environmental due diligence legislation. The report included an annex in the form of a proposed draft directive. JURI adopted the report on January 27, 2021, albeit with revisions to the annex which forms the basis for the Directive now approved by Parliament.
The Commission also ran a public consultation on sustainable corporate governance from October 26, 2020 until February 8, 2021 (the Consultation).3 The results of the Consultation will complement the findings of two recent studies commissioned by the Commission on directors’ duties and sustainable corporate governance, and due diligence requirements through the supply chain,4 and will (along with the Directive) inform the Commission’s approach to its legislative proposal. In the meantime, the Directive provides an insight into the sorts of obligations a future human rights and environment due diligence law may impose.
Scope and application
The key aim of the Directive, according to Article 1, is to ensure that businesses “operating in the [EU] internal market fulfil their duty to respect human rights, the environment and good governance and do not cause or contribute to potential or actual adverse impacts […] through their own activities or those directly linked to their operations, products or services by a business relationship or in their value chains.”
Notably, the Directive extends to both EU domiciled and non-EU entities. Under Article 2, the Directive would apply to: (a) large undertakings incorporated or established in an EU Member State, and any small- or medium-sized undertakings (SMEs) which are either publicly listed or “high risk”; and (b) large undertakings, listed SMEs and SMEs operating in “high risk sectors” which are established outside the EU but selling goods or services in the internal market.
Due diligence requirements
Under Article 4, the Directive would oblige EU Member States to legislate to require that undertakings carry out due diligence with respect “to potential or actual adverse impacts on human rights, the environment and good governance in their operations or business relationships”. Businesses would be required to perform ongoing monitoring to identify and assess whether their operations and business relationships cause or contribute to, or are otherwise directly linked to, any such impacts.
Pursuant to Article 4, if an undertaking were to conclude that it does not cause or contribute to any relevant impacts, it would be obliged to publish a statement to this effect, along with its risk assessment; this would be subject to review by the undertaking if new impacts emerge. However, where impacts are identified, the undertaking should establish a due diligence strategy which: (i) specifies the impacts (and their assessed “level of severity, likelihood and urgency”); (ii) maps and publicly discloses “relevant” information regarding the undertaking’s value chain, including details of subsidiaries, suppliers and business partners; (iii) adopts and indicates all proportionate and commensurate policies and measures to cease, mitigate or prevent such impacts; and (iv) sets up a prioritisation strategy for addressing the potential or actual impacts, bearing in mind their assessed levels of severity, likelihood and urgency.
Building on the ongoing monitoring theme, Article 8 requires undertakings to evaluate the effectiveness and appropriateness of their due diligence strategy at least annually. Further, Articles 5 and 8 provide that undertakings shall consult with stakeholders such as trade unions when establishing, implementing and reviewing their due diligence strategy.
Article 6 would require undertakings to publish their due diligence strategies on their websites. Member States and the Commission would also establish a European centralised platform to which enterprises should upload their due diligence strategies and statements.
Under Article 9, undertakings would need to “establish a grievance mechanism, both as an early-warning mechanism for risk-awareness and as a mediation system”, to allow any stakeholder to voice their concerns (with the option of anonymity) in relation to any human rights, environmental or governance impacts. Such grievance mechanisms would need to comply with the “effectiveness criteria” set out in UN Guiding Principle 31.5
Article 10 would require Member States to ensure that any undertaking that identifies that it has caused or contributed to an adverse impact, must provide for remediation or co-operate with the remediation process. Potentially appropriate remedies would be determined in consultation with the affected stakeholders, and could include both financial and non-financial compensation, public apologies and restitution, as well as the prevention of additional harm through guarantees of non-repetition. Notably, Member States would also be obliged to ensure that such remedies would not prevent those affected from bringing civil proceedings under national laws.
Competent Authorities: Supervision and Investigations
Pursuant to Article 13, competent authorities would also be empowered by Member State domestic law to carry out investigations to ensure compliance by undertakings with the Directive. Such investigations could either be conducted by a relevant authority taking a “risk-based approach”, or in response to relevant information such as the “substantiated and reasonable concerns” of a third party. In fact, the Directive provides that Member States should take steps to facilitate the submission of such complaints.
Guidelines and assistance
Under Articles 14 and 15, the Commission would be responsible for the publication of general non-binding guidelines and practical guidance for businesses, which would take into account the UN Guiding Principles and other key international standards. It is envisaged that assistance would also be provided to SMEs, including through portals established by Member States for the provision of guidance, and EU financial support to facilitate due diligence.
Sanctions and civil liability
Member States would have discretion in terms of the penalties to be adopted for non-compliance by undertakings with the Directive. Article 18 provides that such penalties shall be “effective, proportionate and dissuasive”. Penalties could include fines or the exclusion of undertakings from public procurement, state aid and public support schemes (e.g. export finance).
It is notable that under Article 19, compliance with the Directive would not absolve a business of any potential civil liabilities under national law. Indeed, Member States would be obliged to ensure that their domestic legal systems allow for undertakings to be held liable for adverse human rights, environment or governance impacts which they or their controlled undertakings cause or contribute to, subject to certain defences (e.g. if an undertaking demonstrates that it exercised “all due care” to avoid the harm).
Further, under Article 20, the Directive’s governing law requirements would also constitute “mandatory provisions” for the purposes of the EU regulation on the law applicable to non-contractual obligations (“Rome II”)6 – the effect being that Rome II would not apply in civil claims before Member State courts to limit the application of the Directive.
Under Article 21, Member States would have two years to transpose the Directive into national law, once it comes into force.
Time will tell how closely the draft text of the Directive approved by Parliament resembles any eventual EU law promulgated by the Commission. A number of provisions and terms used will need to be subject to close scrutiny to ensure efficacy and comprehensibility. We note, for example, that some definitions lack clarity,7 and the wording and scope of certain articles is unclear (e.g. there is an inconsistency in how the terms “potential impacts” and “actual impacts” are used in relation to remediation obligations8).
The Commission’s approach will at least partly be informed by its conclusions distilled from stakeholder responses from the Consultation. While the Consultation was linked more broadly to the Commission’s sustainable governance initiative, and addresses a wide range of issues including (most notably) directors’ duties, the notion of a ‘due diligence duty’ for businesses was a key focus. A formal legislative proposal from the Commission is now expected by June 2021.