European Commission Publishes Framework for Mandatory Due Diligence Law

The European Commission published a 69-page directive that is meant to be the foundation for European Union legislation requiring that large companies implement due diligence on environmental and social costs in their supply chains. The European Parliament and European Council will vote on the proposal, and if it is adopted, EU countries will have two years to write national laws to implement it.

The EC said that because voluntary action hasn't been effective, "negative externalities from EU production and consumption are being observed both inside and outside the Union. Certain EU companies have been associated with adverse human rights and environmental impacts, including in their value chains. Adverse impacts include, in particular, human rights issues such as forced labour, child labour, inadequate workplace health and safety, exploitation of workers, and environmental impacts such as greenhouse gas emissions, pollution, or biodiversity loss and ecosystem degradation."

The proposal says that initially, EU-headquartered companies with worldwide revenues, minus the cost of goods sold, of more than 150 million Euros and more than 500 employees in the EU, and foreign companies with more than 150 million Euros in sales, minus the costs of goods sold, within the EU, will be those required to comply. After two years, rules will extend to companies "in sectors where a high-risk of human rights violations or harm to the environment has been identified" such as textiles, minerals and agriculture, if those companies have at least 250 employees and sales, minus the cost of goods sold, of 40 million Euros worldwide, if they are EU-based, or do that much business in the EU, if they are foreign firms.

The EU estimated that about 9,400 EU-headquartered companies and about 2,600 foreign companies would be in the first group, and about 3,400 EU companies and about 1,400 foreign companies would be in the later group.

The largest companies also will "need to have a plan to ensure that their business strategy is compatible with limiting global warming to 1.5 °C in line with the Paris Agreement," a fact sheet said.

This is important, the EC said, because while EU environmental law covers company requirements, it generally doesn't apply to supply chains outside the EU, "where up to 80-90% of the environmental harm of EU production may occur."

The due diligence will need to cover:

• identifying actual or potential adverse human rights and environmental impacts
• preventing or mitigating potential impacts
• minimizing or terminating actual impacts
• establishing and maintaining a complaints procedure
• monitoring the effectiveness of the due diligence policy and measure
• publicly communicating on the firm's due diligence.

The proposal said that the way that third-country companies' criteria are defined ensures that foreign companies are not more likely to be covered by the requirements.

The EC heard from stakeholders over the year that it has been working on the proposal, and large companies said they welcomed an EU legal framework for mandatory due diligence since individual countries have started to introduce legislation. Having an EU-wide standard improves legal certainty, the companies said. "Citizens and civil society associations perceived the current regulatory framework as ineffective to ensure corporate accountability for negative impacts on the human rights and environment," the EC wrote. "Companies indicated that they feared the risk of competitive disadvantages vis-à-vis third-country companies that do not have the same duties. Accordingly, most respondents agreed that due diligence rules should also apply to third-country companies which are not established in the EU but carry out activities of a certain scale in the EU."

Still, each country's administrative authorities will be responsible for enforcement, and will have the authority to impose fines if companies don't comply. Victims will also be able to sue for damages, if those damages could have been avoided with appropriate due diligence.

"This Directive clarifies that any sanction imposed due to non-compliance with the due diligence obligations has to be proportionate. If the public authorities that investigate the company’s compliance with this Directive identify a failure to comply they should first grant the company an appropriate period of time to take remedial action," the EC wrote. "The Directive outlines a limited number of sanctions that should apply in all Member States but leaves it to the Member States to ensure a proportionate enforcement process, in line with their national law. When pecuniary sanctions are imposed, they shall be based on the company’s turnover to ensure their proportionate level."

In the press release announcing the proposal, EU Justice Commissioner Didier Reynders said, “This proposal is a real game-changer in the way companies operate their business activities throughout their global supply chain. With these rules, we want to stand up for human rights and lead the green transition. We can no longer turn a blind eye on what happens down our value chains. We need a shift in our economic model. The momentum in the market has been building in support of this initiative, with consumers pushing for more sustainable products. I am confident that many business leaders will support this cause.”