The EU Commission’s Proposal on Corporate Human Rights and Environmental Due Diligence

News

Today, February 23rd, 2022, the European Commission has adopted a proposal for a Directive on corporate sustainability due diligence. The intention behind the Directive is to create a more level playing field, while at the same time increasing transparency for consumers. The overarching goal is to set up a European Union (EU)-wide human rights and environmental due diligence (HREDD) framework to protect human rights globally and facilitate the green transition.

Some EU Member States have already implemented certain HREDD measures on the national level. The introduction of an EU-wide Directive is therefore very welcome, to prevent unfair competition and to prevent a race to the bottom between different Member States. The proposal will now be presented to the European Parliament and European Council for approval. Once it is officially approved by both bodies, the EU Member States will have two years to transpose the Directive into their national legal systems.

Scope

Complete measures: The proposed Directive does not apply to all EU-based companies. The complete set of measures imposed by the Directive will apply to: (a) EU companies that have more than 500 employees and a net turnover of more than €150 million; and (b) companies located outside the EU with a net turnover of more than €150 million within EU territory.

Simplified measures: Simpler and less stringent measures apply to (a) companies located in the EU with more than 250 employees and a net turnover of more than €40 million worldwide, and whose turnover was generated party (over 50%) in high-risk sectors; and (b) companies located outside the EU with a net turnover of more than €40 million in the EU and whose turnover was generated partly (over 50%) in high-risk sectors.

This means that Small and Medium Enterprises (SMEs) are not in the scope of the proposed Directive, which, given their nonetheless significant potential for adverse impact, is a major shortcoming.

The European Commission estimates that with the current scope of the proposed Directive, 13.000 companies within the EU will be subject, and 4.000 companies located outside the EU.

Human Rights and Environmental Due Diligence Obligations

The HREDD obligations imposed by the proposed Directive are the following:

·      Integration of due diligence into company policies;

·      Identification of actual or potential adverse human rights and environmental impacts;

·      Prevention or mitigation of potential impacts;

·      Ending or minimising actual impacts;

·      Establishing and maintaining a complaints procedure;

·      Monitoring the effectiveness of the due diligence policy and measures; and

·      Communicating on due diligence.

 These obligations are in line with the OECD Due Diligence Guidance for Responsible Business Conduct.

Established Business Relation

Although the companies as set out under the ‘scope’ section are subject to the proposed Directive, the obligations imposed will apply to their subsidiaries and across their value chains as well. In this regard, the European Commission draws an interesting distinction between an ‘established business relation’ – which is a direct or indirect business relationship which is or is expected to be of a lasting nature. By contrast, business relations that are not considered ‘established’ are exempt from the HREDD obligations. This potentially creates loopholes, as companies subject to the proposed Directive may opt to keep their relationships short, so as to not fall within the established business relation requirements.

Human Rights and Environmental Impacts

The Annex to the proposed Directive defines what it considers Human Rights and Environmental impacts of importance. The human rights impacts concern a list of 20 different issues, making explicit reference to the International Bill of Human Rights, the ILO’s Declaration on Fundamental Principles and Rights at Work, the EU Charter of Fundamental Rights, and other instruments relating to human trafficking, women’s rights, indigenous peoples, minorities, children, and people with disabilities.

For environmental impacts, the Annex refers to a list of conventions on biodiversity, chemicals, pollution, and waste. Moreover, the Annex further confirms that human rights and sustainability issues are interconnected by including a prohibition on measurable environmental degradation leading to (a) impairment of natural bases for preservation and production of food; (b) lack of access to safe and clean drinking water; (c) prevention of access to sanitary facilities; (d) harm to health, safety, the normal use of property or land, or the normal conduct of economic activity of a person; or (e) the affection of ecological integrity (e.g. deforestation).

Appropriateness

An important insertion in the proposed Directive is that it obligates companies in scope to consider the specifics of business relationships with regard to, for example, their sectors and geographical area, in order to properly determine how to conduct the HREDD customised to that specific business relationship.

Directors’ duties

In order to ensure that HREDD becomes integrated in companies’ operations, the proposed Directive introduces directors’ duties to set up and oversee the implementation of due diligence and to integrate it into corporate strategy. Moreover, directors must also consider the short-, medium-, and long-term impact on human rights, climate change, and environmental considerations when making operational decisions.

Enforcement

The proposed HREDD Directive imposes on EU Member States the obligation to set up national authorities to enforce the provisions regarding human rights and environmental due diligence. These authorities are permitted to either initiate an independent investigation, or to do so upon receiving substantiated concerns from rights holders or civil society. The national HREDD authorities may (a) request non-compliant companies to remedy their adverse impact or to impose certain measures; or (b) impose pecuniary sanctions in proportion to the company’s turnover.

Remedies for rights holders

In addition to enforcement by national authorities, the proposed Directive creates a civil liability where a company causes damage as a result of failure to properly conduct HREDD, leading to adverse impact that should have been identified, prevented and addressed through the HREDD processes.

However, this liability is excluded for damages arising due to the actions of an indirect partner, provided that the company subject to the Directive did conduct HREDD to a reasonably adequate extent.