Corporate Due Diligence: What the potential EU legislation will mean for companies globally.News
On March 10th, 2021, the Parliament of the European Union (EU) adopted a draft Directive on Corporate Due Diligence and Corporate Accountability. This Directive has the potential to become EU law if taken up by the Commission and turned into a legislative framework. If this happens, the legislation will need to be implemented by the EU Member States within the next two years. However, as will be set out in more detail below, the draft Directive suggests that the legislative framework may have implications for companies located outside the borders of the EU.
The need identified by the European Parliament for a mandatory due diligence regime stems from concerns that a voluntary regime is insufficient. This is corroborated by a recent report by the European Commission that only one in every three businesses is meeting its due diligence obligations throughout its value chain. By implementing a more robust and mandatory framework for corporate due diligence, companies are required to take more responsibility for their activities and may be held accountable if these activities have a negative impact on human rights or the environment.
The Draft Directive
The Directive put together by the European Parliament is a comprehensive document which broadly covers the following topics:
- An obligation on companies to implement ongoing monitoring to identify potential or actual negative impacts on human rights, the environment, or good governance;
This obligation is fundamental to the other topics of the Directive. Companies covered under the Directive (read below which companies are covered) must comply with all provisions detailed below. Lack of compliance may result in legal or financial repercussions.
- Development of due diligence strategies by companies in mutual consultation with relevant stakeholders;
Companies covered under the Directive must produce and publish a due diligence strategy indicating (1) how the company potentially or actually has an adverse impact on human rights, the environment, or good governance; (2) what the company’s value chain is; (3) the prioritization strategy implemented by the company. When risks are identified by the company, the effectiveness and appropriateness of the due diligence strategy must be evaluated annually. The public statements are subject to review whenever new risks emerge.
- Remedies and mitigation strategies for companies that have identified an adverse impact;
If a company through its due diligence strategy has identified that its activities potentially or actually are causing an adverse impact on human rights, the environment, or good governance, the company is required to cooperate to mitigate or remedy the impact. Prevention is always the best option, but proper mitigation and remediation may do a lot to limit (1) adverse impact on stakeholders, and (2) financial and reputational harm to the company. Potential remedies include: financial or non-financial compensation, mea culpa’s, restitution, or a guarantee of non-repetition.
- Establishment of a grievance mechanism by companies;
Companies are required to set up a grievance mechanism, which addresses any human rights, environmental, and governmental risks. If issues are raised through the grievance mechanism, the company must report on these issues, as well as publicly address how it is taking steps to solve, mitigate, or remedy these issues. The European Parliament has linked this requirement to the United Nations’ Guiding Principle 31, which deals with non-judicial grievance mechanisms. According to this Guiding Principle, a grievance mechanism must be legitimate, accessible, predictable, safe, equitable, transparent, rights-compatible, and adaptable).
- An accountability mechanism so that individuals harmed have access to justice and a fair trial.
The Directive requires the EU Member States to set up national legislative frameworks to ensures that businesses can be held accountable for adverse impacts. These accountability mechanisms also aid those who have suffered as they are provided with access to justice for corporate wrongdoings.
Which companies are covered under the Directive?
Even though the draft Directive is EU legislation, if it is implemented in its current form, the legislation will have an impact on companies globally. Namely, the Directive would apply to all companies incorporated, domiciled, or established within the EU, but also to all non-EU enterprises who do business in the EU. Any non-EU based company that offers services or goods to businesses of consumers in the EU are therefore also subject to the Directive.
However, the Directive does not apply to any company. The EU Parliament has taken into account that not all companies are of the same kind and size, and therefore they maintain that a company should comply with the Directive in proportion to the impact they have.
It is expected that the obligations will apply to:
- Large companies with more than (i) 250 employees; (ii) €50 million annual turnover; or (iii) a balance sheet total exceeding €43 million.
- Companies that are publicly listed regardless of their size, turnover, or balance sheet.
- Small and medium sized entities that do not meet the size, turnover, or balance sheet requirements but which are deemed ‘high risk’.
- Any company providing financial services and products.
Finally, the necessity of a company to take action under the Directive will depend on:
- Severity and likelihood of adverse impacts;
- Sector of activity;
- Size of the undertaking;
- Nature and context of the undertaking’s operations (including geography);
- Business model;
- Position in the value chain; and
- Nature of the business’s products and services.
Now that the EU Parliament has published its draft Directive on corporate due diligence and accountability, it now passes the baton to the European Commission. The Commission will be tasked with drafting the formal legislative proposal based on the Directive. This proposal is set to be presented to the Parliament during the summer of 2021.
What can we do to help you?
At LoudLaw, we can assist any company with establishing the necessary policies and procedures to comply with the obligations under the draft Directive. As specialists in the business and human rights industry, we are equipped to help you monitor your value chain and to establish procedures to handle potential or actual threats to human rights, the environment, or the governance of your company.