Under the EU Due Diligence law, companies will be required to identify and, where necessary, prevent, end or mitigate adverse impacts of their activities on human rights, such as child labour and exploitation of workers, and on the environment, for example pollution and biodiversity loss.
The EU Commission says that for businesses, the new rules will bring legal certainty and a level playing field. While for consumers and investors, they will provide more transparency.
The proposal establishes a corporate sustainability due diligence duty to address negative human rights and environmental impacts, it adds.
Industry stakeholders have been calling for a due diligence law for some time that holds companies responsible for the happenings in their supply chains, and that goes beyond voluntary action. Countries including Germany and The Netherlands have implemented their own versions. But in 2020, voters in Switzerland moved to reject a proposal that would have held businesses liable for human rights and environmental violations in their supply chain operations.
The new due diligence rules will apply to the following companies and sectors:
- Group 1: all EU limited liability companies of substantial size and economic power (with 500+ employees and EUR 150 million+ in net turnover worldwide).
- Group 2: Other limited liability companies operating in defined high impact sectors, which do not meet both Group 1 thresholds, but have more than 250 employees and a net turnover of EUR 40 million worldwide and more. For these companies, rules will start to apply 2 years later than for group 1.
Non-EU companies: Active in the EU with turnover threshold aligned with Group 1 and 2, generated in the EU.
But small and medium-sized enterprises (SME) are not directly in the scope of the proposal.
This proposal applies to the company’s own operations, their subsidiaries and their value chains (direct and indirect established business relationships). In order to comply with the corporate due diligence duty, companies need to:
- integrate due diligence into policies;
- identify actual or potential adverse human rights and environmental impacts;
- prevent or mitigate potential impacts;
- bring to an end or minimise actual impacts;
- establish and maintain a complaints procedure;
- monitor the effectiveness of the due diligence policy and measures;
- and publicly communicate on due diligence.
More concretely, this means more effective protection of human rights included in international conventions. For example, workers must have access to safe and healthy working conditions. Similarly, this proposal will help to avoid adverse environmental impacts contrary to key environmental conventions. Companies in scope will need to take appropriate measures (‘obligation of means’), in light of the severity and likelihood of different impacts, the measures available to the company in the specific circumstances, and the need to set priorities.
National administrative authorities appointed by member states will be responsible for supervising these new rules and may impose fines in case of non-compliance. In addition, victims will have the opportunity to take legal action for damages that could have been avoided with appropriate due diligence measures.
Group 1 companies need to have a plan to ensure that their business strategy is compatible with limiting global warming to 1.5 degrees Celsius in line with the Paris Agreement.
To ensure that due diligence becomes part of the whole functioning of companies, directors of companies need to be involved. This is why the proposal also introduces directors’ duties to set up and oversee the implementation of due diligence and to integrate it into the corporate strategy. In addition, when fulfilling their duty to act in the best interest of the company, directors must take into account the human rights, climate change and environmental consequences of their decisions. Where companies’ directors enjoy variable remuneration, they will be incentivised to contribute to combating climate change by reference to the corporate plan.
The proposal also includes, accompanying measures, which will support all companies, including SMEs, that may be indirectly affected. Measures include the development of individually or jointly dedicated websites, platforms or portals and potential financial support for SMEs. In order to provide support to companies the Commission may adopt guidance, including about model contract clauses. The Commission may also complement the support provided by member states with new measures, including helping companies in third countries.
Aim of due diligence proposal
The aim of the proposal is to ensure that the Union, including both the private and public sectors, acts on the international scene in full respect of its international commitments in terms of protecting human rights and fostering sustainable development, as well as international trade rules.
As part of its ‘Just and sustainable economy package’, the Commission has also presented a Communication on Decent Work Worldwide. It sets out the internal and external policies the EU uses to implement decent work worldwide, putting this objective at the heart of an inclusive, sustainable and resilient recovery from the pandemic.
“This proposal aims to achieve two goals. First, to address consumers’ concerns who do not want to buy products that are made with the involvement of forced labour or that destroy the environment, for instance. Second, to support business by providing legal certainty about their obligations in the Single Market. This law will project European values on the value chains, and will do so in a fair and proportionate way,” Věra Jourová, vice-president for values and transparency, said.
Didier Reynders, commissioner for justice added: “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.”
Meanwhile, Thierry Breton, commissioner for the internal market, noted while some European companies are already leaders in sustainable corporate practices, many still face challenges in understanding and improving their environmental footprint and human rights track record.
“Complex global value chains make it particularly difficult for companies to get reliable information on their suppliers’ operations. The fragmentation of national rules further slows down progress in the take up of good practices. Our proposal will make sure that big market players take a leading role in mitigating the risks across their value chains while supporting small companies in adapting to changes.”
The proposal will now be presented to the European Parliament and the Council for approval. Once adopted, member states will have two years to transpose the Directive into national law and communicate the relevant texts to the Commission.
The due diligence proposal’s “shortcomings”
While broadly welcomed, there is some concern over the proposal in its current form, namely its high company size threshold, which campaign group the Clean Clothes Campaign says is not in line with international standards such as the UN Guiding Principles on Business and Human Rights.
“The EC proposal limits the scope of application to companies with more than 500 employees/EUR150m turnover. This is lowered to 250 employees/EUR40m turnover for companies active in high-impact sectors including textiles, clothing and footwear, but with a further limitation to only “severe adverse impact,””it says.
Clean Clothes Campaign continues to call for all business enterprises, no matter their size or corporate structure, to be covered by the legislation.
“Such thresholds would create a huge black hole where companies can continue operating without real accountability for rights violations in their value chains. They are therefore great news for thousands of small and medium size fashion companies but terrible news for many millions of workers who make the clothes sold in European stores,” says Neva Nahtigal, lobby and advocacy strategist for Clean Clothes Campaign.
Another key area where the EU co-legislators need to firmly place rights holders at the centre is in the application of the proposed rules beyond direct suppliers, Clean Clothes Campaign says, adding semi-formal and informal working schemes, as well as unofficial subcontracting and home-based work, must be accounted for in all regulatory measures.
“The proposal opened a good pathway that will need to be reinforced to ensure that all workers are protected. Many of the most egregious human rights abuses, including forced labour and wage theft, occur further down the value chain,” says Muriel Treibich, lobby and advocacy coordinator for Clean Clothes Campaign, also noting the commitment to a new legislative initiative prohibiting the placing on the EU market of products made by forced labour that was announced on the same day in the ‘Communication on decent work worldwide for a global just transition and a sustainable recovery’.
“The European Union has a unique chance to protect the many millions of people whose labour goes into the products that Europeans use on a daily basis. Among other things, legislators must ensure that companies adapt their own purchasing practices. This is not possible without value chain mapping and traceability which, along with transparency, must be one of the mandatory foundations for due diligence overall.”
Clean Clothes Campaign calls on the European Parliament and the Council of the European Union to “seize this opportunity and adopt legislation that will adequately respond to the fundamental challenges and structural inequalities of today’s value chains.”
The European Commission did not respond to Just Style’s request for comment at the time of press.