European Parliament Adopts Legislative Initiative on Corporate Due Diligence and Corporate Accountability

On 10 March 2021, the European Parliament adopted a legislative initiative that calls for the Commission to prepare a directive proposal on mandatory supply chain due diligence. The new legislation would provide that businesses operating in the internal market are obliged to respect human rights, the environment and good governance not only in their own activities, but also in their value chains and through the activities of the operators with whom they have direct business relationships. Moreover, the companies would have the obligation to prevent and mitigate any adverse impacts that may occur.

The new directive would be applied to a broad range of large and listed companies, including all large businesses that are governed by the laws of an EU Member State or established in the territory of the European Union as well as all publicly listed small and medium-sized enterprises (“SMEs”) and the SMEs operating in a high-risk sector. In addition, the scope of the directive would cover businesses that are not established in the territory of the EU and that are governed by the laws of a third country if they sell goods or provide services in the internal market. Thus, in the future, the companies that want to access the internal market, including those established outside the EU, would have to prove that they comply with the due diligence obligations.

The new legislation would extend the companies’ duty of care substantially in the fields of human rights, governance and environmental liability. The directive would also introduce new, broader and less defined standards for assessing environmental liabilities, which depart from the prevailing practice of environmental law.

The new directive would also stress the importance of enforcement as the proposal contains a grievance mechanism, new types of remedies and provisions concerning investigations carried out by and sanctions imposed by authorities as well as a possibility for stakeholders to initiate civil claims against companies in the EU.

Under the draft directive, the companies would have to identify, address and remedy all the aspects of their value chain that could violate human rights (e.g. social, trade union and labour rights), harm the environment (contributing to e.g. climate change or deforestation) or act in contrary to good governance (e.g. corruption). The companies should carry out the due diligence practice in an ongoing manner as well as take proportionate preventive measures.

The businesses would have an obligation to establish and effectively implement a due diligence strategy. The strategy would consist of specifying the potential or actual adverse impacts, mapping and disclosing information of the company’s value chain as well as adopting proportionate policies and measures to cease, prevent or mitigate adverse impacts.

Further, the companies would be obliged to ensure that their business relationships are in line with their due diligence strategy, for instance by means of framework agreements, contractual clauses, codes of conduct or audits. Additionally, undertakings should ensure that their purchasing policies do not cause or contribute to any potential or actual adverse impacts on human rights, the environment or good governance, and verify that their subcontractors and suppliers comply with their obligations respectively. The European Environmental Agency and the Executive Agency for SMEs will publish non-binding guidelines to clarify the required due diligence practice.

Large undertakings as well as SMEs will be provided with an opportunity to publish a statement concluding that, based on their due diligence inspection, they do not cause, contribute to, or have a direct link to any potential or actual adverse impact on human rights, the environment or good governance. This would exempt them from the obligation to establish a due diligence strategy described above.

Pursuant to the new directive, the companies would be obliged to provide a grievance mechanism that allows any stakeholder to express reasonable concerns regarding the adverse impacts on human rights, the environment or good governance. The mechanism would work both as an early warning mechanism for risk awareness and as a mediation system for the stakeholders.

In order to guarantee effective remedies for the victims of e.g. human rights violations, the proposed directive obligates the Member States to adopt sanction mechanisms as well as civil liability regimes to hold companies liable for their actions. The new EU legislation would enable victims as well as stakeholders in third countries to take legal actions against companies.

The grounds for an action are rather broadly defined in the draft directive: “any harm arising out of potential or actual adverse impacts on human rights, the environment or good governance that the companies, or undertakings under their control, have caused or contributed to”. The proposal also imposes a stringent burden of proof on companies. In order to be discharged from the liability, the companies should be able to prove that they have taken all due care in line with the directive to avoid the harm in question, or that the harm would have occurred even if all due care had been taken.

In respect of environmental harm, the challenge potentially posed by the liability mechanism that is based on a duty of care is that the concept of liability is not traditionally understood similarly in the environmental law. Even if the obligation to avoid causing environmental harm is assessed under the standards recognised in international and EU law, these standards are significantly less defined when compared to the currently applied grounds for environmental liability.

Additionally, environmental impacts, such as the impairment of biodiversity and contributing to the climate change, are not as straightforward as human rights violations when it comes to causality between the company’s actions and such impacts. This may pose challenges e.g. with respect to the companies’ burden of proof. The published draft directive does not offer any differentiated approach to environmental impacts, which we deem as a structural problem that needs be monitored during the process of the directive preparation.

The Commission has announced that it will present its legislative proposal for a directive on corporate due diligence and corporate accountability later this year.

Borenius’ lawyers are available to assist in addressing any questions you may have regarding the above or due diligence inspections relating to human rights, environment and corporate governance in general.