Know Your Supply Chain: Proposal for EU-wide Mandatory Due Diligence Legislation

The discussion around the introduction of a new (harmonised) aspect of corporate accountability comes at a time when certain Member States, including France and the Netherlands, have already adopted their own (national) legislation on mandatory human rights due diligence in recent years.   

More recently, in September 2020 the European Parliament's Committee on Legal Affairs published a report together with a proposal for the adoption of a Directive on corporate due diligence and corporate accountability. This newsletter briefly summarises the key features of this far-reaching draft directive (available here).

Key points of the draft directive
What is the objective of the proposed directive?
The draft directive is aimed at preventing and mitigating adverse human rights, governance and environmental impacts throughout an undertaking's entire value chain, as well as ensuring that undertakings can be held accountable for these risks and that anyone who has suffered harm in this regard can effectively exercise the right to obtain remedy.

According to the draft directive, establishing an EU-wide due diligence framework would create a "level-playing field" and could foster the emergence of a "global standard for responsible business conduct". To this end, the draft directive establishes minimum requirements for undertakings to identify, prevent and mitigate appropriate risks occurring throughout their value chain.

Which businesses would the regime target?
The proposed framework would cover:

• all undertakings governed by the law of a Member State or established in the territory of the Union, as well as
• limited liability undertakings governed by the law of a non-Member State and not established in the territory of the Union when they operate in the internal market selling goods or providing services.

The regime would apply to all undertakings (including those providing financial products and services), regardless of their size or sector of activity and of whether they are publicly owned or controlled undertakings. Member States may, however, decide to exempt micro-enterprises.

What risks are covered?
The undertakings would be required to perform due diligence of their value chain within the following risk areas:

• Human rights risks, defined as impacts that may impair full enjoyment of internationally recognised human rights as expressed inter alia in the International Bill of Human Rights, Charter of Fundamental Rights of the EU, key ILO conventions, as well as national constitutions and laws recognising or implementing human rights.
• Environmental risks, understood as impacts that may impair the right to a healthy environment, such as climate change, air and water pollution, deforestation, loss of biodiversity and greenhouse emissions.
• Governance risks, defined as impacts that may impair good governance of a country, region or territory, including corruption and bribery, as well as illegal campaign contributions or failure to comply with the applicable tax legislation.

The due diligence obligation should encompass an undertaking's entire value chain, not only its own operations. The notion of "value chain" seems to have a larger scope than "supply chain", encompassing all entities with which the undertaking has a direct or indirect business relationship (upstream and downstream, inside or outside the EU), and which either (a) supply products or services that contribute to the undertaking's own products or services, or (b) receive products or services from the undertaking.

What action is required?
Undertakings would need to set up a structured compliance system and carry out an ongoing risk assessment of their operations and business relationships to see if they cause or contribute to any of the relevant risks. If no risks are identified, the undertaking should publish a statement in that regard, along with its risk assessment, which must be reviewed if new risks emerge.

If risks are identified, then a due diligence strategy must be established in which identified risks should be specified together with a prioritisation policy where all risks cannot be addressed at the same time. Value chain due diligence should be "proportionate and commensurate" to the undertaking's specific circumstances, including its size, capacity, resources and leverage. The undertakings would inter alia need to indicate the policies and measures they intend to adopt to address identified risks, and to ensure by means of contractual clauses and the adoption of codes of conduct that their business relationships put in place and carry out appropriate policies in line with their due diligence strategy. Certain information about the undertaking's value chain would also need to be publicly disclosed.

Stakeholder involvement
The undertakings would need to engage in consultations with stakeholders (particularly trade unions) when establishing and implementing their due diligence strategy in a manner that is appropriate to their size and the nature and context of their operations.

Additionally, undertakings would need to establish a safe and accessible grievance mechanism to operate as both an early warning risk-awareness and as a remediation system to allow stakeholders to voice concerns regarding the existence of relevant risks.

Penalties and supervision
Member States should provide for proportionate and dissuasive penalties in case of legislation infringements. Repeated infringements, when committed intentionally or with serious negligence, should constitute a criminal offence. Member States should also designate a competent governmental authority to supervise the enforcement of the framework.

In terms of civil law implications, complying with the legislation would not constitute a defence to any civil liability which an undertaking may incur under national law. Furthermore, there is a concurrent proposal for light modification of Brussels I and Rome II regulations to facilitate the enforcement of business-related human rights claims involving an extraterritorial component by introducing additional choice of law and jurisdiction clauses.

Next steps
The report requires the Commission to propose legislation on mandatory supply chain due diligence "without undue delay". The Commission itself has just recently launched a public consultation on the wider topic of sustainable corporate governance, seeking – amongst other things – stakeholders' views on the need to introduce mandatory due diligence. The consultation ends in February 2021, whereupon the Commission is expected to submit its formal legislative proposal. We will continue to monitor further developments.