The rapid growth of supply chains across borders has brought undeniable benefits to developing countries. However, it has also negatively impacted these communities, in particular when it comes to environmental damage and human rights violations caused by the part of the business being conducted in such locations.
Unsurprisingly, ensuring that victims have effective access to justice and remedies has been a growing concern among the human rights community, especially as multinational enterprises sometimes operate in countries where the legal system and law enforcement functions are considerably below the European standard.
In light of this, for over two decades businesses have been encouraged to take responsibility for their supply chains on a voluntary basis.
Voluntary Due Diligence Frameworks
In 2008, the United Nations Human Rights Council welcomed the Protect, Respect, and Remedy Framework,1 which rests on three pillars:
1) The State duty to protect against human rights abuses by third parties
2) The corporate responsibility to respect human rights
3) The need for more effective access to remedies by the victims.
A couple of years later, in 2011, the United Nations Guiding Principles on Business and Human Rights,2 also known as UNGPs, were endorsed by the United Nations Human Rights Council as a way to implement the framework previously set forward.
The UNGPs were key to introduce the first global standard for due diligence and provided a non-binding framework for companies to put their responsibility to respect human rights into practice. Subsequently, the Organisation for Economic Co-Operation and Development (OECD) issued its Guidelines for Multinational Enterprises,3 which provide guidance to help companies carry out due diligence.
Despite the efforts to introduce a voluntary framework for due diligence, evidence gathered from academic research and civil society organisations shows that the voluntary approach is simply not enough to avoid business-related abuses, as there has not been significant progress in preventing human rights and environmental harm and in enabling access to justice. Therefore, legislative initiatives have been rising around the globe – particularly in Europe – aiming to set clear and binding rules to ensure responsible business conduct.
The European legislation on mandatory human rights and environmental due diligence
Different stakeholders have been urging the European Union to establish EU wide legislation on mandatory human rights and environmental due diligence, known as ‘mHRDD’, to be applied across all member States.
In this sense, after the Commissioner for Justice Didier Reynders announced that the European Commission would introduce a legislative initiative on mandatory due diligence for companies, the European Commission launched a public consultation on 26 October 2020 to gather further data and view of stakeholders on a potential initiative on sustainable corporate governance.
Following the public consultation, on 11 February 2021, MEP Lara Wolters presented her report on behalf of the European Parliament Committee on Legal Affairs with recommendations to the Commission on corporate due diligence and corporate accountability.4
Based on this report, on 10 March 2021, the European Parliament adopted a resolution with recommendations to the Commission on corporate due diligence and corporate accountability5, which contains a draft of the new directive on mHRDD setting out the provisions for a future EU wide regulation (the ‘Directive’).
The primary objectives of the Directive are:
1) To prevent and mitigate potential or actual adverse impacts on human rights, the environment and good governance in the value chain
2) To ensure that companies can be held accountable for such impacts
3) That anyone who has suffered harm caused by business’ activities can effectively obtain remedy in accordance with national law.
The Directive would apply to all large companies governed by the law of a Member State, established in the territory of the European Union or operating in the internal market, regardless of whether they are private or state-owned. It would also apply to publicly listed and high-risk small and medium businesses.
Human rights and environmental due diligence strategies
It is worth pointing out that by ‘due diligence’, the Directive refers to the company’s obligation to take all proportionate and commensurate measures and make efforts within their means to prevent adverse impacts on human rights and the environment from occurring in their value chain and to address such impacts when they occur.
Through this process, companies should identify, assess, prevent, mitigate, cease, monitor, communicate, account for, address and remedy the potential and/or actual adverse impacts in their own operations and their business relationships in the value chain.
Under the Directive, businesses have the obligation to produce a document in which they publicly communicate their due diligence strategy with reference to each of the stages that compose the due diligence process.
The strategy should be evaluated annually and revised whenever this is considered necessary. In order for a subsidiary to be deemed in compliance with the obligation to establish a due diligence strategy, the subsidiary should clearly state in its annual reporting (if this is the case) that it is included in the strategy of the parent company.
In order to ensure enforcement, the Directive lays down the Member States’ obligation to designate national authorities to monitor the correct implementation of companies’ due diligence obligations.
These authorities should have the power to carry out appropriate checks and impose effective proportionate and dissuasive administrative sanctions, taking into account the severity and repetition of violations. Those administrative fines should be comparable in magnitude to fines currently provided for in competition law and data protection law.
In addition to the consequences of non-compliance, the Directive will also establish a civil liability regime so that companies can be held liable in accordance with national law for any infringements arising out of adverse impacts on human rights, the environment, and governance that either they or the entities under their control have caused or contributed to by acts or omissions.
Notably, the liability regime also allows for companies to be exempt from liability when they can prove to have taken all due care in line with the Directive to avoid the harm in question, meaning that the harm has occurred despite all due care been taken.
The European Parliament recognised that time limitation, difficulties to access evidence, financial constraints, and vulnerabilities often constitute major practical and procedural barriers faced by victims of human rights violations in developing countries, which obstructs their access to effective legal remedies.
Accordingly, the Directive establishes that the burden of proof is on the companies to prove that they did not have control over a business entity involved in the human rights abuse. Moreover, sufficient time should be given for victims to bring judicial claims, taking into account their geographical location, their means and the overall difficulty to raise admissible claims before Member States courts.
Ultimately, this means that a whole new set of obligations will be imposed on a significant part of companies operating in Europe and that non-compliant companies can be held liable by national bodies. However, companies’ liability under this new set of rules is not limited to the mere non-compliance with such obligations.
In fact, by not complying with the requirement and obligations set under the Directive, companies will also be subject to the civil liability arising from the environmental harm and human rights violations caused elsewhere by the actions of the company itself as well as its supply chain.
Finally, it is worth highlighting that beyond its intrinsic positive effects, the Directive is likely to have relevant advantages, such as:
1) Levelling the playing field among companies operating in the EU
2) Bringing legal certainty and clarity
3) Establishing effective enforcement and sanction mechanisms.
A mHRDD normative will also improve access to remedy, as it is likely to include provisions on civil liability for non-compliant enterprises.
This will unequivocally contribute to improving the environmental and human rights situation at the global level – in particular in developing countries, where not only some of the most vulnerable population can be found but also where public institutions are often unable to guarantee the necessary protection to those most in need.
At the same time, the new mandatory due diligence standards will also impose a whole new set of obligations for companies, requiring them to implement substantial changes to their internal structure in order to adapt to this new reality and comply with the new rules. It will take time and effort but, hopefully, this will eventually foster a new business culture where human rights and the environment take precedence over profit.
A formal legislative proposal from the European Commission is now expected by June 2021. After being approved, the Directive will set a deadline by which EU countries must incorporate its provisions into their national legislation.
This blog post is the first one of a series that will provide updates on the developments of the European mandatory due diligence legislation. Please do not hesitate to contact us should you have any queries regarding the legislative proposal.
Authors: Camila Manfredini and Jessika Castañon, PGMBM Associates