The European Parliament’s (“EP”) hotly anticipated report proposing an approach to mandatory human rights due diligence has finally landed. In a landslide vote of 504 to 79 on 10 March 2021, the EP passed a resolution with recommendations for a draft directive to the Commission, which is actively considering this issue following a consultation which closed earlier this year.
Who might be caught?
The EP is recommending that any mandatory due diligence law applies to large EU companies and listed and high-risk SMEs. Such companies not incorporated in but providing goods or services in the EU would also be caught to create the level playing field EU companies have been demanding. Due diligence would need to cover not only human rights, but also environmental matters and good governance (with precise details on what each of these would cover yet to be defined).
What is the size and shape of the proposed due diligence obligation?
The centrepiece of the EP recommendation is the obligation to carry out effective due diligence on actual or potential adverse impacts on human rights, the environment and good governance.
In-scope companies would need to undertake a risk assessment to identify impacts and establish and effectively implement a due diligence strategy (unless no impacts are identified), which must be prepared taking into account the results of stakeholder engagement. They would need to map their value chain (up- and downstream), undertake proportionate due diligence on it, incorporate proportionate measures to prevent or mitigate impacts and include a prioritisation strategy for addressing them. In addition, companies would be required to establish grievance mechanisms. They would also be required to disclose their strategy and explain how their business strategy and policies align with it.
The EP also proposes that companies take steps which effectively cascade these requirements down their supply chains – for example, by way of contractual clauses, codes of conduct or independent audits.
Which remedies are proposed?
If a company has caused or contributed to an adverse impact, it would be required to provide for or cooperate with its remediation. Direct linkage to an adverse impact would require the company to cooperate with the remediation process to the best of its abilities. Those familiar with the UN Guiding Principles on Business and Human Rights will recognise this framework for allocating responsibility for remediation of impacts, although the EP has sought to define terms (like “contribution”) that in the past have proved tricky for companies seeking to understand what is expected of them in this area.
Compliance would be policed at Member State level, with competent authorities having the power to investigate with potentially broad powers to order suspension of activities and impose penalties (which may extend to fines based on turnover, exclusions from public procurement, state aid and public support (including support from Export Credit Agencies) as well as seizure of commodities).
Member States would also be required to ensure civil liability regimes permit companies to be held liable for any harm arising out of impacts that they, or an undertaking under their control, have caused or contributed to, and proposes legislative changes to make it easier for claims to be brought in the EU to ensure adequate redress. That said, the proposal recommends a defence should be available where entities can prove they took all due care to avoid the relevant harm or that the harm would have occurred in any event.
The EP recommendation is just that – a recommendation, with no binding effect on what the Commission might propose later this year. That said, it is a strong statement of intent and the landslide nature of the vote may weigh heavily on the minds of those working on the Commission’s proposal. Indeed, European Commissioner for Justice Didier Reynders has already given some hints as to what the Commission proposal might look and has indicated he expects the new rules to be adopted by 2024.
This is definitely one to watch.
For more information on human rights due diligence, see our podcast series: Human rights: What does it mean for businesses?