New EU law requiring human rights due diligence on the cards for 2021

European Commission announcement

In April 2020, the European Commissioner for Justice, Didier Reynders, announced that the European Commission was committed to introducing legislation in 2021 to make human rights due diligence mandatory for all EU companies following recognition that voluntary action has not brought about the necessary behavioural change at corporate level. Our understanding is that the Commission is expected to launch a public consultation on the proposal in July or September 2020.

Although detail on the proposed regime is still lacking, Reynders noted that work on consulting on the possible legislation was already underway and that he was keen to learn from the lessons of other national and international developments in this space, specifically calling out that done at OECD and ILO level.

The three reports referred to below provide helpful insight into what any potential EU legislation might look like, with Reynders’ announcement focussing heavily on the first of those reports.

Developing hard law in this area has in the past been a real challenge and was part of the reason why the UN Guiding Principles were prepared as a soft law mechanism. However, the situation has now changed.

Germany, which now holds the rotating presidency of the Council of the EU for the next six months, has expressed support for this proposal, providing the political will. And a coalition of investors with five trillion US dollars of assets under management submitted a petition in April 2020 calling for mandatory human rights due diligence, providing the financial backing for change. Perhaps most importantly, companies themselves are calling for change, as shown in the responses in the European Commission report and the December 2019 (updated in June 2020) cocoa industry call for due diligence obligations, providing the all important business buy-in.

European Commission report

Reynders’ announcement comes off the back of a report commissioned by the European Commission and prepared by the British Institute of International and Comparative Law (BIICL) and others in January 2020.

The BIICL report concluded that only one in three of the companies surveyed were currently undertaking due diligence measures and that around 70% of European businesses support the introduction an EU-wide requirement on all companies to undertake mandatory due diligence in their own operations and throughout their supply chains. However, the majority also thought that this wide scope should be tempered by a consideration of the relative size of companies and sector-specific issues.

The key element of any future regime is that due diligence should be undertaken as part of a standard of care owed by companies, rather than as a simple procedural requirement to undertake due diligence.

European Parliament – first report

The European Parliament also commissioned two reports to aid the development of its own position.

The first report, which was presented in June 2020, sets out that any such legislation should:

• encompass all human rights (as seen in UN Guiding Principle 12);
• cover all violations of such rights (albeit allowing for prioritisation of severe impacts);
• specifically refer to the needs of those in vulnerable situations (including women, children, migrants and indigenous peoples);
• bring in scope all companies (including state-owned enterprises), whether domiciled in the EU or providing services in or placing goods on the EU market;
• extend beyond businesses’ own operations to include all levels of supply chains (although the report stops short of suggesting upwards diligence e.g. encompassing customers); and
• impose substantive obligations to analyse, mitigate and remedy impacts.

European Parliament – second report

The second report, also published in June 2020, makes a number of detailed recommendations around what an EU due diligence law should do in relation to monitoring, enforcement and remedy.

For companies, the monitoring recommendations include a requirement to conduct periodic monitoring to address risks and impacts, complaints received and the effectiveness of remediation. The report also suggests that the regime should require the establishment of:

• a complaint mechanism that is open to workers and third parties;
• stakeholder engagement;
• standardised disclosure on company monitoring; and
• the involvement of company boards to provide approval for monitoring and reports.

There are also recommendations for requirements on Member States and the EU, which include establishing a central reporting repository and independent monitoring body and identifying in-scope companies (including naming and shaming non-compliant entities).

As regards enforcement and remedy, the recommended obligations, for Member States, include:

• setting effective, proportionate and dissuasive penalties;
• establishing enforcement rights and procedures for interested parties;
• providing effective means of remedy for victims (including judicial and non-judicial remedies); and
• providing competent bodies to investigate abuses, initiate enforcement actions and support victims.

Swiss Responsible Business Initiative

A development with some parallels to the EU mandatory due diligence proposal is the “Responsible Business Initiative”, which was first brought forward in Switzerland in 2016.

The far-reaching proposal seeks to require companies headquartered or registered in Switzerland, and companies under their control, to respect human rights and international environmental standards in their operations abroad and through their business relationships (i.e. covering their supply chains).

To achieve this aim, the proposal:

• makes it mandatory to conduct human rights and environmental due diligence;
• introduces direct liability of companies for violations of human rights and environmental standards by companies under their control; and
• reverses the burden of proof in part, requiring companies to demonstrate that they took the requisite care to prevent such violations or that the damage would have occurred even if the requisite care had been taken.

The initiative, supported by over 100,000 signatories, will be put to a national referendum as soon as November 2020 - following the rejection by the members of the initiative of a softened counter-proposal put forward by both chambers of the Swiss Parliament in early June 2020.