23 February 2022 | By Marten Männis
Corporate & Social Responsibility
EU-wide due diligence rules for large companies coming
On 23 February, the European Commission will present its proposal on a EU-wide due diligence legislation. The discussions on the necessity on the expansion of corporate social responsibility has gained noticeable traction over the past decade, with some European countries already having implemented such rules in their national regimes.
The EU has made combatting forced labour and addressing serious impacts of climate change a top priority, amongst a broader advocation and protection of human rights globally, as stated in its EU Action Plan on Human Rights and Democracy 2020-2024. It published a Guidance in 12 July 2021 to provide companies with a practical overview of how effective human rights due diligence practices, which address the risk of forced labour in supply chains, can be implemented. In the view of the EU, responsible business conduct by European companies plays a crucial role in ensuring that EU policies on human rights are effectively implemented, including with regard to labour. It has reiterated its commitment to promote the implementation of responsible business conduct across sectors and has implored EU companies to respect human rights, including labour rights, regardless of their location, size, sector, operational context, ownership and structure.
With regards to due diligence, the Guidance recommends using the OECD due diligence framework as a reference. This includes:
- Embed responsible business conduct into the company’s policies and management systems
- Identify and assess actual or potential adverse impacts in the company’s operations, supply chains and business relationships
- Cease, prevent and mitigate adverse impacts
- Track implementation and results
- Communicate how impacts are addressed
- Provide for or cooperate in remediation when appropriate
The plans for a EU-wide legislation on corporate accountability follow calls from numerous organisations across Europe to introduce increased measures and obligate companies to take responsibility for their operations overseas. The introduction of such EU-wide legislation, initially planned to be published in 2021, has already been delayed several times. However, the reported thresholds established under the draft proposal will only cover a small number of companies, wholly excluding SMEs from the responsibility. Similar to the system in place in France and Norway and the soon-to-be-implemented legislation in Germany, the Directive will establish thresholds for applicability through the number of employees of a company and the net global turnover.
Reportedly, the Directive will apply to companies with more than 500 employees and a net worldwide turnover above €150 million. Furthermore, companies, whereby half of their net worldwide turnover comes from a high-risk sector, such as the textile industry, mining, or agriculture, will also be subject to the regime, if they employ at least 250 employees and generate at least €40 million worldwide.
The reported proposal and the decision to exclude the majority of European companies from such due diligence rules will definitely meet considerable criticism, as there have been numerous calls to expand due diligence rules without consideration. As the EU has already admitted, voluntary approaches have been insufficient in addressing the environmental and human rights concerns that the legislation aims to tackle. In addition, several organisations have already criticised the proposal process of the upcoming Directive, highlighting a lack of transparency in the proceedings.
As seen from its Guidance on due diligence, the EU would ideally envision a system whereby all EU-companies implement and establish due diligence processes. Whether the upcoming Directive will be a first step of many, remains to be seen. The French legislation, in place since 2017, has been considered a “win” by environmental organisations, even though the scope could, similarly to the reported Directive, be considered too narrow.
Specific industries have already had EU-wide due diligence rules established. Regulation (EU) 2017/821 sets the supply chain due diligence obligations for Union importers of raw materials such as tin and gold from conflict-affected and high-risk areas. Furthermore, the European Commission has established a due diligence portal for companies that fall under the Regulation. The aim of the portal is to assist companies in sourcing minerals and metals and to comply with the regulatory requirements.