EU publishes study on supply chain due diligence requirements


Our team: Tim Wright


The EU recently published a Study[1] into current due diligence requirements through the supply chain for the possible development of regulatory options at the EU level. The study, which was published on 20 February 2020, and runs to some 572 pages, was commissioned by the European Commission (EC) and carried out by a research consortium led by the British Institute of International and Comparative Law in partnership with Civic Consulting and LSE Consulting. A more digestible 85 page Synthesis Report[2] summarising the findings of the full report is also available.

Background

In March 2018, the EC published its Action Plan on Financing Sustainable Growth.[3] A key objective of the Action Plan is to assess the “possible need to require corporate boards to develop and disclose a sustainability strategy, including appropriate due diligence throughout the supply chain, and measurable sustainability targets.”

This was followed by a report released by the European Parliament in May 2018 calling for the EC to provide a pan-European legislative proposal for an “overarching, mandatory due diligence framework including a duty of care” to be based on the OECD Guidelines for Responsible Business Conduct for Institutional Investors[4] and the French Corporate Duty of Vigilance Law for companies and investors, including banks.

Focus

The Study focuses on due diligence requirements to identify, prevent, mitigate and account for adverse corporate impacts, including:

  • abuse of human rights;
  • health risks; and
  • environmental damage, including climate change.

It examines existing market practices and regulatory frameworks, as well as options for regulating due diligence in companies’ own operations and through their supply chain.

Regulatory Shift

The Study notes that the landscape has shifted significantly since its commission, with the Netherlands bringing in a Child Labour Due Diligence Law and a number of legal actions being brought under the French Corporate Duty of Vigilance Law. The Business and Human Rights Resource Centre’s website[5], which tracks initiatives towards mandatory due diligence laws, currently lists 13 Member States where such initiatives have been discussed or adopted.

However, the Study shows that while the standard of due diligence contained in the UN Guiding Principles on Business and Human Rights is increasingly being introduced into legal standards or proposed in Member States, only one in three businesses in the EU are currently undertaking due diligence which takes into account all human rights and environmental impacts.

Survey Results

There is currently no general duty at EU level which requires companies to undertake due diligence for their adverse human rights or environmental impacts. The majority of those interviewed by the Study’s authors thought that the current legal landscape does not provide companies with legal certainty about their human rights and environmental due diligence obligations. They were also unconvinced that the introduction of new voluntary guidance would have notable social, environmental and human rights impacts, although reporting requirements, such as the EU Non-Financial Reporting Directive, were felt to have had a positive impact in raising awareness on the internal conversations within companies. Tellingly, almost all interviewees favoured a policy change to introduce a general obligation at the EU level, although they differed on aspects of liability and methods of enforcement.

Regulatory Framework

The EU has already instituted a number of initiatives imposing certain due diligence-related obligations for human rights and environmental impacts. Examples include the EU Timber Regulation, the EU Conflict Minerals Regulation (which comes into force on 1 January 2021), and the EU Non-Financial Reporting Directive which applies to public-interest companies of over 500 employees across the EU including listed companies, banks and insurers.

Announcing the Study, Didier Reynders, Commissioner for Justice, said “Companies told us they believe that EU rules would here provide legal certainty and a harmonised standard for businesses’ duty to respect people and the planet. As working towards climate neutrality is among the top priorities of this Commission, I will make sure the results of this important study are taken into account for future work.”

The Study suggests that regulation requiring mandatory due diligence as a legal duty of care is likely to have the most significant human rights impacts. As such, we can expect to see new EU-level regulation on a general due diligence requirement for human rights and environmental impacts at some point in the future.

[1] https://op.europa.eu/en/publication-detail/-/publication/8ba0a8fd-4c83-11ea-b8b7-01aa75ed71a1/language-en

[2] https://op.europa.eu/en/publication-detail/-/publication/291b84d3-4c82-11ea-b8b7-01aa75ed71a1/language-en/format-PDF/source-search

[3] https://ec.europa.eu/info/publications/180308-action-plan-sustainable-growth_en

[4] https://mneguidelines.oecd.org/rbc-financial-sector.htm

[5] https://www.business-humanrights.org/en/human-rights-due-diligence-0

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