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The European Parliament Lays the Foundations of a Corporate Due Diligence and Corporate Accountability

Tuesday 3 August 2021

Julie Zorrilla
Navacelle, Paris
jzorrilla@navacellelaw.com

Thomas Lapierre
Navacelle, Paris
tlapierre@navacellelaw.com

Stéphane de Navacelle
Navacelle, Paris
sdenavacelle@navacellelaw.com

Introduction

In line with the growing momentum across Europe aiming at establishing human rights and environmental due diligence duties and holding companies accountable for their operations and their impacts, Members of the European Parliament (MEPs) have adopted, on 10 March 2021 in plenary session, the legislative initiative report with recommendations for a directive on corporate human rights due diligence.[1]

In that regard, MEPs have called for the adoption of a directive that ensures due diligence for companies on their activities’ potential or actual impacts on human rights, the environment and good governance as well as access to legal remedies for victims.[2]

The MEPs’ recommendations follow the European Commissioner for Justice Didier Reynders’ announcement to introduce a due diligence directive in April 2020.[3] Although this resolution is not binding, it will undoubtedly reinforce, at a transnational level, already existing national initiatives such as the UK’s Modern Slavery Act in 2015, France’s Corporate Duty of Vigilance Law and the Netherlands’ Child Labour Due Diligence Law in 2017.

Although the resolution has been proposed and the legislation process is still at an early stage, four main takeaways can be summarised from the MEPs’ proposal for a directive on corporate due diligence.

All companies would be required to adopt a due diligence strategy

The MEPs’ proposal suggests that any future legislation on corporate due diligence should be applicable to all companies established within a European Union Member State, irrespective of their size.[4] MEPs have even suggested that it should apply to entities that are not established in the territory of the EU but that operate on the European market by selling goods or providing services.[5] Publicly listed small- to medium-sized enterprises (SMEs) and high-risk SMEs would also be subject to due diligence,[6] with technical and financial support to comply with their requirements.[7]

In that regard, it should be noted that the considered scope of application of the directive is extensive. As a mean of comparison, the French Duty of Vigilance Law, which was enacted in 2017 and which shares the same aims as the proposed directive, applies only to major companies (5,000 employees in France, or 10,000 employees worldwide)[8] and it has been estimated that only 265 companies currently fall under the French Duty of Vigilance Law’s scope.[9]

Companies would have to adopt a due diligence strategy and risk-map their activities’ potential or actual impacts on human rights, the environment or good governance

Under the MEPs’ proposal, companies would be required to identify, assess, prevent, cease, mitigate, monitor, potential and/or actual adverse impacts on human rights, the environment and good governance in their activities and value chain.[10] This duty of due diligence would not only relate to the impact of their activities but also to those directly linked to their operations.

Build up as a preventive instrument[11] – the proposal suggests requiring companies to establish a continuous monitoring of their activities using a risk-based methodology. A company would have to take proportionate measures considering the likelihood, severity, urgency and nature of its activities’ potential or actual impacts on human rights and the environment.

The context of its business operations, including geographic, sector or size and whether their operations and business relationships would cause or contribute to an adverse impact, would also be relevant factors considered.[12]

Companies would have to publish and communicate on their due diligence strategy[13] which would be evaluated and reviewed on a yearly basis.[14]

Companies’ due diligence obligation would be supervised by national authorities with powers to impose administrative sanctions to failing companies

MEPs suggest that Member States designate one or more national competent authorities responsible for the supervision of the application of this directive with necessary personal, technical and financial resources to carry out their duties effectively.[15] Investigative powers would be granted to the national competent authorities.[16]

Companies would also be subject to proportionate fines in case of infringements of their due diligence obligation, calculated on their turnover.[17] Companies could even be temporarily or indefinitely excluded from public procurement, state aid or public support schemes in case of violation in order to deter any violation.[18]

In that regard, it could be argued that such a directive would overcome difficulties of enforcement that had been identified by some legal commentators regarding the French law on Duty of Vigilance. In France, the supervision and enforcement of the French Law on Duty of Vigilance is de facto left to proactive non-governmental organisations (NGOs)[19] which, in some cases, have started to sue some companies before French Courts for violation of the French law on the Duty of Vigilance and are confronted with uncertainties regarding issues of jurisdiction between commercial and judicial courts.

Companies would have to compensate their contribution to potential/actual harm to human rights or environmental abuses

In their resolution, the MEPs suggest holding companies liable, by acts or omissions, for causing or contributing to harm to human rights, the environment or good governance.[20]

They suggest shifting the burden of proof from a victim to a company.[21] The company would have to prove that it respected its duty of care to avoid the harm and did not have control over a business entity involved in human rights or environmental abuse.[22]

MEPs have asked for such provisions of the directive to be overriding mandatory provisions in the meaning of the Rome II Regulation (ie, applicable by courts of EU Member States irrespective of conflict of laws questions).[23]

Member States would also be responsible for the determination of effective, proportionate and dissuasive penalties for non-compliance by companies with environmental due diligence obligations.

Conclusion

The road towards a binding directive on a corporate duty of vigilance remains long and whether such a piece of legislation will be as extensive in its scope of application as the MEPs have advocated for remains to be seen. It is now up to the European Commission to deliver on the matter of corporate due diligence. Nonetheless, the drafting and implementation of a binding directive on Members States is becoming a possibility which would effectively take environmental and human rights compliance to a new globalised level.

 

Notes

[1] European Parliament, Resolution of 10 March 2021 with recommendations to the Commission on corporate due diligence and corporate accountability (2020/2129(INL)), accessible at: https://www.europarl.europa.eu/doceo/document/TA-9-2021-0073_EN.html.

[2] European Parliament Press release, MEPs: Companies must no longer cause harm to people and planet with impunity, 10 March 2021, accessible at: https://www.europarl.europa.eu/news/en/press-room/20210304IPR99216/meps-companies-must-no-longer-cause-harm-to-people-and-planet-with-impunity.

[3] ‘EU Commissioner for Justice commits to legislation on mandatory due diligence for companies’, Business & Human Rights Resource Centre, 30 April 2020, accessible at: https://www.business-humanrights.org/en/latest-news/eu-commissioner-for-justice-commits-to-legislation-on-mandatory-due-diligence-for-companies.

[4] Articles 2.1 and 2.2 of the Recommendations for drawing up a directive of the European Parliament and of the council on corporate due diligence and corporate accountability. (‘1. This Directive shall apply to large undertakings governed by the law of a Member State or established in the territory of the Union. 2. This Directive shall also apply to all publicly listed small and medium-sized undertakings, as well as high-risk small and medium-sized undertakings’).

[5] Article 2.3 of the Recommendations for drawing up a directive of the European Parliament and of the Council on corporate due diligence and corporate accountability (‘This Directive shall also apply to large undertakings, to publicly listed small and medium-sized undertakings and to small and medium-sized undertakings operating in high-risk sectors, which are governed by the law of a third country and are not established in the territory of the Union when they operate in the internal market selling goods or providing services’).

[6] Article 2.1 and 2.2 of the Recommendations for drawing up a directive of the European Parliament and of the council on corporate due diligence and corporate accountability. (‘1. This Directive shall apply to large undertakings governed by the law of a Member State or established in the territory of the Union. 2. This Directive shall also apply to all publicly listed small and medium-sized undertakings, as well as high-risk small and medium-sized undertakings’).

[7] Article 15 of the Recommendations for drawing up a directive of the European Parliament and of the Council on corporate due diligence and corporate accountability (‘Specific measures in support of small and medium-sized undertakings’).

[8] Article 1 of the Law No 2017-399 of 27 March 2017 relating to the duty of vigilance of parent companies and ordering companies or the French Corporate Duty of Vigilance Law.

[9] Sherpa, CCFD, ‘Le radar du devoir de vigilance – Identifier les entreprises soumises à la loi’, June 2020, page 3, see  https://plan-vigilance.org/wp-content/uploads/2020/06/2020-06-25-Radar-DDV-Edition-2020.pdf.

[10] Article 1.2 of the Recommendations for drawing up a directive of the European Parliament and of the council on corporate due diligence and corporate accountability:

‘This Directive lays down the value chain due diligence obligations of undertakings under its scope, namely to take all proportionate and commensurate measures and make efforts within their means to prevent adverse impacts on human rights, the environment and good governance from occurring in their value chains, and to properly address such adverse impacts when they occur. The exercise of due diligence requires undertakings to identify, assess, prevent, cease, mitigate, monitor, communicate, account for, address and remediate the potential and/or actual adverse impacts on human rights, the environment and good governance that their own activities and those of their value chains and business relationships may pose’.

[11] European Parliament Press release, MEPs: Companies must no longer cause harm to people and planet with impunity, 10 March 2021 (‘MEPs stress that due diligence is primarily a preventative instrument that requires companies to take proportionate measures based on the likelihood and severity of the impact, the sector of activity, the size and length of the value chain and size of the undertaking’).

[12] Ibid.

[13] Article 6 of the Recommendations for drawing up a directive of the European Parliament and of the council on corporate due diligence and corporate accountability.

[14] Article 8.1 of the Recommendations for drawing up a directive of the European Parliament and of the council on corporate due diligence and corporate accountability (‘Undertakings shall evaluate the effectiveness and appropriateness of their due diligence strategy and of its implementation at least once a year, and revise it accordingly whenever revision is considered necessary as a result of the evaluation’).

[15] Article 12, s 1 and 2 of the Recommendations for drawing up a directive of the European Parliament and of the council on corporate due diligence and corporate accountability (‘1. Each Member State shall designate one or more national competent authorities responsible for the supervision of the application of this Directive, as transposed into national law, and for the dissemination of due diligence best practices. 2. Member States shall ensure that the national competent authorities designated in accordance with paragraph 1 are independent and have the necessary personal, technical and financial resources, premises, infrastructure, and expertise to carry out their duties effectively’).

[16] Article 13 of the Recommendations for drawing up a directive of the European Parliament and of the council on corporate due diligence and corporate accountability (‘Member State competent authorities referred to in Article 14 shall have the power to carry out investigations to ensure that undertakings comply with the obligations set out in this Directive, including undertakings which have stated that they have not encountered any potential or actual adverse impact on human rights, the environment or good governance’).

[17] Article 18.2 of the Recommendations for drawing up a directive of the European Parliament and of the council on corporate due diligence and corporate accountability (‘The competent national authorities may in particular impose proportionate fines calculated on the basis of an undertaking’s turnover’).

[18] Article 18.2 of the Recommendations for drawing up a directive of the European Parliament and of the council on corporate due diligence and corporate accountability (‘The competent national authorities may in particular impose […] temporarily or indefinitely exclude undertakings from public procurement, from state aid, from public support schemes including schemes relying on Export Credit Agencies and loans, resort to the seizure of commodities and other appropriate administrative sanctions’).

[19] For 2019: ActionAid, ‘Amis de la Terre France, Amnesty International, CCFD-Terres Solidaires, Collectif Ethiques sur l’étiquette, Sherpa, Loi sur le devoir de vigilance des sociétés mères et entreprises donneuses d’ordre – Année 1: les entreprises doivent mieux faire’, February 2019, see: https://plan-vigilance.org/wp-content/uploads/2019/06/2019.02.19-FR-Rapport-Commun-Les-entreprises-doivent-mieux-faire-1.pdf; for 2020: Sherpa, CCFD, ‘Le radar du devoir de vigilance – Identifier les entreprises soumises à la loi’, June 2020, see: https://plan-vigilance.org/wp-content/uploads/2020/06/2020-06-25-Radar-DDV-Edition-2020.pdf.

[20] Article 19.2 of the Recommendations for drawing up a directive of the European Parliament and of the council on corporate due diligence and corporate accountability (‘Member States shall ensure that they have a liability regime in place under which undertakings can, in accordance with national law, be held liable and provide remediation for any harm arising out of potential or actual adverse impacts on human rights, the environment or good governance that they, or undertakings under their control, have caused or contributed to by acts or omissions’).

[21] Recital 53 of the Recommendations for drawing up a directive of the European Parliament and of the council on corporate due diligence and corporate accountability (‘The burden of proof would be shifted from a victim to an undertaking to prove that an undertaking did not have control over a business entity involved in the human rights abuse’).

[22] Article 19.3 of the Recommendations for drawing up a directive of the European Parliament and of the council on corporate due diligence and corporate accountability (‘Member States shall ensure that their liability regime as referred to in paragraph 2 is such that undertakings that prove that they took all due care in line with this Directive to avoid the harm in question, or that the harm would have occurred even if all due care had been taken, are not held liable for that harm’).

[23] Article 20 of the Recommendations for drawing up a directive of the European Parliament and of the council on corporate due diligence and corporate accountability, 10 March 2021 (‘Member States shall ensure that relevant provisions of this Directive are considered overriding mandatory provisions [as defined by Article 16 of Regulation (EC) No 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations (Rome II)]’).