After postponements and many complaints, the European Commission has finally published proposed new rules for EU companies to undertake sustainability and human rights due diligence in supply chains.
The measures aim to spread due diligence practices across the European Union, which has developed a patchwork of measures after some states imposed human rights checks on companies while others held back. The move has been hailed as an “important step” as policymakers push EU firms to focus on sustainability.
Didier Reynders, the EU’s commissioner for justice, says the proposals will be a “game changer”. “We can no longer turn a blind eye on what happens down our value chains,” he says.
According to Phil Bloomer, executive director of the Business and Human Rights Resources Centre, the proposals are a “welcome development”.
“If agreed and gaps are closed, the law will provide improvements for workers and communities facing abusive companies: support responsible companies against unscrupulous competitors; and promote prosperity,” he says.
EU proposals for human rights rules
Altogether as many as 16,800 EU companies may be affected by the new human rights rules. The proposals apply to EU companies with either 500 or more employees or with a turnover of €150m or more. Another set of companies operating in “high impact sectors” with more than 250 workers, or turnover of €40m or more, will also be affected. Non-EU companies of the same size operating in EU states will also be caught by the reforms.
The new rules will allow states to impose fines for non-compliance and introduce a civil liability allowing victims to take legal action against companies for damages “that could have been avoided with appropriate due diligence”.
The largest companies will have to compile a “plan” to ensure their businesses are “compatible with limiting global warming to 1.5C, in line with the Paris climate agreement”.
The proposal will also impose a new duty on company directors to “set up and oversee” due diligence and its integration into corporate strategy. The duty also demands directors take into account human rights, climate change and environmental consequences of their decision-making.
The proposals follow a demand from European parliamentarians to push ahead with mandatory due diligence. At the time they said efforts to encourage voluntary human rights due diligence in supply chains had failed, and that compliance with a new law should be a condition of entry to the single market.
Risk governance and analysis
The reform proposals have been widely welcomed, but industry observers and NGOs were keen to highlight aspects they believe are missing.
ACCA, a global association for accountants, says the proposals should include disclosures about board composition and scenario analysis of the risks companies face in relation to human rights and sustainability. It also calls on companies to set and report on environmental and social targets.
According to Rachael Johnson, head of risk management and corporate governance at ACCA, many companies realised during the pandemic that their risk governance was “misaligned”.
“There needs to be more due diligence,” Johnson says, “so more questions asked and checked over longer histories and shorter time horizons if they [companies] are to build resiliency and not get hit hard again.
“Indeed, when it comes to the existential risks we face today something that is not material now could easily be tomorrow, so the monitoring must be continuous.”
Others worry that the rules will apply to too few companies, fail to protect the “defenders” of human rights and the environment (such as NGOs and unions) and that there may be loopholes.
According to Phil Bloomer, “the limitation of due diligence to ‘established business relationships’ could represent a major loophole—unscrupulous brands graze the planet for the cheapest labour and therefore have far fewer ‘established’ suppliers.”
Pressure to ‘speed up’ due diligence reform
Just weeks ago a group of 100 companies, including Ikea, Danone and Aviva Investors, jointly signed a letter calling on the European Commission to speed up work on due diligence reforms.
This followed calls last year from a host of international NGOs, among them Amnesty International, Oxfam and Friends of the Earth, demanding to know what was happening with the draft proposals.
This week’s document will now go before the European Parliament and Council for approval. If adopted, member states will have two years to implement the new directive into national law. Human rights and sustainability due diligence is on its way for companies across the EU.