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23 Feb 2022

European Coalition for Corporate Justice

Commentary by the European Coalition for Corporate Justice: Dangerous gaps undermine EU Commission’s new legislation on sustainable supply chains

Today’s proposal by the European Commission to minimise business’ destructive impact on workers, communities, and the environment is a turning point in the battle to end corporate impunity, but is riddled with flaws and exemptions, warned the European Coalition for Corporate Justice.

ECCJ director Claudia Saller said: “Companies are increasingly under pressure to take their social and environmental duties seriously. But many hide behind their complex supply chains to avoid accountability and dodge difficult questions. The Commission’s proposal is the first EU initiative of its kind and that in itself is ground-breaking, but it fails to deliver on the potential.”

The draft law would, for the first time, require EU companies with more than 500 employees and turnover of €150 million to prevent human rights and environmental abuses along their full supply chains, by carrying out so-called ‘due diligence’. In industries where the risk of exploitation is higher like agriculture and fashion, only companies with more than 250 employees and turnover of €40 million would be covered, while SMEs would be exempt. Non-EU companies in the single market that exceed these turnover thresholds would also be covered.

This limitation means the draft legislation only applies to less than 0.2% of EU companies. By restricting the scope so dramatically, the proposal wilfully ignores many harmful business operations, as staff size and annual turnover are not reliable indicators of how a company is impacting the lives of workers and communities worldwide.

Under the new law, companies could be held liable for harms committed at home or abroad by their subsidiaries, contractors and suppliers, and their victims will have the opportunity to file lawsuits before EU courts. This is an important step that creates a right to remedy for people affected by corporate malpractice.

However, a dangerous loophole risks making the law ineffective in preventing harm beyond the first tier of the supply chain – and impeding victims from holding companies liable. The text implies that companies could fulfil their obligations by adding certain clauses in their contracts with suppliers and offloading the verification process to third parties. Companies should not be allowed to shift their responsibilities on to their suppliers or to get away with harm by participating in voluntary industry schemes.

The draft law also does nothing to strike down serious legal hurdles in bringing transnational cases against companies – such as high costs, short time limits, limited access to evidence, restricted legal standing, and a disproportionate burden of proof...

...The proposed directive includes other important elements, such as setting up new supervisory authorities in EU member states to issue orders and impose dissuasive sanctions. When applying for public contracts, companies will have to prove they have not been sanctioned for due diligence breaches.

The Commission wants companies to adopt a climate transition plan in line with the 1.5 degree target of the Paris climate agreement. However, the proposal does not foresee any specific consequences for the breach of this climate duty, which risks making it ineffective.

Company directors will have to integrate human rights, the environment, and the climate into their decisions and oversee due diligence actions. Other governance rules previously considered by the Commission have been scrapped following fierce lobbying by industry groups...