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2 Mar 2022

Johannes Blankenbach and Phil Bloomer, Business & Human Rights Resource Centre

EU corporate accountability draft directive: Driver of business respect for people & planet or missed opportunity?

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Photo: sinonimas, Getty Images via Canva

The EU Commission’s legislative proposal for a Corporate Sustainability Due Diligence directive was published on 23 February 2022. After multiple delays, the release is a crucial first step towards mandating human rights and environmental due diligence (mHREDD) for EU-operating businesses. But much remains to be done to make the future legislation effective.

European governments, trade unions, civil society and businesses have consistently called for effective legislation to improve corporate accountability, in line with the UN Guiding Principles (UNGPs) and OECD Guidelines. This is a historic opportunity for the EU to transform the business model to deliver greater shared prosperity and tackle climate breakdown, as Commissioner Reynders has highlighted.  The stakes are high as vested interests use their lobby power to insist on business as usual.

There are key positives in this draft that must be built on. The due diligence obligation of companies subject to the law appears to extend to risks and harms along their supply and value chain, upstream and downstream; the rights and violations to be addressed through due diligence are fairly comprehensive; and there is a civil liability mechanism, complemented by administrative oversight and sanctions. However, as many in the movement have stressed, dangerous loopholes exist in and beyond those categories which risk seriously undermining the transformative potential of this initiative.

Issues of scope and reach

While it is encouraging to see that a range of financial actors would explicitly be subject to the law, overall only a tiny percentage of EU-operating businesses would be included in the proposed legislation’s personal scope, and no SMEs: the turnover and employee number thresholds for companies to be covered are simply too high (500 employees and over €150m net turnover, 250/€40m for a number of high-risk sectors). The UNGPs and OECD Guidelines already ensure proportionality by stipulating that, while the responsibility to respect human rights and the environment applies to all businesses, the means through which a company meets this standard will vary according to its size and the severity of its impacts, among other factors.

Compared to company scope, the list of violations to be prevented, addressed and remediated through due diligence seems fairly comprehensive, although stronger on human and labour rights than environmental standards. Having the right to strike and the prohibition of withholding an adequate living wage explicitly covered in the annex are welcome developments. However, the UNGPs state that companies may potentially impact any of the internationally recognised human rights, and several central business and human rights tenets are missing. These include ILO 190 on Eliminating Violence and Harassment in the World of Work, the UN Declaration on Human Rights Defenders, and a clear reference to Indigenous peoples’ right to free, prior and informed consent, among others – as well as climate change impacts as an explicit aspect of due diligence.

According to the Commission’s proposal, large EU-operating companies would, in principle, have to identify, prevent and address risks and adverse impacts across their entire supply and value chain, including subsidiaries and direct and indirect business relationships – but only if these are ‘established’. Limiting the reach and obligation in this way risks undermining the UNGP- and OECD-outlined focus of appropriate action on where in the value chain the company’s salient risks and impacts are, independent from the nature or proximity of a business relationship. Unscrupulous brands are grazing the planet for the cheapest labour and therefore have far fewer ‘established’ suppliers, and at worst the proposal could even create perverse incentives for ‘supplier-hopping’. Long-term supply chain relationships and greater transparency are important building blocks for effective due diligence, although this does not mean there is an excuse for due diligence inaction if supplier sites are not (yet) known. Moreover, it is also concerning that the draft limits financial actors’ due diligence obligations even further to only the pre-service phase and large clients.

Beyond tick-box approaches towards meaningful engagement

The draft risks cementing a failed approach to achieving effective due diligence. The Resource Centre with many allies and companies have catalogued the failure of due diligence that cascades human rights responsibilities through complex supply chains by simply including them in contracts and asking for a compliance statement from social auditors. Contracts can support due diligence, especially if they also reflect obligations of the buyer to implement responsible purchasing practices. However, an overreliance on contractual assurances from first-tier suppliers to comply with and further cascade due diligence requirements in their supply chains, could risk fueling tick-box approaches and accountability gaps. The law must not result in lead firms overlooking other, more effective ways to influence suppliers across the value chain, including adjustments to own problematic business models and purchasing and pricing practices; and it must not allow them to avoid responsibility (and liability) through provisions on contractual clauses and third-party auditing. Such ambiguities need to be addressed and elements of genuine due diligence reinforced throughout the proposal.

The key element for human-centric due diligence is effective and safe engagement with affected stakeholders, including workers, unions and human rights and environmental defenders: to understand risks and impacts, to co-design adequate responses, and to verify and track their effectiveness through rightsholder-driven approaches. While we see starting points for such engagement in the proposal, it could be interpreted as merely optional where it is central. The role of engagement with affected stakeholders including defenders in due diligence, and the specific risks they face, must be acknowledged both in the directive and annex.

Fair access to justice and remedy, finally?

Importantly, the proposal includes a civil liability regime, in addition to administrative oversight and fines. Civil liability for harms will be vital to finally ensure access to remedy and justice for victims, and incentivise effective due diligence. But this advance is heavily compromised. The proposed substantial – while not blanket – exemption from liability for abuses beyond tier-1 would be another major obstacle to victims’ access to justice. It would apply to cases where specific contractual and (third-party or industry initiative-related) verification measures are in place – the failed model we refer to above. This needs to be rectified, as must the question of burden of proof in civil cases, which should not fall to victims. The proposal in its preamble warns of a “risk of excessive litigation”. No one wants this. But based on our work and experience this is simply not the case; rather, it is those speaking out against corporate abuse that face an increasing risk of (SLAPP) litigation against them.

Ultimately, despite substantive gaps, the release of the proposal is an important step in the right direction. As it enters European Parliamentary and Council negotiations, the draft can now provide a platform for debate to ensure the final law effectively safeguards the rights of workers and communities along global value chains. Supportive companies, investors, CSOs and trade unions will continue to work with the joint goal of seeing this proposal develop into legislation that becomes a driver of respect for human rights and the environment by business.