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Opinion

Exploring core elements of an EU regulation on mandatory human rights and environmental due diligence

This blog is part of a series 'Towards Mandatory Human Rights Due Diligence' and based on a detailed contribution by the same authors.

The European Commission is clearly intending to introduce legislation in 2021 which would require companies in the European Union to carry out human rights and environmental due diligence. It is crucial that this legislation sets clear standards and obligations, and learns from the existing regulation in this area.  We offer some suggestions based on our decades of experience as academics and legal practitioners in this area, and to provide a combined civil law and common law understanding.

While there has been significant support from civil society and governments for some regulation in this area, a core reason why there should be considerable corporate support is that an EU law on mandatory human rights and environmental due diligence (mHREDD) could provide for legal certainty, coherence and consistency, and what is often called a “level playing field”. Indeed, the survey in the important Study commissioned by the European Commission on mHREDD in supply chains, showed that a large majority (75.37 per cent) of business respondents indicated that any EU-level regulation would benefit business through providing a “single, harmonised EU-level standard (as opposed to a mosaic of different measures at domestic and industry level)” (p.142). Interestingly, that Study also showed that the majority of businesses considered that the new regulation would improve or facilitate leverage with third parties by introducing a non-negotiable standard, without reducing competitiveness or innovation. Further, EU legislation on mHREDD (as well as its influence on a treaty in this area) offers an opportunity to begin to enable the root causes of human rights abuses and environmental damage by companies to be addressed in a coherent and consistent manner.

In our view, there are three main issues which the EU legislation – which we consider should be made as a Regulation – should clarify: the scope of what is to be covered; the type of obligations on companies; and monitoring and enforcement. If these are left vague and open to too much diversity in the application by EU Member States, then the power and influence of a harmonised model would be lost.

Scope

In our view, the EU legislation on mHREDD should include all human rights in the European Convention on Human Rights and the European Social Charter, as well as customary international human rights law and indigenous rights. This covers a wide range of human rights and links the legislation directly with existing treaty and customary international law commitments of every Member State. It also does not leave the terms too vague for companies, regulators and courts. The legislation should also include environmental damage and environmental human rights, as this would be consistent with the EU Green Deal, as indicated by the European Commissioner for Justice, Didier Reynders, and for which there is already considerable legislation in Member States and in corporate knowledge (if not always in practice). In each instance, the company should integrate a gender and vulnerable group perspective.

The scope of the legislation should extend to all companies of any kind (including financial institutions) domiciled in Member States, without any threshold. This makes it clear and consistent. There can be specific provisions for certain sectors (such as those working in conflict zones) and for types of companies (such as small and medium sized enterprises, which may need incentives). To ensure fairness in trade and competition, the legislation should apply to all companies (including subsidiaries) operating in the EU and, consistent with the French Duty of Vigilance Act, would extend to the transnational effects of activities of companies domiciled in Member States. We also propose that the legislation extends to state bodies and state-owned companies (as occurs under the Australian Modern Slavery Act), including their public procurement and export credit activities, as this would give strong incentives for companies to comply.

Type of Obligation

The type of obligation to be implemented in EU legislation should be expressly an open and broad substantive HREDD requirement, across the entire value chain, including the supply chain. This should be based on the core aspects and include all steps of human rights due diligence as set out in the UN Guiding Principles of Business and Human Rights, the OECD Guidelines on Multinational Enterprises and the ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy. Each Member State has accepted all or most of these instruments.  These core aspects are set out below (in a helpful diagram in the OECD Due Diligence Guidance for Responsible Business Conduct, p.21):

We also propose that the EU legislation includes a requirement that companies consult stakeholders at each of the steps it takes, and that gender dimensions and vulnerable groups’ differences should be taken into account in such consultations (and in all impacts assessments) and these should be culturally appropriate. This should remind companies to focus on risks to rightsholders and discourage them from ‘ticking the box’ exercises. As human rights challenges vary widely, depending on state, industry, (severity of the) human rights issue at hand or type of supply chain, and for consultations with stakeholders, the EU might wish to incentivize the development of industry and sectoral standards which support the mHREDD legislation (see e.g. the Dutch International Responsible Business Conduct Agreements). EU legislation could also include minimum requirements regarding technologies to prevent exacerbating human rights impacts through these technologies.

EU legislation on mHREDD should make civil liability on a company for a failure to conduct reasonable and appropriate HREDD. A liability provision for failure to prevent or not undertaking reasonable and appropriate HREDD is an option, as the legal systems of several Member States already include such liability (see Country Reports in the EC Study). If reasonable and appropriate HREDD is undertaken by a company, this could serve as a defence against liability, and an incentive to comply with the legislation.

EU legislation on mHREDD could enable criminal prosecution in cases of gross violations. This would help to counter behaviour from company boards which repeatedly and willfully disregard human rights and environmental impacts. Whether specific criminal sanctions should be developed at the Member State level should also be guided from the EU level in order to safeguard a coherent and certain EU level law.

Monitoring and Enforcement

We recommend that EU legislation on mHREDD should prescribe effective, proportionate and dissuasive sanctions for non-compliance, and should either implement public supervision on the EU level or include specific guidance on the shape and type of monitoring and enforcement in Member States, so that there does not become a diversity of practices. Coherence of practices would be enhanced by the EU legislation including provisions supporting collaboration by, and exchange of, information between the relevant public supervisors in Member States facilitated by an European supervisory entity, in order to enable continuous learning of the national supervisors.

In connection with civil liability, it is recommended that it address some procedural hurdles which rightsholders may be confronted in access to remedy. For example, civil enforcement may result in different remedies for rightsholders, such as compensation of damages, which should be clarified, and also it could propose forward-looking court orders or arbitral awards. Another issue may be whether provisions on lifting the corporate veil or directors’ duties should be implemented. Current jurisprudence has rendered this issue less prominent, as courts have in principle accepted the responsibility of parent companies deploying and enforcing global policies in cases where these have been violated by subsidiaries. In relation to criminal sanctions, it is evident that they are effective only if public prosecutors prosecute repeated non-observance of HREDD. This may not happen because of priority setting, observed chance of success of a case, lack of expertise or budgetary reasons.

Public supervision deploying administrative law and including development of administrative policies is also essential. Public supervisors are able to develop policies building on best practices much faster than case law, and can deploy and enforce these in markets (see e.g. Dutch research on binding legislative instruments, co-authored by one of the authors). Furthermore, these policies of public supervisors may be challenged in administrative courts, which provides clarity regarding the conformity of this policy with the EU and Member State legislation for a whole market.

Finally, developing comprehensive methodologies for measuring human rights impact should be supported and facilitated by EU legislation, and should be commensurate and coherent with such methodologies regarding the environment and climate change. Preferably an EU body should assess and approve such integrated measurement methodologies, as is currently done in the EU Taxonomy on Sustainable Finance.

Above all, it is pivotal that monitoring and enforcement do not focus on mistakes made by companies (road to the bottom) but incentivizes companies to improve continuously (road to the top) and, thus, elicit as much as possible positive changes in corporate behaviour.

Key Recommendations:

  1. The legislation should include a broad definition of human rights, based on the European Convention on Human Rights and the European Social Charter, as well as customary international humanitarian and international criminal law, and should integrate a gender and vulnerable group perspective.
  2. The legislation should include environmental damage and environmental human rights.
  3. The legislation should cover all types of business entities regardless of their size, sector or type of incorporation, and should be based on their domicile, and should include all companies (including subsidiaries) operating in the EU.
  4. The legislation should apply to state-owned and state-controlled companies, and public bodies.
  5. The legislation should implement an obligation on companies to conduct human rights and environmental due diligence, and it might have liability for harm caused by not undertaking reasonable and appropriate human rights and environmental due diligence.
  6. The legislation should include consultation of stakeholders on the different steps of human rights and environmental due diligence which a company undertakes, taking into account in particular gender dimensions and vulnerable groups’ differences.
  7. The legislation should provide for a defence against liability where a company has undertaken reasonable and appropriate human rights and environmental due diligence.
  8. The legislation should provide for criminal sanctions to address gross human rights and environmental impacts, and to counter behaviour from company boards which repeatedly and willfully disregard human rights and environmental impacts.
  9. An EU body should supervise or at least coordinate supervision of compliance with the legislation in all Member States.
  10. The legislation should provide for public supervision based on administrative law, and with powers to monitor compliance and best practices related to human rights and environmental due diligence, to support the development of best practices by training and capacity building, and to enforce the legislation.

Towards Mandatory Human Rights Due Diligence

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Finnish EU Presidency urged to toughen up human rights rules on business

19/2/19 - Sharan Burrow, secretary general, ITUC, and Phil Bloomer, executive director of BHRRC 19 Feb 2019

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Will Germany become a leader in the drive for corporate due diligence on human rights?

Saskia Wilks and Johannes Blankenbach, BHRRC 20 Feb 2019

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Responsible Business Conduct - the European Business model of the 2020s

Heidi Hautala, Member of European Parliament & Vice-President of the European Parliament 21 May 2019

View Full Series