Key Considerations for Effective Mandatory Due Diligence Legislation
Théo Jaekel highlights three key issues for further discussion from his point of view, namely the need for enforcement mechanisms; considering companies’ individual circumstances; and a focus on ensuring transparent business practices through effective liability provisions.
At Ericsson we strongly welcome and support the need for mandatory human rights and environmental due diligence legislation. An effective legislation can create legal certainty, a level playing field and provide access to remedy for impacted stakeholders. The concept of a smart mix of measures referred to in the UNGPs on Business and Human Rights is clearly based on the notion that relying on voluntary measures alone is not sufficient. This approach has been tried for decades. Now is the time to truly implement a smart mix by introducing clear and effective legal standards.
A key success factor for an effective mandatory due diligence legislation is to base the provisions on existing and established standards, especially the UNGPs, and to ensure horizontal application for all companies. Respect for human rights should be a cornerstone of any business enterprise, regardless of size or sector. Moreover, in accordance with the UNGPs, it is important to stress the need for a full value chain approach, not limiting due diligence requirements to global supply chains only, but rather taking a risk-based approach, regardless of whether risks materialise upstream or downstream of a company in question. Only by applying these requirements to all business enterprises will we create a level playing field and ensure the standards of conduct are applied throughout the value chain.
Having established the clear need for mandatory due diligence legislation, I would like to highlight three key issues that need further discussion and close consideration.
Firstly, there is a strong need for enforcement mechanisms in order to make sure the legislation is effective. It will however be crucial to clearly define what companies are actually liable for. Such provisions need to be predictable. Here, I believe we also need to look to the UNGPs as a foundation, which differentiate between specific levels of responsibility in connection with adverse human rights impacts. A company can cause, contribute, or be directly linked to such impacts. Liability provisions introduced in the new mandatory due diligence legislation should reflect these levels of responsibility. This approach would clearly define that companies are liable in case they cause or contribute to an adverse human rights impact, but not if merely directly linked.
When making this distinction it is however important to remember that there is a continuum between contribution and linkage. Professor John Ruggie presents factors that can determine where on that continuum a particular instance may sit in his Comments on Thun Group of Banks Discussion Paper on the Implications of UN Guiding Principles 13 & 17 In a Corporate and Investment Banking Context. The factors mentioned by Professor Ruggie are:
- the extent to which a business enabled, encouraged, or motivated human rights harm by another;
- the extent to which it could or should have known about such harm;
- and the quality of any mitigating steps it has taken to address it.
Therefore, to what extent a company has in fact embedded comprehensive and effective due diligence measures to prevent harm, should be taken into consideration when determining liability. Furthermore, what can be learnt from due diligence requirements and liability mechanisms in existing legislation, for example anti-bribery laws, should also be considered. Most importantly, any liability provisions need to ensure both effective deterrent for companies and adequate remedy for impacted stakeholders.
Secondly, in accordance with the UNGPs, the new legislation should be drafted in a way that ensures each company’s individual circumstances, e.g. severity of risks, size of the company, position in the value chain etc., are considered when determining what constitutes reasonable due diligence measures. An overly prescriptive and rigid legislation risks becoming a tick-box exercise. The aim should not only be to ensure that business enterprises have formal policies and processes in place, but also to ensure that these are effective. This goes back to the previous point regarding the quality of mitigating measures. What in the end is considered effective and reasonable must be assessed based on each company’s unique operations. Here, appropriate sectoral guidance and industry standards and eventually legal precedence will play a supporting role in determining where lines are drawn.
Thirdly, while transparency and disclosure are integral steps in any proper due diligence, mandatory due diligence legislation should rather focus on ensuring transparent business practices through effective liability provisions. Separate or new reporting standards should not be created. Such requirements already exist, and it is crucial that the drafting of new legal requirements is aligned with parallel processes such as updating the EU Non-Financial Reporting Directive. Creating additional and separate reporting requirements will only create ineffective administrative burdens and in the end divert much needed resources within companies from focusing on embedding effective due diligence measures in practice.
These are some of the key issues that need to be closely evaluated, and different approaches carefully considered. An inclusive and robust consultation process is therefore a crucial next step.
To conclude, the key question to ask is what mandatory human rights and environmental due diligence legislation needs to achieve? And the answer to that question should be better outcomes for people. That should be what guides the drafting of this legislation. And that is what companies should ensure through their due diligence measures.
This is how we build back better, by raising the bar and rising to the challenge.
Perspectives from Business, Public Sector, Academia and Civil Society
This post is an excerpt from our collation of perspectives on Mandatory Due Diligence ahead of the German EU Council presidency. Click through below to read all of the contributions from around the globe.