EU mandatory due diligence legislation: What investors need to know and why they should care
This blog was originally published here via the Investor Alliance for Human Rights on 8 February 2021.
Since its beginning a year ago, the ongoing COVID-19 pandemic has exposed once more the vulnerabilities in value chains, the precarity of global business operations, and the weakness of voluntary corporate action in addressing these issues. Organizations like the Business & Human Rights Resource Centre take up hundreds of grassroots allegations of abuse each year. During the COVID-19 crisis, we have seen a spike in allegations as millions of workers and communities around the world feel the consequences of corporate inaction in the face of a global pandemic. Yet there are signs of change.
In April last year, under its Sustainable Corporate Governance Initiative, the European Commission committed to introducing EU-wide legislation that would mandate companies to respect human rights and the environment. Momentum towards mandatory due diligence, based on the UNGPs and the OECD MNE Guidelines, has been growing worldwide among governments, companies, investors and civil society. Regulation is already in place or under discussion in a number of European countries, paving the way towards regional harmonization.
While the Commission prepared to conclude a public online consultation seeking input on its initiative, the European Parliament’s Committee on Legal Affairs (JURI) on January 27 adopted a report requesting the Commission submit a mandatory due diligence legislative proposal. It provided detailed suggestions as to what such a law covering EU businesses (and those active in the internal market) could look like. The committee’s report will be voted in plenary in March.
An EU due diligence and corporate accountability law covering all sectors, including finance, is a key piece in a set of legislative measures broadly framed by the European Green Deal and the EU Action Plan on Financing Sustainable Growth. These include e.g. EU Regulation on Investor Disclosure, requiring European investors to disclose their due diligence policies and impacts on people and planet, as well as the EU Taxonomy Regulation, which is meant to encourage private investments into economic activities classified as ‘sustainable’. The social ‘minimum safeguard’ attached is that activities need to be carried out in line with the UNGPs and OECD MNE Guidelines. Other important processes include discussions around a Social Taxonomy, and the current reform of the EU Non-financial Reporting Directive. Hopes are high that the latter will lead to more “comparable, concise and relevant” disclosure on sustainability issues, including due diligence.
But what makes mandatory due diligence legislation unique is that it is potentially the only component that will directly require ongoing business action to address adverse impacts, holding businesses accountable if they fail to act as well as ensuring access to remedy for affected people. Improved transparency and reporting are necessary for civil society stakeholders and investors to assess responsible business conduct, but these requirements alone are insufficient to drive the change needed both in board rooms and for rights-holders.
So how will mandatory due diligence contribute towards this change?