Clifford Chance

The Parliament's Resolution, adopted on 10 March 2021, sets out principles for proposed new legislation on corporate due diligence and accountability for human rights, environmental and governance impacts within businesses' operations and through value chains.

The European Parliament has formally agreed a position on the issue of corporate due diligence and corporate accountability – available here. This is based on a report by Lara Wolters, a Dutch Socialist Member of the European Parliament and follows months of preparatory work. The Resolution includes specific recommendations for the Commission as well as proposed wording for any new EU Directive – seeking to influence the shape of legislation the Commission is already working on.

Main Features of the Parliament's Resolution

The Resolution runs to some 40 pages and includes a section with proposed wording for any new Directive. This summary highlights only a few key features and notable measures proposed.

Due diligence requirement: The Resolution concludes that voluntary due diligence standards for companies are insufficient in driving meaningful improvements and that legislative measures are needed to ensure that businesses take appropriate steps to prevent and mitigate adverse impacts on human rights, the environment and good governance that are associated with their operations, and their value chains. This would be achieved under the terms for legislation suggested by the Parliament by requiring relevant undertakings to map their value chains and develop due diligence strategies, leaving the details of requirements to Member States. Stakeholder engagement, transparency and disclosure would facilitate accountability of undertakings in this regard. The Parliament's approach departs from the expected scope of the Commission's proposal for legislation on due diligence in specifying 'good governance' as part of the due diligence requirements. The Parliament's draft wording also provides expansive definitions of the scope of the requirement as including the entire value chain.

The Resolution refers to and reflects elements of international standards that deploy the concept of due diligence, such as the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises. This is in line with the Commission's stated intention to build on those frameworks when crafting its legislative proposals, in part to ensure coherence. Bodies such as the Office of the High Commissioner for Human Rights have observed the need for careful transposition of concepts in such standards into legislative forms. There are aspects of the Parliament's proposed wording for legislation that require careful attention to ensure coherence (examples being the definition of 'business relationships' and the consequences of such associations, the mixing of 'potential' with 'actual' impacts when discussing matters such as remediation and the use of 'indirect' and 'direct' terminology).

Level playing field – EU and non-EU businesses within scope: To ensure a 'level playing field' for EU businesses, the Parliament suggests that proposals would extend not only to defined categories of EU businesses but also to equivalent categories of non-EU businesses operating in the European single market by the supply of goods or services. The due diligence requirements would extend to all large undertakings governed by the law of a Member State or established in the territory of the EU (including those providing financial products and services) as well as all publicly listed small and medium-sized undertakings and 'high-risk' small and medium-sized undertakings. Last minute amendments were sought to exclude small and medium sized enterprises from the scope of the proposals but these were rejected.

Civil liability regime: Under the Parliament's proposals, Member States would be responsible for implementing and enforcing measures imposed pursuant to the proposed law. The proposals include civil liability of undertakings for adverse human rights, environmental and good governance impacts. While adherence to the due diligence requirements would not itself operate as a defence, an undertaking able to demonstrate that it exercised due care or that a harm would have occurred regardless should not incur liability.

Proposals for enhanced access to remedy by victims: Access to remedy would be supported by requirements for businesses to provide grievance mechanisms for raising concerns about adverse impacts on human rights, the environment and good governance, reporting on reasonable concerns raised through such mechanisms and oversight on remediation. Beyond the proposed due diligence legislation itself, the Resolution notes that victims of business-related adverse impacts are often not sufficiently protected by the law of the country where harm is caused. The Parliament proposes that protective provisions on governing law in any legislation are considered as mandatory provisions in line with Article 16 of 'Rome II' (the regulation that caters for the law applicable to non-contractual obligations within the EU). Provisions of Rome II that restrict the proposed law's approach on governing law, would not apply.

International Cooperation and Treaties: The European Parliament also calls on the Commission to propose a negotiating mandate for the EU to constructively engage in negotiations concerning an international treaty on business and human rights, proposals for which have been under consideration for some years pursuant to a resolution of the UN Human Rights Council.

Next steps

The aim of the European Parliament's Resolution is to influence the European Commission, which has the sole right of legislative initiative within the EU. The Commission has committed to publish a proposal for a directive on sustainable corporate governance – including mandatory human rights and environmental due diligence with respect to impacts across supply chains - in the second quarter of 2021 (June is understood to be the current aim).

A public consultation run by the European Commission (see our blog post here) closed in early February and is reported to have attracted over 500,000 responses.

The Parliament's Resolution notes the importance of taking account of future corporate due diligence requirements in EU trade policy, including the conclusion of free trade agreements. Indeed, the new EU trade policy review published in February noted the importance of such due diligence measures as part of "effective action and enforcement mechanisms to ensure that forced labour does not find a place in the value chains of EU companies."

European Commissioner for Justice Didier Reynders, who leads the Commission's work on corporate governance and supply chain due diligence, has been following developments in the European Parliament closely. He is reported to have said: "We envisage a holistic approach, where due diligence is part of sustainable corporate governance." Given the number of current initiatives and pending reviews of existing EU measures that engage overlapping concerns, as well as the plethora of views now available to the Commission with relevance to its development of legislation, the objective to achieve a holistic approach with the desired practical benefits presents many challenges.