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Clifford Chance

Clifford Chance

Business & Human Rights Insights

The Commission's corporate governance initiative stalls, while calls for due diligence obligations continue undimmed

The European Commission's proposal (see our blog post) for mandatory human rights and environmental due diligence ("mHREDD") has been postponed till after the Summer. However, pressure to legislate for mHREDD continues despite the hiatus. The recent consultation shows that cross-stakeholder support for mHREDD is strong and Members of the European Parliament are pushing for the Commission to be "ambitious" in its legislative vision.

Consultation on the Commission's proposal

Between October 2020 and February 2021, the Commission conducted an open public consultation in relation to its proposal for a sustainable corporate governance directive, with mHREDD at its centre.

The consultation questionnaire garnered views on: (1) the need and objectives for EU intervention; (2) directors' duty of care - stakeholder interests; (3) a due diligence duty; and (4) other elements of sustainable corporate governance.

The Commission received over 450,000 responses. A large proportion of these responses were generated by a handful of NGOs, prefilling questionnaires and sharing these with individuals. Disregarding these responses, the Commission analysed the remaining 855 responses which were received from a diverse group of stakeholders, with businesses, business associations and NGOs comprising the majority of the respondents.

Widespread support for mHREDD

The Commission's summary report on the consultation showed enthusiasm for the proposed directive and support for an mHREDD framework sits at around 85% (as shown in the chart below). It comes as no surprise that over 95% of NGOs support the introduction of a binding legislative framework for due diligence at the EU level. This tallies with NGOs' longstanding preference for increased corporate accountability in this area. More notable is that 68% of businesses and 60% of business associations responding to the consultation took the same view, which is presumably due to the need for legal clarity and a level playing field.

In terms of the structure of the potential due diligence obligations, there was a preference for the EU defining a minimum set of requirements with regard to the necessary processes which should be applicable across all sectors. Under this model, definitions and obligations would be drawn from EU and international human rights conventions, including the International Labour Organization (ILO) conventions. Among those who backed this approach, there was widely held support for each of the following areas to be covered: (i) human rights; (ii) climate change mitigation; (iii) rights of local communities, indigenous peoples and vulnerable groups; and (iv) protection of natural capital, land degradation and ecosystem degradation.

Directors' duties

Responses to questions on directors' duties were mixed. For some questions, like whether stakeholders (including employees) should have a role in the enforcement of directors' duties, the overall support was under 60%. On the question of whether directors should be required to set up targets to measure impacts on stakeholders, the overall support was higher, at 70%.

Preference for own-initiative enforcement by domestic regulators

In relation to enforcement mechanisms, the clear preference among respondents was for supervision by competent national authorities with a mechanism of EU cooperation and coordination (71% in support). This led the pack over other proposals, including judicial enforcement with liability (49% in support) and supervision by competent national authorities based on complaints about non-compliance with effective sanctions (44% in support).

Corporates call for legislation urgently

The consultation does not in any way bind the Commission in its preparation of a proposal. However, the survey is a barometer of the views of the participating stakeholders and indicative of the tenor of support for the Commission's initiative. The contributions to the consultation, which have been made publicly available, reveal that several well-known corporates agreed with many of the consultation proposals, including IKEA, Decathlon, and PwC. Following the delay to the legislative timetable of the directive, a public letter urging the Commission to prioritize legislation on mHREDD was undersigned by companies in the cocoa industry including Unilever, Nestlé, and Tony's Chocolonely.

The European Parliament's perspective

To add to this, last week, the Presidents of five political groups in the European Parliament re-emphasised their support for "concrete measures which will ensure that [the EU] can take global leadership and set a worldwide standard for responsible business conduct". They also urged the Commission to take "due account" of and apply the same level of ambition as reflected in the Parliament's own-initiative report on corporate due diligence and corporate responsibility which was adopted by way of a Resolution in March 2021 (see our blog post here).

In a separate letter on the same day, 15 Members of the European Parliament's Working Group on Responsible Business Conduct (including the rapporteur on the own-initiative report, Lara Wolters) wrote to the Commission to highlight "essential" elements of any mHREDD legislation. These include requirements for mHREDD across the entire value chain at all tiers in line with the expectations set out in the UN Guiding Principles on Business and Human Rights. The signatories to the letter also emphasised the need for extensive liability. Similarly, the letter also calls on the Commission to match the level of ambition displayed by the European Parliament in its own-initiative report in its forthcoming proposal.

Next steps for the proposal

There is considerable pressure mounting for the Commission to publish its proposal after the Summer recess. However, the exact timing and content of the proposal are still unclear. It has been reported, for example, that the Commission's own Regulatory Scrutiny Board was heavily critical of the Commission's draft proposal and requested it be amended. Once the Commission publishes its draft, the proposal will then be sent to the European Parliament and Council of the EU for adoption under the ordinary legislative procedure (previously known as co-decision). The Parliament and Council will be able to amend the Commission's proposal. If adopted, the act will have to be transposed into the national laws of the 27 Member States.

National due diligence laws

Meanwhile, the progress of mandatory due diligence at a national level continues. In parallel with the EU process, Germany recently adopted a draft law requiring mandatory supply chain due diligence (see our blog post here). Outside the EU, in Norway, draft legislation on mandatory due diligence throughout value chains was tabled in April and adopted earlier this month.

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