Europe is poised to make its mark as global standard-setter on ESG-focused supply chain due diligence
After successive delays and intense debates, publication of the proposal for a new EU law on human rights and environmental due diligence is expected on 23 February 2022.
What do we know, and what do we expect?
Many expect the Sustainable Corporate Governance proposal, see our briefing, to have a transformative impact on companies and stakeholders in the EU and beyond: objectives of the planned legislation have been stated as harmonisation, legal certainty and a level playing field through increased supply chain transparency and higher standards of responsible business across transnational business.
It appears, however, that the proposal may be rather different to what was originally foreseen by the 2020 consultation. Some reports suggest changes in scope and coverage in areas such as:
- directors' duties (which look likely to be reduced or removed from scope);
- the proposal's application to different sizes and types of businesses (which remains unclear);
- the inclusion of climate change within the proposed due diligence requirements (unclear);
- the inclusion of a ban on imports with links to forced labour (unclear);
- the linking of board members' pay to mandatory sustainability criteria (likely removed) and
- mandatory board strategies to set concrete environmental tagets for companies (also likely removed).
What we know so far:
- The proposal of the European Commission is due to be published on 23 February 2022
- The proposal will include mandatory human rights and environmental due diligence obligations for companies operating in the European Union
- Once published, the proposal will need to be approved by the European Parliament and the Council of the EU according to the ordinary legislative procedure, which can take anything from 18 months to several years
- A number of businesses have voiced support for measures that are meaningful – to avoid a "tick box approach" – and include accountability, including in the form of civil liability. For example, over 100 companies last week called for a "paradigm shift" through wide-reaching EU ethical supply chain rules.
What we will be looking out for:
Here are some of the things we, and businesses, will be looking out for in the proposal:
- Directive or Regulation: Previous soundings were that the proposal would be in the form of a directive (thus requiring national implementation), however, if corporate governance measures and directors' duties are removed or trimmed back, a Regulation may now be an option (and this would be directly applicable in each of the EU Member States).
- Non-EU companies: If the proposal – as is expected – applies to non-EU incorporated companies that operate or supply goods/services into the EU, what are the implications for them?
- Directors' Duties: What new obligations – if any – will be imposed on directors?
- Extent of supply chain obligations: How far down the supply chain will any due diligence requirements apply – first tier (only direct suppliers) or beyond? What will the different levels of responsibility be as one moves down the supply chain and what, if any, will the impact be on potential sanctions for non-compliance (or third party remedies)? Will 'supply chain' be defined to include the entire value chain?
- Will SMEs have to comply: To what size of companies will the obligations apply? Will there be an exemption for small and medium sized companies (SMEs) with fewer than 250 employees?
- Sectoral focus: Will the requirements apply only to certain sectors or will there be differentiated requirements between business sectors? If not, will there be guidance to explain expectations focused on the different risks and challenges that face sectors – from extractives, through manufacturing and retail, technology and finance?
- Human rights and environmental due diligence: What substantive issues will be covered under the human rights and environmental due diligence requirements? How far will the proposal go to address the inherent differences in approach to these two areas?
- Forced labour ban: What about the ban on products made with forced labour announced by Commission President Ursula von der Leyen in her State of the Union speech in September 2021? It had been expected this would form part of the proposal but the latest indications are that it will be handled separately, potentially in the form of "a product withdrawal mechanism".
- Sanctions: What sanctions will there be for non-compliance with due diligence obligations? Possibilies include an administrative fine on companies or an exclusion from procurement processes.
- Civil liability: What scope will there be for affected people and/or NGOs to claim damages from companies? Will liability be tied to failures of result or failures of processes?
- EU Member State existing and proposed legislation: How will the new EU legislation fit with existing laws in for example France (Loi de Vigilance) and Germany (Supply Chain Act) and, indeed, existing EU-wide legislation such as the Conflict Minerals Regulation? How will it also fit with the recently proposed EU Regulation on Deforestation-free products?
What happens next
After a long build-up, we should finally see the Commission's proposal on 23 February 2022. We then expect robust debates in both the European Parliament and among Member States in the Council of the EU, and various proposals for amendments before it becomes law. There is likely to be a race against time to adopt the legislation before the European Parliament's current term ends in 2024.
As mentioned above, if the proposal takes the form of a Regulation, it will be directly applicable in Member States. If a Directive, the final step will be for Member States to transpose the Directive into national legislation.