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Clifford Chance

Clifford Chance

Business and Human Rights Insights

Towards European mandatory due diligence requirements on human rights and environment – an update

The European Commissioner for Justice, Didier Reynders, has again signposted that European legislative proposals for mandatory human rights and environmental due diligence ("mHREDD") requirements on businesses are on the way.

The Commissioner's comments were made at an event on 6 October 2020 hosted by the German Federal Ministry of Labour and Social Affairs, and follow Commissioner Reynders' April announcement that EU legislation on mHREDD is in the pipeline. Since April, the Commissioner indicated (at an event in June) that the proposals would be "cross-sectoral" and would cover human rights and social and environmental impacts. As to the enforcement mechanisms associated with the requirements, Reynders considered that a "possible combination of state supervision and civil liability in case of breaches" could be incorporated.

In his most recent comments, Commissioner Reynders highlighted the need for "real regulation, with obligations and with liability". Addressing enforcement, he suggested that businesses failing to meet their obligations under the proposed rules could face "at least" civil liability, and potentially criminal liability. He also indicated that the Commission is considering "special provisions" for SMEs.

Although businesses would be well advised to consider ways to 'future proof' their operations at an early stage, the precise substance and form of the legislation remains to be seen.

Draft legislation is expected to be tabled by the Commission in early 2021. Although there is ample scope to prepare in advance, businesses should not expect EU-wide requirements to bite for some time. After draft legislation is released by the Commission, it could be another 18-24 months before it is adopted. Then, in the case of a directive (if that is what is envisaged), the legislation would need to be transposed into national law, likely adding a further 18 months for the requirements to take effect.

Details about the contemplated shape and content of future legislation will follow consultations on the Commission's forthcoming proposals, which Commissioner Reynders announced would be launched in the next few weeks. This should provide businesses with an opportunity to contribute their perspective to the planned legislation.

Support from the Council of the EU Ministers and from the European Parliament

The Commissioner's confirmation that EU legislation on mHREDD is on foot comes against the backdrop of support for mHREDD from other quarters of the EU.

Legislative recommendations from the European Parliament Committee on Legal Affairs

Although the power to propose legislation resides with the Commission, in September 2020, MEP Lara Wolters and the European Parliament Committee on Legal Affairs published a draft report with recommendations to the Commission for new EU-wide legislation mandating mHREDD requirements. The recommendations take the form of a draft text for a directive mandating mHREDD.

Key features are as follows:

  • Application: The recommended due diligence requirements would apply to all "undertakings" governed by the law of a Member State or established in the territory of the EU, regardless of their size or sector, and whether private or state-owned. The obligations would also apply to "limited liability undertakings" governed by the law of a non-Member State and not established in the territory of the Union when they operate in the internal market. The terminology is not defined, but this would potentially bring many US, UK, Asia and other non-EU domiciled businesses under the remit of the proposed rules.
  • Scope: As well as being required to carry out due diligence with respect to human rights, environmental and governance risks in their operations and business relationships (i.e. across their entire value chain), undertakings would be required to produce and publish a due diligence strategy if risks were identified. They would also be required to implement grievance mechanisms in line with the UN Guiding Principles on Business and Human Rights.
  • Liability and penalties: The Committee does not make recommendations regarding civil liability (leaving this to Member States), instead stating that due diligence should not absolve a business from any civil liability under national law that it may otherwise incur. However, it does recommend that Member States impose penalties for failures to comply with the proposed legislation and envisages that Member States would impose criminal consequences for repeated delinquency.

The Committee recommends amendments to existing European regulations dealing with jurisdiction and recognition of judgments and governing law for non-contractual obligations (commonly referred to as the 'Brussels Recast Regulation' and the 'Rome II Regulation'). These amendments focus on civil claims for business-related human rights violations within the scope of the Committee's draft mHREDD directive. If adopted, it would be easier to bring claims against EU-domiciled parent companies for harms caused by their non-EU subsidiaries or an undertaking with which they have a business relationship. EU Member State courts could also take jurisdiction on an exceptional basis over matters occurring in third countries where there is inadequate access to justice. Finally, victims of business-related human rights abuses committed within the value chains of EU undertakings could elect for non-contractual claims to be governed by a law with high human rights standards (including the law of the country of domicile of the parent company of the undertaking).

If adopted by the European Parliament, the recommendations would, under rule 47 of the European Parliament Rules of Procedure, constitute a request to the Commission to propose legislation following the recommendations, and serve as an opportunity for Parliament to provide an indication of its views on the form that legislation should take. The Legal Affairs Committee is expected to vote on the draft report in early December 2020. If approved, Parliament will take a plenary vote by early next year. Since the draft report was published, two other parliamentary committees, the Subcommittee on Human Rights (part of the Committee on Foreign Affairs) and the European Economic and Social Committee, have echoed support for mHREDD and provided substantive comments on the draft.

Thus, although it is for the Commission, not Parliament, to determine the form and substance of any legislative proposals, the Committee's recommendations may well inform eventual legislative proposals and Parliamentary support for the Committee's draft would provide additional impetus to the Commission to push forward with mHREDD.

Support from the Council of EU Ministers

Speaking alongside Commissioner Reynders, the German Federal Minister for Labour and Social Affairs, Hubertus Heil, endorsed the Commission's commitment indicating that Germany would push for commitments from the Council of the EU Ministers in support of the initiative before the end of the six-month German Presidency in 2021.

Meanwhile, national-level initiatives continue

Commissioner Reynders has spoken about building on Member State initiatives. France has led the way with its Duty of Vigilance Law, with legislation since having been adopted in the Netherlands and proposals being considered in other countries such as Germany and Sweden.