Guest piece by Dr Rachel Widdis on EU Developments in Sustainable Corporate Governance, and Human Rights Due Diligence
An EU Commission initiative on Sustainable Corporate Governance is expected, likely as a Directive. There is momentum towards placing obligations on entities established in the EU, or providing goods and services on the internal market, to take proportionate and commensurate action to prevent adverse impacts on human rights, the environment, and good governance in their activities, business relationships, and value chains.
Feeding into the development of this Sustainable Corporate Governance initiative, the European Parliament adopted a Resolution with recommendations on Corporate Due Diligence and Corporate Accountability (European Parliament Resolution). It calls on the Commission to present legislation ensuring companies address and are held accountable for human rights, environmental and governance risks, and impacts in their own activities and value chains, including sanctions for non-compliance and civil remedies.
These Commission and Parliament initiatives relate to but are distinct from, the recent Commission proposal for a Corporate Sustainability Reporting Directive revising the Non-Financial Reporting Directive. In the discussion here, entities focusing on Sustainability, ESG and Responsible Business Conduct will recognise crossover themes including the related field of Business and Human Rights.
Concurrently, State level legislative initiatives on supply chain due diligence are being debated in Germany, Belgium, the Netherlands, and Norway, following upon the French Duty of Vigilance Law of 2017. In addition, proposals are being advanced by civil society across multiple European States (ECCJ Legislative Progress Europe).
Why is a legislative initiative required? The concept of Human Rights Due Diligence is established within widely accepted international standards (UN Guiding Principles on Business and Human Rights, OECD Guidelines). However, voluntary measures have not delivered fundamental changes in practice. While many corporations issued related policies and progressive businesses engaged, most did not (Corporate Benchmark 2020). Well-documented adverse impacts within global supply chains persist, amplified by the pandemic (COVID Observatory). Robust commitment from business is needed to prevent often severe impacts on people, communities, and the environment. Further, a well-designed EU framework would benefit harmonization, transparency and certainty for business, consumers and investors.
The aim of due diligence is primarily preventative, to avoid adverse impacts occurring in the first place. Building upon soft law initiatives, the Parliament proposes an obligation on entities within its scope to identify, assess, prevent, cease, mitigate, monitor, communicate on and account for potential and/or actual adverse impacts on human rights and the environment or good governance in an entity’s own activities, business relationships, and value chain. It is a risk-based and proportionate approach, intended to flex relative to the size, nature, and context of a business, and is driven by the potential severity of risks and impacts. It is to be underpinned by meaningful stakeholder engagement.
Human rights and the environment are interconnected, with adverse impacts often closely linked. For example, the Vedanta and Okpabi cases which reached the UK Supreme Court concern environmental damage affecting the livelihoods and health of people and communities. In climate litigation, there is an upward trend in human rights-related cases (global-trends-2020). Equally, environmental damage can occur without direct or immediate harm to human beings (Urgenda). While recognising the interconnectedness of human rights and the environment, in order to avoid gaps in protection, both are required within due diligence.
What ambition the Sustainable Corporate Governance initiative will show is unknown as yet. To promote a level playing field, the Parliament recommends due diligence obligations applying to entities established in the EU and third-country entities for goods or services placed on the internal market. Large undertakings, including those providing financial products or services, are within its scope. While there is a provision to exclude micro-enterprises, it includes publicly listed SMEs and ‘high-risk SMEs’. Under the proposal, Member States would be responsible for establishing oversight authorities with investigative powers, sanctions, and enforcement. The role of grievance and non-judicial mechanisms is recognised. There is provision for a much-needed civil liability regime under national law, whereby entities can be held liable and provide remediation for harm that they, or entities under their control, have caused or contributed to by acts or omissions. A defence of due diligence is envisaged if entities can prove they took all due care to avoid the harm, or that the harm would have occurred even if all due care had been taken. While not uncontroversial, such a defence arguably incentivises a ‘hands-on’ approach as it is in the entity’s interest to prevent harm and mitigate potential liability.
As it stands, when harm occurs access to remedy is excessively long and challenging, with the risk of denial of justice weighing heavily in comparative jurisprudence. In recognition of potential limitations in protection by applying the law of the country where harm impacts, the Parliament proposes Member States ensure treatment of relevant provisions as overriding mandatory provisions under Rome II.
The public consultation on the Sustainable Corporate Governance initiative dealt extensively with questions of Director/Board responsibility to stakeholders beyond the enterprise itself. It is hoped the resulting framework will set standards of Board oversight concerning due diligence and sustainability.
Leadership from the EU is welcome, and the Sustainable Corporate Governance initiative eagerly anticipated.
Dr. Rachel Widdis teaches Business and Human Rights in the School of Law, Trinity College Dublin. She was commissioned to develop an outline proposal for Human Rights and Environmental Due Diligence legislation in Ireland for the Irish Coalition on Business and Human Rights.