After nearly a year of delay, the European Commission released its long awaited proposal on mandatory due diligence for companies. The new Directive seeks to radically improve the negative impacts of trade on people and the environment. Here is our take on this legislation and what to expect from it.
No matter how hard we, as consumers, try, it is almost impossible to trace back the full production line of a product. It is unfair to burden consumers in this way and it also removes the responsibility of companies to be accountable for how they run their business.
Following an overwhelming demand from the public, NGOs as well as businesses, for harmonised due diligence rules in the EU, the proposal recently published by the Commission could be a first step in the right direction. It is now in the hands of the European Parliament and our governments, with both sides expected to have their say within this month. While this process is ongoing, we looked closely at the proposal to determine if it is achieving the necessary objectives.
Due diligence for better trade
Trade is a key component of our society and economy, but trade as we know it seems to have gone out of control – with it its environmental and social impacts, including the prevalence of forced labour, degrading work conditions, environmental pollution, poor resource management, etc. The need for less trade and better trade is undeniable as we are living beyond the carrying capacity of the planet with devastating social, climate and environmental injustices.
In the EEB’s latest video, Kevin the squirrel aims to bring wealth to his community through his nutcap business. In this short tale, we witness how easy it is to lose track of what other players in the supply chain are doing, and how the absence of appropriate rules lets a profit-driven approach take over at the expenses of society and nature.
Due diligence, but for whom?
To address these risks, the Commission’s proposal suggests mandatory due diligence rules that would apply to companies of all business sectors. With these rules, companies would be considered responsible for what happens in their entire value chain, within and beyond EU borders. That would mean more protection for the environment, workers and communities involved or impacted at every stage of the production and distribution of products, as well as more transparency for consumers.
The Commission’s proposal addresses all EU businesses that have an annual global turnover of over 150 million EUR and employ more than 500 people. For high-risk sectors such as textiles, mining and extractive industries, and agriculture and food production, the threshold would be set at 40 million annual global turnover with 250 employees, providing that at least 50% of the turnover is generated in the high-risk sector. These conditions would also apply to companies based outside the EU, with an important distinction: the benchmark on their turnover would only relate to what is generated in the EU.
However, there is a gap between the theory and the practice. According to EEB experts, with these proposed thresholds, only about 13,000 EU companies would be covered, and just about 4,000 foreign companies operating in the region. Notably, small and medium enterprises (SMEs) would not be covered by the Directive, even in high-risk sectors such as textiles and mining industries where they are key players.
Besides, the companies covered by the Directive would be considered responsible for partners with whom they have an ‘established business relationship’. However, the ‘established business relationship’ is not clearly defined in the proposal and EEB experts fear there could be a potential legal loophole. As it stands, it could mean that certain one-off exceptional transactions that may still be substantial or significant for the company do not need to undergo due diligence.
Moreover, limiting companies’ due diligence obligations to ‘established business relationships’ means there may not actually be an obligation to carry out due diligence before a relationship is established, which could be detrimental.
What does this mean for the environment?
The due diligence proposal requires companies to identify, prevent, mitigate and cease causing any environmental adverse impacts caused in their business. The potential “environmental adverse impacts” that companies need to assess in their due diligence refer to a violation of one of the elements found in international environmental conventions and listed in the Annex of the proposal. However, this definition is weakened because of two reasons.
First, it only covers those impacts that are identified in the listed Multilateral Environmental Agreements (MEAs). Second, many adverse environmental impacts, such as plastic pollution, are not yet regulated in any international convention, while there is not even a reference to any climate agreement in the Annex and therefore climate is not included in the definition.
For these reasons, NGOs have been calling for an open-ended definition of environmental adverse impacts in the Directive, that avoids having specific environmental impacts to be pre-defined.
Where does the liability fall?
The proposal requires Member States to ensure that companies are held accountable if they fail to comply with their due diligence obligations, and includes both civil and administrative liability. This double liability means that there are more ways for companies to be held accountable and more ways for affected people, communities and stakeholders to seek remedies in case of failure.
However, as the proposal stands, companies may have an easy way to limit their liability by requiring their business partners to provide them with contractual assurances that human rights and environmental harm is not occurring on their watch.
Access to justice
The proposal provides three ways for complaints to be made by anyone affected. Firstly, each company must set up a complaint system whereby affected or potentially affected stakeholders can alert the company of the actual or potential harm it causes. Secondly, the national supervisory authority may also receive alerts from the public or stakeholders about actual or potential non-compliance with the Directive, or about actual or potential harm. Thirdly, complainants may seek damages in national courts in the EU thanks to company civil liability.
However, the proposal fails to address the practical barriers for seeking justice and accessing remedies. These include high costs – notably legal fees and court costs – travel needs, language barriers, and access to legal advice. There are also no details on the limitation periods for environmental damages to be eligible for complaints, nor is there a clear obligation for rapid decisions and measures to be taken in potentially grave or life-threatening situations.
In the same way our squirrel Kevin reached out to the League of Extraordinary Animals, civil society in Europe and beyond is relying on the EU institutions to develop effective corporate due diligence rules to ensure more transparency, fairness and accountability for all actors in the value chains.
The Nutville tale comes with two possible endings, and we have a clear favourite. We hope the European Parliament and our national governments will choose the same one.