Business and Human Rights: Mandatory human rights due diligence – European Commission to introduce a legislative initiative by 2021

On 29 April 2020, the European Commissioner for Justice, Didier Reynders, announced that the European Commission will develop legislation that would require EU companies to carry out human rights and environmental due diligence.¹ The Commissioner confirmed that a legislative initiative would be introduced by 2021. Details of the exact legal mechanism will follow, but according to the Commissioner, any legislation would be "inter-sectorial, mandatory and of course with a lot of possible sanctions".²

The announcement follows the publication of a study in February 2020, commissioned by the European Commission (the "Study")³, which revealed widespread support among business respondents for EU-level mandatory human rights due diligence legislation.

Support for due diligence in this context has been growing in recent years, including from the business sector. For example, in December 2019, three of the world's largest cocoa companies, Barry Callebaut AG, Mars Wrigley and Mondelēz International⁴, issued an "urgent" call on the European Union to strengthen due diligence requirements of companies in global cocoa supply chains, and asked for a "draft regulation to be published no later than the end of 2020"⁵. There is growing evidence that investors also support such measures: in April 2020, a group of 101 international investors representing over US$4.2 trillion in assets issued a joint call for greater regulatory measures requiring companies to carry out human rights due diligence.⁶

This business and investor support has been increasing in parallel to emerging mandatory due diligence legislation at the domestic level.

In addition, the health, social and economic crisis caused by COVID-19 is "fast becoming a human rights crisis."⁷  Consequentially, responsible business conduct is becoming ever more important, which is in turn increasing the risk of reputational and potentially legal damage.

As we outline further below, these factors mean that it is now more important than ever for companies to have proper human rights due diligence processes in place.

Key takeaways

1. The European Commission's commitment to a legislative initiative on mandatory human rights and environmental due diligence in 2021 is the latest development in an increasing tide of regulation on the topic of business and human rights.
2. The Study acknowledges a number of non-legal incentives for carrying out due diligence, as well as identifying various benefits associated with introducing mandatory due diligence legislation.
3. The COVID-19 pandemic has underlined the importance of businesses carrying out human rights and environmental due diligence.

Ultimately, existing non-legal incentives suggest that companies should already be considering how they manage human rights and environmental risks.  Future and impending legal developments in this regard will only serve to accelerate this prerogative.

The continuing trend towards mandatory human rights due diligence

The United Nations Guiding Principles on Business and Human Rights ("UNGPs") (2011)⁸ were the first globally accepted standard holding businesses and governments accountable for adverse human rights impacts. The UNGPs are complemented by OECD recommendations and ILO recommendations⁹.

The political will generated by the UNGPs has caused the legal landscape around human rights and environmental due diligence to change significantly in recent years.  For example, the UNGPs are reflected in mandatory human rights due diligence legislation in France¹⁰ and the Netherlands¹¹. There are also national movements for mandatory due diligence legislation in a number of countries such as Germany, Finland, Austria, Denmark, and Switzerland.¹² The UNGPs are also reflected in legislative requirements for mandatory disclosure of a specific human rights risk –  modern slavery in a company's supply chain – in the UK¹³, Australia¹⁴ and California¹⁵, with similar laws proposed in Hong Kong¹⁶ and Canada.¹⁷

In response to these legal developments, some multinationals have argued that an EU-level mandatory human rights diligence legislation would "level the playing field" and increase legal certainty in the face of a "patchwork" of different domestic obligations.¹⁸ Civil society and NGOs have also been campaigning for the EU to enact its own law.¹⁹

The Commissioner for Justice has now reacted to these calls by committing to a legislative initiative in 2021 on an EU-wide mandatory human rights and environmental due diligence law. Whilst the legislation remains to be drafted, the Commissioner has suggested that the law will contain an enforcement mechanism with sanctions. He has also suggested that such a mechanism could be coordinated by supervisory authorities at the national level, with oversight at the EU level. He further indicated that the legislation will be based on the UNGPs, the OECD and the ILO frameworks, and will be cross-sectorial,²⁰ which reinforces the importance of companies adhering to these voluntary guidelines now. 

Why act now?

Businesses should start positioning themselves to ensure they are prepared for the EU-wide legislation. As a leader in sustainable policy, the EU's law will likely trigger further regulatory developments around the world.

In addition, and as identified in the Study, there are a number of non-legal incentives to undertake human rights and environmental due diligence.  The top three incentives identified in the Study were: reputational risks; investor requirements; and consumer expectations. A significant minority of business respondents were also incentivised by operational risks (42.35%) and regulatory reporting obligations (41.73%).  The least selected incentive for business respondents was litigation risk (20.14%) despite class actions being potentially costly and spanning many years.

These incentives have now become more relevant in circumstances where human rights are "at the frontline in the fight against COVID-19"²¹. Some businesses are reacting to the crisis by guaranteeing workers' pay and supporting suppliers.  However, there is increased attention on other businesses which are taking measures that are resulting in human rights and environmental violations – which the OECD has said "may in turn have longer-term legal and reputational effects on companies"²². The OECD is therefore calling on businesses to take a responsible business conduct approach in tackling the coronavirus.²³ A proper responsible business approach includes effective human rights and environmental due diligence.

Current due diligence market practices

The Study also illustrated that there is a significant variance in how businesses currently manage human rights and environmental risks in their supply chains.  More than two-thirds of business respondents reported their due diligence practice to include training on human rights or environmental impacts, contractual clauses, codes of conduct and audits.  Internal and external investigations and engagement with human rights and environment experts were other steps adopted by a minority of business respondents.  The Study draws on case studies to highlight particularly interesting examples of due-diligence related company practices: for example, Nestlé's collaboration with the Danish Institute for Human Rights under an innovative partnership aimed at integrating human rights into policies and procedures.²⁴  Businesses should take note of emerging best practices to ensure they are adhering to their current and emerging human rights due diligence responsibilities.

¹ The commitment was made during a Webinar hosted by the Responsible Business Conduct Working Group of the European Union, 29 April 2020, available at: https://vimeo.com/413525229

² Webinar hosted by the Responsible Business Conduct Working Group of the European Union, 29 April 2020, available at:https://vimeo.com/413525229

³ Study on due diligence requirements through the supply chain, February 2020, British Institute of International and Comparative Law, Civic Consulting, Directorate-General for Justice and Consumers (European Commission), and LSE, available at: https://op.europa.eu/en/publication-detail/-/publication/8ba0a8fd-4c83-11ea-b8b7-01aa75ed71a1/language-en

⁴ As well as Fairtrade International, Rainforest Alliance, and Voice.

⁵ Joint position paper on the EU's policy and regulatory approach to cocoa, 2 December 2019, available at: https://www.voicenetwork.eu/wp-content/uploads/2019/12/Joint-position-paper-on-the-EUs-policy-and-regulatory-approach-to-cocoa.pdf

⁶ Investors call on mandatory human rights due diligence, 24 April 2020, available at: https://responsiblebusinessconduct.eu/wp/2020/04/24/investors-call-on-mandatory-human-rights-due-diligence/

⁷ António Guterres, Secretary-General of the United Nations, 23 April 2020, available at: <https://www.un.org/en/un-coronavirus-communications-team/we-are-all-together-human-rights-and-covid-19-response-and

⁸ The United Nations Guiding Principles on Business and Human Rights, 2011, available at: https://www.ohchr.org/Documents/Publications/GuidingPrinciplesBusinessHR_EN.pdf

⁹ The OECD Guidelines for Multinational Enterprises of 2011, and the Responsible Business Conduct Guidance of 2018, are both aligned with the ILO Tripartite Declaration of Principles concerning Multinational Enterprises.

¹⁰ The Duty of Vigilance Act 2017, available at: https://www.legifrance.gouv.fr/affichTexte.do?cidTexte=JORFTEXT000034290626&categorieLien=id

¹¹ The Child Labour Due Diligence Law 2016-2017, available at https://www.eerstekamer.nl/behandeling/20170207/gewijzigd_voorstel_van_wet

¹² The Business & Human Rights Resources Centre tracks emerging legislation and civic movements: https://www.business-humanrights.org/en/national-movements-for-mandatory-human-rights-due-diligence-in-european-countries

¹³ The Modern Slavery Act 2015, available at: http://www.legislation.gov.uk/ukpga/2015/30/contents/enacted

¹⁴ Modern Slavery Act 2018, available at: https://www.legislation.gov.au/Details/C2018A00153

¹⁵ The California Transparency in Supply Chains Act 2015, available at: https://oag.ca.gov/sites/all/files/agweb/pdfs/sb657/resource-guide.pdf

¹⁶ Hong Kong: lawmakers push for anti-slavery law, 9 January 2019, available at: https://www.business-humanrights.org/en/hong-kong-lawmakers-push-for-anti-slavery-law

¹⁷ Proposed Bill S-211, available at: https://www.parl.ca/DocumentViewer/en/43-1/bill/S-211/first-reading

¹⁸ See, for example, the business interview comments at page 106 of the Study, available at: https://op.europa.eu/en/publication-detail/-/publication/8ba0a8fd-4c83-11ea-b8b7-01aa75ed71a1/language-en

¹⁹ For example, on 3 October 2019, over 80 NGOs and trade unions published a call on the European Commission for EU-level mandatory human rights and environmental due diligence legislation. See: European Coalition for Corporate Justice Civil Society Calls for Human Rights and Environmental Due Diligence Legislation, 3 October 2019, available at: http://corporatejustice.org/news/16785-civil-society-calls-for-human-rights-andenvironmental-due-diligence-legislation.

²⁰ Webinar hosted by Responsible Business Conduct Working Group of the European Union, 29 April 2020, available at: https://vimeo.com/413525229

²¹ The United Nations - COVID-19 and Human Rights, April 2020, available at: https://www.un.org/victimsofterrorism/sites/www.un.org.victimsofterrorism/files/un_-_human_rights_and_covid_april_2020.pdf

²² The OECD: COVID-19 and Responsible Business Conduct, 16 April 2020, available at: https://mneguidelines.oecd.org/COVID-19-and-Responsible-Business-Conduct.pdf

²³ The OECD: COVID-19 and Responsible Business Conduct, 16 April 2020, available at: https://mneguidelines.oecd.org/COVID-19-and-Responsible-Business-Conduct.pdf

²⁴ Danish Institute for Human Rights - "Nestlé Partnership", available at: https://www.humanrights.dk/projects/nestle-partnership