Business and Human Rights: Mandatory human rights and environmental due diligence – EU continues to lead global charge

As we outlined in our previous briefing, the European Commission ("EC") has announced that it will develop legislation that would require EU companies to carry out human rights and environmental due diligence.¹ Below we examine an indication of what that proposed law could look like and other related developments at the EU and domestic level.

Key takeaways:

1. The European Parliament Responsible Business Conduct Working Group ("RBC Working Group") has urged the EC to include certain standards in the proposed EU human rights and environmental due diligence law – including that the law applies to businesses across all sectors and sizes and contains an effective enforcement mechanism.
2. The proposed EU due diligence law is one of a number of developments at the EU level which aims to promote sustainable and responsible business.
3. The future EU law reflects a fast-changing legal environment at the domestic level, which is illustrated in a map recently published by the European Coalition for Corporate Justice and emphasised by a recent announcement by the German Government to introduce a national supply chain law by the end of 2021.

Accordingly, best-in-class companies are already:

• Closely monitoring legislative developments relating to mandatory human rights and environmental due diligence.
• Carrying out a human rights impact assessment and taking proportionate counter-measures, as well as communicating internally and externally on what measures have been taken.
• Reviewing and reinforcing complaints mechanisms and speak-up programmes, and ensuring the business is well equipped to deal with "crises".
• Reviewing the extent to which their Board is equipped to address supply chain risks, including through training executives and seeking independent support and advice.
• Reviewing the role, resources and expertise of the legal and compliance functions, who should play a key part in addressing these new challenges.

The proposed EU due diligence law

The RBC Working Group has followed up the EC's commitment to introduce mandatory human rights and environmental due diligence legislation with a letter to the EC Commissioner for Justice requesting that the proposed EU law contains certain principles (the "Letter") – including that the law should:

• Apply to all business of any size across the EU;
• Include the obligation to respect human rights and the environment in businesses’ own domestic and international activities and throughout their global value chains;
• Ensure that businesses have an obligation to conduct ongoing due diligence processes on their entire global value chains and report publicly on such processes, their effectiveness and results;
• Be supplemented by more specific standards and guidance;
• Establish civil liability for human rights abuses and environmental harms and provide access to remedy for victims; and
• Provide authorities with effective instruments to monitor compliance and ensure enforcement, including through penalties and sanctions.

The proposed EU law remains to be drafted but these points may represent the core pillars on which the future EU law is drafted.

Other related developments at the EU level

In its Letter, the RBC Working Group submits that the proposed EU law should form part of the EU's broader effort to promote responsible business conduct, and calls on further action in areas such as public procurement and sustainable trade.² The European Green Deal³ – which established the EC's roadmap for making the EU's economy sustainable – is currently positioned as Europe's growth strategy to promote the "green recovery" of the EU in the post-Covid economic crisis⁴. In addition, the EC has already initiated the process to strengthen the EU's Non-Financial Reporting Directive to promote sustainable investment.⁵

As regards environmental standards, the direction of travel of the EU is clear: it has recently published a taxonomy of environmentally sustainable economic activities (which will be deepened over time), has introduced a green bond standard, and has published a Circular Economy Action Plan.  In addition, both the Paris Agreement and the Sustainable Development Goals point towards increased environmental protection.  This is being reinforced on a voluntary basis by the adoption of a plethora of plastics, renewable energy, waste and energy targets (to name but a few) by the private sector.

As a leader in sustainable policy, the EU's law will likely trigger further regulatory developments around the world.

The fast-changing domestic legal landscape

The continuing international trend towards mandatory human rights and environmental due diligence legislation at the domestic level is gathering more momentum. Switzerland is set to hold a referendum towards the end of 2020 on introducing its own due diligence law⁶ and, as we outline further in our briefing, in July 2020 the German government announced that it intends to introduce its own due diligence law before the end of 2021. The European Coalition for Corporate Justice has also published an updated map which illustrates the growing number of domestic legislative proposals in Europe.

What can businesses do to prepare for increasing due diligence obligations?

Voluntary frameworks provide guidance on how businesses can prepare for the proposed EU due diligence law and related further developments at the EU–level and beyond. Indeed, the Letter supports the EC's commitment to draw on existing internationally recognised standards when drafting the proposed EU mandatory human rights and environmental law, including the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises.

In addition, the IFC Performance Standards offer a framework for financial institutions to effectively identify and assess the key environmental and social risks that might be associated with a financial transaction or project.

As a general matter, companies are well-advised to conduct a mapping exercise of their entire global value chain in order to facilitate compliance with future due diligence requirements resulting from an eventual EU due diligence law.  Many businesses have already adopted a human rights compliance programme and procedures, and, outside of the current mega trends of plastic and climate-related commitments, businesses and their advisors have known for some time how to analyse and mitigate environmental risk. Environmental risk assessments, monitoring, reporting, compliance mechanisms and external review are all relevant. In the face of greater scrutiny, closer attention will need to be paid to these areas and other emerging best practices under existing voluntary guidelines.