EU study on due diligence requirements through the supply chain – the European Commission’s Final Report and its legislative implications

The European Commission has published the results of its study on due diligence requirements through the supply chain. The study draws on an extensive survey and consultation process involving business, trade unions and civil society, assessing current market practices and worldwide regulatory requirements as well as options for implementing and ensuring due diligence. It provides one of the most comprehensive overviews to date of business attitudes in Europe.  It also sets out the likely way ahead on much-anticipated EU legislative measures, and has already had an impact, influencing the Commission’s recently published Consultation Paper on the renewed Sustainable Finance Strategy.

The study

The Commission’s research was undertaken by the British Institute of International and Comparative Law in partnership with Civic Consulting and LSE Consulting. The study methodology included surveys, interviews, case studies and legal research. Conducted between March 2019 to May 2019 the Commission surveyed 334 businesses, from SMEs to multinationals, from all sectors; and sought the views of almost 300 other stakeholders, such as business and industry associations, civil society, trade unions and practising lawyers. 

Key findings

The study suggests:

• One third of the surveyed companies stated that they are currently conducting broad-ranging due diligence in relation to their environmental and human rights impacts arising in their operations and supply chains, based on the framework set out in the UN Guiding Principles.  Another third of businesses conduct supply chain due diligence in certain limited areas (such as health and safety, labour, non-discrimination and equality, environmental, land rights and indigenous communities).
• The due diligence instruments that are most frequently applied by companies include clauses in supplier contracts, codes of conduct and audits. Most business respondents stated that their due diligence activities cover first tier suppliers only, but around 16% suggested they extended further up the supply chain.
• The survey produced some interesting results on why businesses conduct due diligence – and a divergence in opinion between the business community and other stakeholders.  The business representatives surveyed put reputational risks and demands by investors and consumers as the most relevant drivers for undertaking due diligence; but that legal obligations have the least influence. In contrast, other stakeholders, including civil society respondents, generally viewed regulatory requirements as the most important driver for businesses conducting human rights due diligence.

 Options for regulatory intervention

The study considered the following four options for regulatory interventions at the EU level:

• No policy and no regulatory change;
• Introduction of new voluntary guidelines;
• Introduction of new reporting obligations;
• Introduction of new mandatory due diligence requirements.

Option 4 generally represented the most favoured option, receiving a warm reception from business representatives. 70% of the company representatives surveyed thought it would generate benefits for businesses, particularly the creation of a level playing field, legal certainty, harmonisation across European jurisdictions and increasing leverage in their relationships with business partners. Other stakeholders stressed the potential of mandatory regulation to increase the number of businesses conducting human rights due diligence, and to improve access to remedy, i.e. enabling to bring law suits.

Survey respondents generally favoured a cross-sectoral regulation that also considers sector-specific issues. Interestingly, the majority also indicated a preference for a regulation that applies to companies of all sizes.

However, participants had different opinions in relation to the form mandatory due diligence requirements would take, particularly regarding liability and methods of enforcement. The Commission’s study put a variety of options on the table, including judicial or non-judicial remedies, and governmental/regulatory oversight (potentially with the power to impose sanctions for non-compliance). Most interviewees mentioned that a state-based oversight mechanism might be helpful in enforcing potential regulations. Yet, some interviewees stressed that resources of state bodies are limited, and therefore such bodies could hardly investigate issues like environmental and human rights impacts abroad.

 The way forward

The European Commission’s study is a very interesting research and will help to understand shifting business needs and attitudes in relation to the potential introduction of EU-wide mandatory supply chain due diligence. The fact that multinational businesses appear increasingly to favour legal regulations is not a particular surprise; business have often been at the forefront of driving legislative change in this regard (for example, the UK Modern Slavery Act), and uniform regulation at EU level can level the playing field and can ease legal compliance across jurisdictions.

Yet drafting legal regulation in this area is challenging. Too prescriptive, and it risks becoming a ‘tick-box’ exercise. Too general, and it will be criticised for weakness.  It also needs to take into account the very different human rights risks arising in different sectors. The issues with which a telecommunications company must grapple are not necessarily the same as those facing an extractives business; and nor can one realistically expect an SME to conduct human rights due diligence of the same form and sophistication as a multinational.

The possibility of sanctions adds a further layer to this complexity. The transition from reporting requirement to a fining / civil liability regime – if that is the route the EU ultimately takes – is not straightforward. The law must be clear in what circumstances sanctions may be imposed, and what kind of due diligence might provide grounds for exemption from such legal liability.

It remains to be seen how and when exactly the EU will introduce mandatory due diligence provisions. Surprisingly, the current COVID-19 pandemic seems to accelerate concrete next steps. The EU Commissioner for Justice, Didier Reynders, explained that he would ensure that the results of the study are taken into account for the future work of the European Commission. During a recent high-level webinar hosted by the European Parliament, the Commissioner announced that the European Commission will present a legislative proposal on mandatory human rights and environmental due diligence in early 2021. A public consultation will be started soon. According to the Commissioner, the envisaged legislation will be cross-sectoral and cover the entire supply chain. It will include companies of all sizes but will also offer exceptions for SMEs. The legislation will likely provide for sanctions and corresponding enforcement authorities. Yet, according to the Commissioner, the question of civil liability still needs to be determined.

The European Commission’s study has already had another concrete impact: the European Commission’s Consultation Paper on the renewed Sustainable Finance Strategy – that was just recently published – includes specific questions regarding the need and design of a legally binding supply chain due diligence law.