EU mandatory supply chain due diligence – European Parliament publishes draft directive

As reported, the European Commission announced earlier this year that it would present a legislative proposal on mandatory human rights and environmental due diligence in early 2021. The European Parliament’s Committee on Legal Affairs has now published a draft report which will be sent to the European Commission, accompanied by the request that the European Commission presents a legislative proposal without undue delay, taking into account the recommendations laid out in the draft report. We look here at the key points coming out of the proposed directive outlined in the report, as this gives a flavour of the kind of legislation that may be coming. 

Scope

The scope of the draft directive is far-reaching. It would apply to all companies established in the EU or limited liability companies operating in the EU’s internal market. The proposed directive would thus also apply to non-EU companies conducting business in the EU. There are no limits or thresholds in relation to the size of covered companies. However, EU Member States might exempt so-called micro enterprises (i.e. not exceeding two of the following three characteristics: 10 employees; balance sheet total of EUR 350,000; net turnover of EUR 700,000).

Due Diligence Duties

Companies would be obliged to establish an adequate compliance system. In a first step, companies would have to identify and assess human rights, environmental and governance risks. In further steps, enterprises would be required to establish a due diligence strategy and to actually carry out proportionate supply and value chain due diligence. Enterprises would also need to ensure - through the use of contractual clauses and the implementation of code of conducts - that their business partners implement and carry out human rights, environmental and governance due diligence themselves. The text includes a further provision that would oblige companies to carry out consultations with different stakeholders (such as indigenous people) and trade unions on their due diligence strategy. Companies would also be required to establish grievance mechanisms, providing stakeholders with opportunities to raise concerns.

Procedural aspects/Supervision

The draft stipulates that the EU Commission would be responsible for publishing non-binding guidelines to enable companies to fulfil their due diligence duties under the directive in the best way.

Furthermore, Member States shall designate competent authorities that oversee adherence to the draft directive and can carry out investigations when needed, including interviews with affected stakeholders. Where non-compliance with the directive could cause irreparable harm, those authorities could make interim orders against the companies, imposing certain measures including, in the most egregious cases, temporarily suspending their business operations.

Liability

Non-compliance with the provisions of the directive would result in ‘adequate’ penalties (to be determined). Moreover, repeated infringements that are committed intentionally or with serious negligence would constitute a criminal offence, punishable by adequate criminal penalties.

With regards to civil liability, conducting adequate human rights due diligence in accordance with the provisions of the directive would not absolve the companies of any civil liability pursuant to national law. Further, through an envisaged amendment of the EU’s Brussels I Regulation, a parent company domiciled in a member state could be sued in its EU home country or in the EU country in which it operates for damage caused in a third country by a subsidiary or certain business partners. Additionally, a proposed revision of the EU’s Rome II Regulation would enable claimants to choose the law of the country in which a parent company is based or – if domiciled outside the EU – the law of the country where it operates, or the law of the country in which the damage occurred as the applicable law for the proceedings.

Conclusion

In contrast to other current proposals at the national level, including the developments in Germany, the draft directive would also include environmental and governance risks. Moreover, the possible imposition of criminal sanctions goes beyond the French Vigilance Law (currently considered the high watermark) and the current discussion in Germany on a supply chain due diligence law, which focusses on civil liability and administrative fines. The European Parliament’s draft directive gives a taste of what could find majority support. But it remains to be seen which provisions will become part of the European Commission’s official legislative proposal in early 2021. If adopted, Member States would be obliged to transpose the provisions of the directive into national law, with some discretion as to how they do that.

Key preparatory steps for companies to ensure compliance with the draft directive:

• Identify relevant suppliers and other business partners (internal contract management);
• Identify core geographical, sector- and product/service-specific risk factors;
• Subsequently, assess concrete human rights, environmental or governance risks in the supply chain.

With the legal risks surrounding supply chains increasingly climbing agendas, this is an important development and one that will likely gain momentum in the months ahead. We will continue to monitor and report on developments on the EU’s mandatory human rights due diligence proposals.