Clifford Chance

On 29 April 2020, the European Commissioner for Justice, Didier Reynders, announced plans for a legislative initiative next year to introduce EU-wide mandatory due diligence requirements for businesses to respect human rights and prevent environmental harm across their global supply chains.

The Commission's commitment comes at a time of global uncertainty amid the Covid-19 pandemic, with the forthcoming legislation to form part of the EU's recovery package. In his announcement, Commissioner Reynders indicated that "the Covid-19 crisis powerfully exposes the vulnerabilities of our economy and of unregulated global supply chains", suggesting that the action we take in response "will determine the sustainability of our economy, society and planet".

Background to the proposal

The proposal follows a study by the EU Commission, published in February 2020 (the Final Report), which focuses on due diligence requirements for businesses to identify, prevent, mitigate and account for negative human rights and environmental impacts in their supply chains.

There has been growing momentum for the establishment of a mandatory human rights and environmental due diligence framework since the introduction of the UN Guiding Principles on Business and Human Rights in 2011. We have seen significant developments at national level in several European countries, with elements of the corporate responsibility to respect human rights now embedded in legal requirements in some jurisdictions.

In France, for example, the landmark Duty of Vigilance Law came into effect in March 2017, imposing legally binding obligations on parent companies regarding their activities, and those of their subsidiaries and entities within their supply chain. See our recent blog post for more information on the first legal action under the law since it entered into force, heard in January 2020.

In the Netherlands, the Child Labour Due Diligence Act was adopted in May 2019, which aims to prevent the supply of goods and services produced using child labour to consumers in the Netherlands. Meanwhile, in Germany, the Initiative Lieferkettengesetz launched in September 2019 calls for the issuance of a mandatory supply chain due diligence law. Further updates on the implementation of human rights reporting and due diligence requirements around the world can be found in our latest briefing.

More recently, in December 2019, over 100 civil society organisations released a statement demanding EU human rights and environmental due diligence legislation. In April 2020, a group of 101 investors representing over US$4.2 trillion in assets under management also called on governments to introduce mandatory human rights due diligence regulation for companies, presenting a statement on the "investor case" for such measures.

Options for legislation

Commissioner Reynders' announcement outlined high-level points intended to feature in the new law, including that it will apply across all sectors, will address a broad range of risks and will provide for sanctions as a means of enforcement.

Mandatory due diligence was one of four options for regulatory proposals put forward in the EU Commission's Final Report. The study framed this as a "legal duty or standard or care", which would allow for a company to demonstrate, in its defence, that it has met this standard by undertaking the level of due diligence "required in the particular circumstances". That is to say, a context-specific and risk-based approach is envisaged, with prioritisation of those risks which are the most severe, significant or salient. Sub-options considered for the application of the legal duty included limiting it to a defined set of large companies, applying it to all businesses (including SMEs), or a general duty applying to all businesses with specific additional obligations applying to only large companies. The study also looked at potential oversight and/or enforcement mechanisms, such as judicial or non-judicial remedies, a State-based oversight body and sanctions for non-compliance.

Next steps

It remains to be seen how the Commission's plans will translate into legislation, with the precise rules to be determined. It is also unclear to what extent any such legislation will be implemented in the UK in light of the Brexit transition.

The Commission will launch a public consultation in the coming weeks to seek input from stakeholders, which will inform the Commission's legislative proposal. The draft legislation is expected to be tabled in early 2021.