The nuances of a pending European Union-wide environmental and human rights act are still being revealed, but one thing is already abundantly clear. The EU Due Diligence Act will push many European companies toward greater accountability for the environmental and human rights harm caused by their actions.
The European Commission will provide further clarity on reporting requirements and compliance measures in the coming months. But in the meantime, large EU-based companies can reasonably prepare themselves to make a net-zero pledge in the future. The EU Due Diligence Act will also potentially affect several thousand non-European businesses with EU-based suppliers.
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A brief history of the EU Due Diligence Act
Back in April 2020, EU Commissioner for Justice Didier Reynders signaled that the EU was ready to move on comprehensive human rights and environmental legislation standards.
In his statement for the European Commission, he said: “This proposal is a real game-changer in the way companies operate their business activities throughout their global supply chain. With these rules, we want to stand up for human rights and lead the green transition. We can no longer turn a blind eye on what happens down our value chains. We need a shift in our economic model. The momentum in the market has been building in support of this initiative, with consumers pushing for more sustainable products. I am confident that many business leaders will support this cause.”
A 2020 European Commission study backed Reynders up. The study showed that 70% of participating companies also desired a legal framework for both environmental impact and human rights. A year later, the full European Parliament echoed its support. And finally, in February 2022, the European Commission adopted a proposal for a directive on corporate sustainability due diligence.
The objective of the EU Due Diligence Act is to promote sustainable and ethical corporate conduct across worldwide value chains. Member States will designate an authority to supervise and impose effective, proportionate, and dissuasive sanctions and compliance orders. Furthermore, they will ensure victims get compensation for damages resulting from any failure to comply.
This proposal is a draft law that seeks to establish sustainability standards by enforcing the following company-wide practices:
- Diligently considered human rights
- Elimination of child labor and worker exploitation
- Reduction of environmental impact
Consumers will gain enhanced transparency into company supply chains, enabling them to make better-informed choices. The Act would also ensure that all EU companies operate under equal competitive conditions.
It’s worth noting that similar standards are already ratified in a few EU countries, including France and the Netherlands. In Germany, the new Supply Chain Act (Lieferkettengesetz) went into effect on January 1, 2023. The Act also aligns with the Human Rights Due Diligence (HRDD) process described in the UN Guiding Principles, pillar II (UNGP) and OECD guidelines (2011) and guidance (2018).
What is the scope of the Due Diligence Act?
The EU Due Diligence Act will affect larger EU and non-EU companies. Mayer Brown estimates that the directive applies to 13,000 EU businesses and 4,000 non-EU businesses. Small and medium-sized businesses are technically exempt but will likely see some impact when doing business with larger firms.
The EU-based companies targeted are generally required to have:
- Over 500 employees with €150 million in net turnover, or
- Over 250 employees with over €20 million in assets, over €40 million in net turnover in a “high-risk sector.” These industries include agriculture, forestry, footwear and textiles, and food and extractives.
Non-EU based companies are generally required to have:
- Net turnover of more than €150 million in the EU, or
- Net turnover of more than €40 million but not more than €150 million with 50% of net worldwide turnover generated in one of the high-risk sectors named above.
The new directive creates the following requirements for these businesses:
- Integrate due diligence into company policies and update annually.
- Identify actual or potential adverse human rights and environmental impacts.
- Prevent or mitigate these potential impacts, and end or minimize actual impacts.
- Monitor due diligence policy effectiveness through annual (or more frequent) reviews.
- List all relevant due diligence measures taken in the previous year on the company website.
These measures must encompass entire company supply chains — including suppliers and contractors.
Protecting human rights and environmental causes in the EU
There’s significant legal precedence for corporate human rights due diligence initiatives in the EU. The Center for Strategic and International Studies cites the UN Guiding Principles on Business and Human Rights, the OECD’s Guidelines for Multinational Enterprises and the Due Diligence Guidance for Responsible Business Conduct as precedents.
And the staggering impact of human rights abuses is clear. The 2018 Global Slavery Index estimated 24.9 million victims of forced labor across the globe. The 2020 Corporate Human Rights Benchmark (CHRB) looked at human rights disclosures for 229 global companies. At least 104 of those companies had at least one serious allegation connected to them.
How can organizations comply?
It’s better to be prepared than to play catch-up. Develop a due diligence plan — in detail — to help your company eliminate human rights and environmental violations from its supply chain and escape costly consequences for noncompliance. And don’t forget to download our Ultimate Guide to the EU CSRD eBook to reduce risk for your organization.
