Due diligence has emerged as one of the primary tools for business enterprises, including financial institutions, to live up to their responsibilities towards people and planet. Although some companies have adapted their business models to meet their commitments to sustainability, others continue to exclusively prioritise profits, growth, and the interests of their shareholders. To be effective, legislation must impose robust obligations, including these key elements:
Human Rights and Environmental Due Diligence
Civil liability is needed to deliver redress for victims of corporate abuse. Victims in foreign countries often face huge obstacles to hold companies to account and obtain remedy. Under the UNGPs, which all Member States and the EU itself have endorsed, States have a duty to improve access to judicial remedy for victims of business-related human rights abuses. A European Commission’s study concluded that if judicial mechanisms of redress existed, compliance with due diligence requirements would increase.
To ensure a true level playing field for all European companies, EU legislation should harmonise civil liability. EU legislation should provide civil litigation as an option of last resort, however, without the possibility of effective litigation, there is no real incentive for companies to negotiate under alternative resolution mechanisms. Companies can be reassured that civil liability would only apply if there was a link between the harm and the company’s actions or omissions, and if the company could not prove that it acted with due care.
- Civil liability is needed to deliver redress for victims of corporate abuse. Victims in foreign countries where EU companies operate, source products or outsource activities, often face huge obstacles to hold companies to account and obtain remedy. They must have the opportunity to seek remedy before the courts of the home country of the parent or lead company that negligently failed to prevent the harm and benefited at the expense of it.
- Civil liability would foster adequate due diligence. The Commission’s study on due diligence requirements through the supply chain concluded that if judicial mechanisms of redress existed, compliance with due diligence requirements would increase. Due diligence would limit the risk of claims and proof of adequate due diligence could act as a defence to legal claims (see commentary to UNGP 17).
- Harmonised EU rules on civil liability are needed to ensure a level playing field. National laws of several EU Member States include a general liability provision in case entities do not comply with applicable (national or EU) laws (see McCorquodale and Scheltema paper, August 2020). The French Duty of Vigilance Law provides for civil liability for failure to conduct due diligence. Companies in these Member States could be held civilly liable. To ensure a true level playing field, EU legislation should harmonise civil liability.
- Furthermore, under the UNGPs, which all Member States and the EU itself have endorsed, States have a duty to improve access to judicial remedy for victims of business-related human rights abuses.
- Civil liability would only apply under certain limited circumstances. Companies can be reassured that civil liability would only apply if there was a link between the harm and the company’s actions or omissions, and if the company could not prove that it acted with due care. The scope of business entities whose actions or omissions could trigger liability would therefore be much narrower than the range of entities over which due diligence should be conducted.
- Civil litigation is anyway seen as an option of last resort. Companies can be reassured that non-judicial accountability and dispute settlement mechanisms would become the preferred means for remedy. Civil litigation often takes a long time and entail high costs for the claimants, particularly in transnational cases. However, without the possibility of effective litigation, there is no real incentive for defendants to negotiate under alternative resolution mechanisms.
- Civil liability for harm in supply chains is already a key element of existing due diligence laws and legislative initiatives (e.g. French Duty of Vigilance law; key points for a German supply chain due diligence law, drafted by the Ministries of Labour and Cooperation; Swiss Responsible Business Initiative; UK case law, according to which parent companies can be civilly liable for the operations of its overseas subsidiaries and overseas claimants may be allowed to bring claims through the UK courts (see Lungowe v Vedanta Resources plc  UKSC 20, Judgment, 10 April 2019); draft UN Treaty on Business & Human Rights; European Parliament’s report on an EU legal framework to halt and reverse EU-driven global deforestation).
- The Commissioner for Justice, Didier Reynders, has repeatedly affirmed that civil liability is likely to be an element of the Commission’s proposal for a directive (see here or here). A representative from the Commission insisted on it at a recent DROI hearing [14:23]. The European Parliament briefing on EU Human Rights Due Diligence Legislation and the European Economic and Social Committee (EESC) recent opinion on Mandatory Due Diligence, also recommended it.
- Some European companies and business associations have also spoke out in favour (e.g. Ericsson in this DROI hearing [9:25], Mondelez in this webinar [3:37], or the European Brands Association in its recent opinion on the Commission’s initiative.
Penalties and sanctions
It is of crucial importance that breaches are also met with a mix of administrative and criminal penalties. The reason being that different penalties have different effects and perform different functions. Administrative liability can and should apply when a company has failed in its due diligence obligation but has not yet caused or contributed to harm, thereby incentivizing a company to prevent harm from occurring. Criminal liability should be applicable when irresponsible companies continue to undertake risky and harmful businesses if projected profits outweigh the administrative sanctions.
- Whilst provisions giving effect to the right to effect remedy must be prioritized, it is of crucial importance that breaches of the due diligence obligation and failure to prevent harm is also met with a mix of administrative and criminal penalties. The reason being that different penalties (civil, administrative, criminal) have different effects and perform different functions, and work together as a collective whole for effective enforcement.
- In contrast to civil liability that enables victims to gain remedy when there has been a company failure to prevent harm, administrative liability can and should apply when a company has failed in its due diligence obligation but has not yet caused or contributed to harm. Administrative liability can thereby incentivize a company to prevent harm from occurring. For example, a company that has not undertaken a human rights and environmental risk-assessment should be compelled, through administrative sanction, to undertake that risk-assessment process to ensure that it knows what it has to do to prevent harm.
- Likewise, if a company refuses to consult with stakeholders retaining a legitimate interest in its impacts (workers, affected communities, specialist NGOs) as part of its due diligence obligation, it should face administrative sanction in order to compel it to undertake proper stakeholder consultation.
- Irresponsible companies can be willing to simply factor in the cost of due diligence non-compliance and corresponding administrative sanctions if projected profits meaningfully outweigh the administrative sanctions. In other words, companies may continue to undertake risky and harmful businesses if it is profitable enough to pay for the cost of breaking the law, whilst still generating a significant profit. In such cases, criminal liability should clearly be applicable for the continued breach of a due diligence obligation.
For due diligence legislation to be consistent with the EU Green Deal, environmental standards should also be translated into concrete obligations for companies. EU due diligence rules should specify the protected environmental goods and the expected standard of business conduct, as this would guide companies when conducting due diligence, and administrative and judicial authorities when determining liability.
EU legislation should also require that companies measure their total carbon footprint, set targets for reducing direct and indirect greenhouse gas emissions to align with the 1.5 degrees goal of the Paris Agreement and publicly communicate on their progress towards meeting these targets. According to the European Commission’s study on due diligence requirements through the supply chain, due diligence legislation is likely to have a positive impact on the environment, the health of workers, the resilience of companies.
- As highlighted by the European Commission in the inception impact assessment of the sustainable corporate governance initiative, “many EU companies are sourcing supplies from entities based in countries with lesser environmental standards”.
- The increased geographic dispersion of the supply chain, particularly by operating, sourcing products or outsourcing activities to countries with lesser environmental standards, which often lack the institutional capacity to put in place adequate environmental protection policies, has exacerbated environmental damage and the irreversible loss of natural resources at global scale. In fact, the impact of end-to-end supply chains on emissions is more than five times that of companies’ direct operations.
- Due diligence legislation should be consistent with the EU Green Deal and should not fall short of already existing due diligence standards covering environmental impacts, such as the French Duty of Vigilance Law and the OECD Guidelines for Multinational Enterprises.
- Although not as straight-forward as human rights standards, which protect individual rights, environmental standards, often addressed to states, can also be translated into concrete obligations for companies, as a recent final statement by the Dutch National Contact Point for the OECD shows with regard to a bank’s duties under the Paris Agreement.
- In the absence of a comprehensive and conclusive body of international environmental standards, EU due diligence legislation should specify the protected environmental goods and the expected standard of business conduct in this regard. This would guide companies when conducting due diligence, and administrative and judicial authorities when determining liability (see German Environment Agency study, July 2020).
- Due diligence should include climate change risk assessments and mitigation and adaptation measures. EU legislation should require that companies measure their total carbon footprint, set targets for reducing direct and indirect greenhouse gas emissions to align with the 1.5 degrees goal of the Paris Agreement and publicly communicate on their progress towards meeting these targets (see HRW recommendations for EU legislation, June 2020).
- According to the European Commission’s study on due diligence requirements through the supply chain, due diligence legislation is likely to have a positive impact on the environment. More than half of business survey respondents (52.94%) agreed with such statement.
- Improved environmental performance throughout the global supply chain can have significant benefits for companies, as it improves business performance, as it is good for the health of their workers; decreases the reputational risk of exposure to environmental scandals; reduces reliance on resources that could experience shocks due to climate change or environmental degradation; and delivers greater resiliency, as companies with sustainability policies in place during the Covid-19 crisis have proved (see OECD policy response on COVID-19 and RBC, April 2020).
The ILO Tripartite Declaration encourages companies to conduct due diligence to identify, prevent, mitigate and account for their adverse impacts on human rights, including labour rights. These standards are, however, voluntary. The EU has now the opportunity to make them legally binding.
As the ‘race to the bottom’ has driven down labour conditions in overseas countries, due diligence legislation should make explicit reference to living wages and incomes throughout the supply chain. With EU legislation in place, companies would be held liable for labour abuses where they failed to conduct adequate due diligence. This would also make it easier for host countries to implement labour standards in practice.
- The rise of global supply chains as a new mode of production, trade, and investment has given rise to and aggravated adverse impacts on labour rights. The increased geographic dispersion of the supply chain, particularly by the outsourcing of manufacturing to overseas companies, has induced a ‘race to the bottom’ and driven down labour conditions in Southern countries competing with one another. The current international legal framework (or the absence of one) has allowed market competition through the violation of fundamental labour standards.
- The ILO Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy encourages companies to conduct due diligence to identify, prevent, mitigate and account for their adverse impacts on human rights, including labour rights. These standards are, however, voluntary. The EU has now the opportunity to make them legally binding.
- Due diligence legislation must, therefore, cover any potential or actual adverse impact that may impair the full enjoyment of human rights, including labour rights, understood as those expressed in the ILO Declaration on Fundamental Principles and Rights at Work, as well as in all ILO Conventions and Recommendations, and, in particular the eight fundamental ones.
- Ideally, living wages and incomes should be part of due diligence frameworks. Due diligence legislation should make explicit reference to living wages and incomes throughout the supply chain, and include a definition of living wages and incomes that refers to a decent standard of living (see BfdW/FTAO study, June 2020).
- Member States should ensure that national public authorities (including labour inspectorate) have the responsibility to monitor the respect of companies’ obligations included in the directive. The European Labour Authority should play a role in facilitating and enhancing cooperation between the Member States when it comes to the enforcement of due diligence (see ETUC proposal for a directive, December 2019).
- Companies should be held liable for labour abuses in their global supply chains where they failed to conduct adequate due diligence. Corporate liability in the subcontracting chain is actually common in EU Labour Law (e.g. the Enforcement of Posting of Workers Directive, the Sanctions Directive, the Seasonal Workers Directive).
- Corporate due diligence would support better compliance with labour standards by companies in global supply chains and would make it easier for host countries to implement labour standards in practice. According to the European Commission’s study on due diligence requirements through the supply chain, due diligence legislation is likely to improve labour conditions in third countries. A large majority (65.69%) of business survey respondents agreed that new due diligence rules would have such social impacts.
- There is a common misunderstanding that due diligence legislation would discourage investment in Southern countries. Evidence actually shows that Western firms are often more likely to enter foreign countries with increased respect for human rights, as it fosters a skilled and healthy labour force and reduces the risk of reputational damage.
Broad company scope
Due diligence is the obligation of all companies – proportionate to the level risk that a business generates or encounters. Small and medium sized enterprises would have a far lower burden relative to the size of their operations, but would still need to assess and mitigate risks, especially if they operate in particularly risky sectors. Increasingly, empirical evidence is revealing that companies that know their supply chains and actively identify and mitigate their risks generally perform better overall.
- From international standards it is very clear that due diligence is the obligation of all companies – proportionate to the level risk that a business generates or encounters. In discussions over who should be doing due diligence, the element of proportionality clearly outlined in international standards is often neglected.
- Small and medium sized enterprises (SMEs) typically do not generate and encounter as many risks to human human rights, labour and the environment as larger businesses do, by virtue of the simple fact that their value chains are smaller. Just like with any other obligation that applies to all businesses (employment and industrial relations laws; occupational health and safety etc.) SMEs will have a far lower burden relative to the size of their operations.
- Nonetheless, SMEs constitute a truly significant part of the economy and can have truly significant impacts. They can operate in particularly risky sectors and in a manner which generates significant risks to human rights, labour and the environment. In line with international standards, SMEs must also assess and mitigate the risks that their for-profit operations generate, in order to ensure that they are not profiting from human rights, labour and environmental abuses.
- Increasingly, empirical evidence is revealing that companies with responsible business conduct policies and practices, such as due diligence, are more resilient, stronger and better performing businesses. Companies that know their supply chains and actively identify and mitigate their risks generally perform better overall. It is therefore incorrect to only conceptualise due diligence as burden on companies; as the evidence reveals its potential as a beneficial and valuable standard of conduct.
Broad value chain scope
Most of the worst forms of human, labour and environmental abuses occur outside Europe, far beyond the first and second tier of the value chain, often at the bottom. For this very reason, international standards and existing due diligence laws and legislative proposals do not limit the scope of corporate due diligence obligation according to value chain tier. Often the leverage a company has goes far beyond the first or second tier, and is clearly commensurate with how large a company is: larger companies will naturally be required to do more and to go further than smaller companies.
An EU Due Diligence Law must apply to the entire Value Chain - proportionality
- Most of the worst forms of human and labour abuses, such as child and forced labour, occur far beyond the first and second tier of the value chain, often at the bottom.
- For this very reason international standards such as the UNGPs and the OECD Due Diligence Guidance (drawn up in tripartite negotiations together with business) do not limit the scope of due diligence obligations according to tier.
- Existing due diligence laws and legislative proposals such as the French Devoir du Vigilance, the Swiss Responsible Business Initiative, the proposed German Due Diligence law and the Dutch Child labour Due Diligence Law also do not limit the scope of corporate due diligence obligation according to value chain tier.
- International standards indicate the concept of “leverage” for defining the scope of the corporate due diligence obligation; how much influence a company has, or can have, over an entity in its chain. Often the leverage a company has goes far beyond the first or second tier, and is clearly commensurate with how large a company is.
- Large companies have the proven capacity to get all the way down to the very bottom of their supply chains to work with primary suppliers in order to improve conditions on the ground, often in challenging environments. Larger companies will naturally be required to do more and to go further than smaller companies; commensurate with their leverage and influence across the value chain.
An EU Due Diligence Law must apply to value chains inside as well as outside of the EU
- Well-documented and sever human rights, labour and environmental abuses exist within the value chains of European companies inside and outside Europe.
- Under the UNGPs EU member states have an obligation to ensure that companies perform due diligence in order to identify, prevent, mitigate and remedy adverse impacts – no matter where they occur.
- There is no legitimate reason why European value chains containing the below confirmed abuses should not be covered by the Due Diligence obligation.
Consultation of stakeholders, including trade unions
All businesses should inform and consult all communities and individuals impacted or potentially impacted in a safe, timely and direct manner about the likely economic, social, cultural and environmental impacts and risks. Due diligence rules also need to include an obligation for companies to involve trade unions, workers and their legitimate representatives in the definition and implementation of companies’ due diligence processes. This can help companies to identify risks and to set up a more effective due diligence process. Their involvement may help to push back against pressure from financial markets and short-term investors, and give voice to those with a strong interest in the long-term sustainability of the company.
- All businesses should consult communities and individuals impacted or potentially impacted in a timely and direct manner. Their perspectives should be taken into account in the definition and implementation of due diligence measures.
- Impacted or potentially impacted stakeholders should be informed about the likely economic, social, cultural and environmental impact, including potential risks, and the different stages of the due diligence process.
- Trade unions, workers and their legitimate representatives should be appropriately involved in the definition and implementation of companies’ due diligence processes (see ETUC proposal for a directive, December 2019).
- Due diligence legislation should enshrine the right for trade unions at the relevant levels, including sectoral, national, European and global levels, to negotiate the elaboration, implementation, enforcement, assessment and review of the due diligence process.
- Workers or their representatives should also be timely and sufficiently informed and consulted on the definition and implementation of the due diligence process, in accordance with Directive 2002/14/EC, Directive 2009/38/EC and Council Directive 2001/86/EC.
- Trade unions and workers’ representatives of companies in the global supply chain should also be involved in the definition and implementation of the due diligence process, particularly in the identification and assessment of the adverse impacts.
- Consultations should be free from any type of coercion, intimidation or manipulation, sufficiently. Companies should ensure the safe participation of rights-holders without fear of reprisal.
- Through consultations, companies should address specific barriers that certain groups may face. Adapting the process to the needs and rights of specific groups is essential to the success of the consultation processes.
- Where a company fails to engage in effective, meaningful and informed negotiations with trade unions, or does not adequately inform and consult them, workers or their representatives, these should enjoy the possibility to refer the matter to the competent authority, which should impose sanctions on the company.
- Company level consultations do not replace the obligation of States to obtain free, prior and informed consent from indigenous peoples and local communities or other rights granted to groups that might be disproportionally impacted.
- The consultation and involvement of stakeholders, workers and trade unions, can help companies to identify risks more precisely and to set up a more effective due diligence process. Their involvement may help to push back against pressure from financial markets and short-term investors and give voice to those with a strong interest in the long-term sustainability of the company, thus helping improve its long-term performance and profitability.
Extended limitation period for bringing civil action against a company
The limitation period for bringing civil action against a company often constitutes a major obstacle for victims of corporate abuse, rendering them unable to access legal remedies. In Europe, the limitation period for civil claims is usually between one and three years, which is short and does not take into consideration the fact that transnational cases need more time to work with affected groups, lawyers and investigators across borders, languages, and cultures. EU legislation should redress the unrealistic limitation periods by ensuring that limitation periods are reasonable and sufficient.
- The statute of limitations often constitutes a major obstacle for victims of corporate abuse, rendering them unable to access legal remedies. In Europe, the limitation period for civil claims is usually between one and three years, which is short and does not take into consideration the fact that transnational cases need more time to work with affected groups, lawyers and investigators across borders, languages, and cultures.
- Due diligence legislation should redress the unrealistic limitation periods for bringing legal actions by ensuring they are reasonable and sufficient, taking into special account the particularities of transnational litigation.
- This means establishing that limitation periods should not begin to run before the human rights or environmental abuse has ceased, and that the plaintiff can be reasonably expected to know the fact that it constitutes abuse, that the abuse caused or contributed to harm, and the identity of the company potentially liable for the harm.
- Due diligence law should stipulate that the limitation period should be no less than five years, or provide that the requirement of the statute of limitations be waived pending completion of the complaint procedure.
- The draft UN Treaty on Business and Human Rights proposes that states lift the statute of limitations for prosecution of the most serious crimes under international law and allow reasonable periods of time for investigation and prosecution of other crimes, especially when the violation occurred in a different state.
Reversal of the burden of proof
Claimants (victims of corporate abuse) still need to prove liability, causality and damages in courts, even though the information needed to prove these claims is in the hands of the company. Lack of access to company documents can even prevent victims from identifying which company is responsible for the harm. The obligation to release documents and other information either does not exist or is available in only a limited way. The EU now has the opportunity to change this. EU legislation should require the parent company to disprove its connection to the business entities involved in the harm and show what steps it had taken to manage human rights and environmental standards in its operations and prevent the harm from occurring.
- Too often claimants are in a situation where there is a huge inequality in access to information. Despite this, victims of corporate abuse still need to prove: duty (whether or not the defendant owed the plaintiff a legal duty of care), breach (the wrongdoing of the company), causation (the company's action or inaction actually caused or contributed to harm) and damages (the extent of the financial consequence of the damage). These rules on the burden of proof constitute a major barrier to justice for victims of corporate abuse, and is next to impossible because the relevant information is in the hands of the company and is generally not easily accessible to the victim.
- Information vital to proving the claim is under lock and key with the companies. Lack of access to company documents too often prevents victims from establishing causality and liability of the company, or it may even prevent them from identifying which company is responsible for the harm.
- The obligation to release documents and other information by a company in a legal dispute either does not exist in most European legal systems or is available in only a limited way. For a court to require that documents for disclosure be disclosed, the claimants bringing the case would need to know of their existence and specific content – which is not possible in most cases.
- Due to complex corporate structures, particularly in the case of multinational companies, it is difficult or even impossible to assign liability to a specific entity.
- Removing practical and procedural barriers would help to improve access to courts for affected people and place the evidentiary burden on companies.
- Due diligence legislation should redress imbalances by placing a requirement on the parent company to disprove its connection to the business entities involved in the harm and show what steps it had taken to manage human rights and environmental standards in its operations and prevent the harm from occurring.
- The reversal of the burden of proof is a well-established mechanism in EU Labour and Consumer Law: warranties for consumer products are covered by the reversed burden of proof following Directive 1999/44/EC; the revised text for the proposed Collective Redress Directive, agreed by the European Parliament and Council negotiators on 22 June 2020; and the 2016 Council of Europe recommendation on Human Rights and Business recommends the revision of “civil procedures where the applicable rules impede access to information in the possession of the defendant or a third party if such information is relevant to substantiating victims’ claims of business-related human rights abuses”.
- The Racial Equality Directive, the Employment Equality Directive and the recast Gender Equality Directive oblige Member States to introduce a shift in the burden of proof in their domestic non-discrimination regulations.
- Relevant institutional reports have recently called for a reversal of the burden of proof in claims of business-related human rights abuses. The 2019 European Parliament study on Access to legal remedies for victims of corporate human rights abuses in third countries and the 2020 EU Fundamental Rights Agency report (Opinion 3) recommend shifting the burden of proving causality and supply chain liability, in cases where human rights are infringed by corporate activity, once it has been established prima facie that a business has failed to conduct due diligence.
What is due diligence?
It is generally understood as the means by which companies can efficiently identify, prevent, mitigate and account for the negative human rights impacts of their activities or those linked to their business relationships, which often involve subsidiaries, subcontractors, suppliers and a variety of economic transactions.
It is at the core of the United Nations Guiding Principles on Business and Human Rights, the OECD Guidelines for Multinational Enterprises, and the ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy. These international standards have been developed in collaboration with business enterprises, governments and civil society and across multiple sectors, and endorsed by the EU. They have been translated into practical due diligence frameworks as set out in the OECD Due Diligence Guidance for Responsible Business Conduct, UN resolution, and additional sectoral and gender guidelines.
Although HRDD as such is not currently a legal obligation for companies, due diligence or some of its elements (reporting, impacts assessment, etc.) are already incorporated into national and international legal frameworks. Governments make use of due diligence when asking companies to comply with already established legal principles in areas analogous or directly relevant to human rights, such as labour rights, environmental and consumer protection, or the fight against corruption.
Some States have gone one step further by directly embedding human rights due diligence into law. One example is the French Duty of Vigilance Law, adopted in 2017. This law requires large French companies to establish and publish a vigilance plan with measures to adequately identify risks and prevent human rights and environmental abuses linked to their own activities and to the activities carried out by their subsidiaries, subcontractors and suppliers. The law also establishes civil liability for harm resulting from a company’s failure to observe its duty of vigilance. Another example of this trend towards corporate due diligence regulation in Europe is the Dutch Child Labour Due Diligence Law, adopted in 2019. This law creates due diligence requirements for companies operating in the Dutch market, which will soon be obliged to identify, prevent and mitigate child labour risks throughout their global supply chains.
EU law also contains different legislative tools embedding elements of due diligence. The EU has taken important steps towards the development of corporate human rights due diligence, for instance with the adoption of the Timber Regulation and the Conflict Minerals Regulation, which establish due diligence obligations for importers of timber and certain minerals, and the Non-Financial Reporting Directive, which establishes companies’ disclosure obligations on human rights risks and measures.