New EU mandatory human rights and environmental due diligence regime

In brief 8 min read

The European Commission (EC) has announced it will introduce a legislative initiative in 2021 on mandatory human rights and environmental due diligence for certain companies.

Australian companies likely to be impacted by this development should consider their enterprise risk management frameworks and the extent to which they take into account that company's potential adverse impacts on human rights and the environment. Companies with established due diligence processes, and related policies and procedures, will be best placed to deal with any trickle-down compliance obligations.

On 29 April 2020, the European Commissioner for Justice, Didier Reynders, announced that the EC will introduce rules for mandatory corporate environmental and human rights due diligence in 2021.
If and when introduced, this legislation would represent a high-water mark for international corporate human rights due diligence requirements.
At this stage, it is not clear how the proposed penalty provisions will operate, or the potential scope of corporate liability for failure to carry out appropriate due diligence. It does appear that the EU is moving away from an automatic, safe-harbour style 'due diligence defence' to a general corporate duty to protect human rights.
Although not directly applicable to Australian companies, the effects of any legislation would be felt in Australia: both by Australian companies with European operations or subsidiaries or which are seeking to do business in Europe, as well as by Australian policymakers responsible for shaping the future direction of regulation in this area.
Ahead of the legislation coming into force, Australian companies likely to be impacted by these reforms should revisit their human rights policies and procedures to ensure they are identifying, preventing and addressing their salient human rights and environmental risks and impacts in line with existing soft law standards in this area (eg the UN Guiding Principles on Business and Human Rights (UNGPs)). Those organisations which already adhere to the UNGPs will be best placed to adjust to the incoming obligations.
This proposed EU regime should not be seen as a game changer. Rather, the announcement is the latest in a series of developments representing a rising tide of human rights and environmental due diligence obligations. The new EU regime will add to existing legal obligations and further codify existing soft law frameworks. It will also be relevant to legal actions for alleged human rights abuses, in establishing the standard of conduct expected from companies.

New EU mandatory environmental and human rights due diligence

On 29 April 2020, Didier Reynders announced that the EC intends to introduce new corporate environmental and human rights due diligence in 2021. The announcement was made during a high-level webinar event hosted by the EU Parliament’s Responsible Business Conduct Working Group.

A draft of the legislation is not available, and there are few details about the final form that the legislation will take, including in relation to proposed thresholds for regulation (eg based on company size). However, it is clear the new regime will be cross-sectoral in nature, include penalties for non-compliance, and broadly track existing soft law standards, including the UNGPs.

What might the legislation look like?

The announcement was made on the back of a study on due diligence requirements through the supply chain, prepared for the EC by the British Institute for International and Comparative Law and the London School of Economics and Political Science (the Study). The Study was published on 24 February 2020.

The Study contains a comparative analysis of a number of different proposals focused on due diligence requirements to identify, prevent, mitigate and account for adverse impacts on human rights, the environment and climate change.

The Study considered a range of possible regulatory options from no change (Option 1), to new voluntary guidance (Option 2), to a requirement for due diligence reporting (Option 3) to a requirement for mandatory due diligence as a legal duty of care (Option 4). Option 4 would require companies to take objectively reasonable steps to discharge the duty of care – a simple tick-box exercise involving a series of clearly defined steps would not be sufficient.

The Study concluded that the positive social, human rights and environmental impacts arising from this last option are likely to be the most significant. The burden on companies would be reduced by aligning the proposed legislation to existing international guidelines, including the UNGPs.

It seems from comments made by Commissioner Reynders that the EC favours this option of mandatory due diligence as the basis by which to develop the new law.

It is not clear at this stage how the proposed penalty provisions will operate, or the potential scope of corporate liability for failure to carry out appropriate due diligence.

The evolution of mandatory human rights and environmental due diligence

Putting to one side Option One (the baseline 'no change' scenario), none of the Options analysed in the Study are without precedent.

Option Two: in the last 10 years there has been a proliferation of soft law standards relating to the management of business and human rights risk. Chief amongst them are the UNGPs, which are a set of guidelines for States and companies designed to create a practical framework for preventing, addressing and remedying human rights abuses committed in business operations. There has been widespread business convergence around the UNGPs as the authoritative standard in this area. Other global standards on responsible business, for example the OECD Guidelines for Multinational Enterprises (the OECD Guidelines), have been updated to align with the UNGPs, and the recent Australian modern slavery legislation intersects with the UNGP requirements.
Option Three: in recent years, a large number of governments have introduced (or have proposed the introduction of) mandatory reporting obligations which require certain companies to report on the due diligence they have done to identify and manage human rights and environmental impacts. Increased stakeholder and civil society focus on these issues creates a strong reputational incentive for companies to demonstrate year-on-year improvement in their frameworks for the management of human rights and environmental risk. Some global examples include:
- The EU Non-Financial Reporting Directive 2014/95/EU, which required EU member States to enact legislation requiring certain large companies to disclose certain information on the way they operate and manage social and environmental risks, impacts and opportunities. Member States were required to implement the Directive by December 2017 and, broadly speaking, the laws have been a driver in more fulsome ESG reporting by companies caught by the requirements.
- The UK, Australia and California have introduced modern slavery reporting obligations. The specific requirements differ, as do the methods of enforcement. Broadly these obligations require commercial organisations doing business in these jurisdictions to publish details on the steps they are taking to address modern slavery risk in their operations and supply chain. Similar proposals exist in Hong Kong, Canada and NSW.
Option Four: There are certain government regulations and proposals which go a step further and impose mandatory human rights due diligence requirements. Such policy options are less common. Examples include:
- The French Devoir de Vigilance¹ imposes a generalised human rights and environmental due diligence obligation on certain companies. This law requires companies to draft a vigilance plan that 'includes due diligence measures to identify risks and prevent serious violations of human rights and fundamental freedoms, human health and safety, and the environment'². Civil society grounds and claimants whose human rights have been impacted may require companies to explain the shortcomings of their vigilance plans.
- The EU Conflict Minerals Regulation 2017/821/EU (Conflict Minerals Regulation) requires importers of certain high-risk commodities to conduct and report on due diligence which they have undertaken on their supply chains. The Conflict Minerals Regulation is partially effective, although many of the main operative provisions are not required to be implemented by Member States until 2021.

The substance or content of the EC proposal is therefore not new. There is already a patchwork of mandatory reporting obligations and due diligence obligations across the globe. However, what sets it apart is (i) its proposed breadth of application in that it would apply across the EU; (ii) the proposal for corporate penalties for non-compliance; and (iii) its potential to serve as a global high-water mark for human rights due diligence, thereby setting a model for legislative change in other parts of the world.

Consequences for Australian companies

Although the new regulation will not apply to Australian companies directly (although it may apply to Australian companies with subsidiaries incorporated into an EU Member State), it is likely that the introduction of this legislation will have an impact on many Australian companies.

First, EU-level regulation of this kind would represent a threshold compliance requirement for Australian companies that have operations or are looking to operate in the European market.
Second, any Australian companies with indirect exposure to the European market (including those that supply goods or services to European companies to which the new legislation would apply) can expect their business partners to ask them to introduce some form of human rights and environmental due diligence requirement as part of their supply chain contracting arrangements. Given the compulsory nature of this obligation in the EU, European companies are likely to use their leverage in their business relationships and treat these requirements as a 'non-negotiable'. This trend has been observed in Australia in relation to modern slavery reporting for some time.
Third, this legislation represents another example of European leadership on business and human rights risk management. Depending on the success of the legislation, it may well provide inspiration for similar legislative proposals in other countries.

What should you be doing now?

It is clear from the comments by Commissioner Reynders that the new legislation will be aligned with existing standards, including the UNGPs and the OECD Guidelines, wherever possible.

Accordingly, Australian companies likely to be impacted by this development should consider their enterprise risk management frameworks and the extent to which they take into account that company's potential adverse impacts on human rights and the environment. Companies with established due diligence processes, and related policies and procedures, will be best placed to deal with any trickle-down compliance obligations.

Please don't hesitate to contact us for further information about this update, including details of how our Business and Human Rights team can assist with human rights due diligence, impact assessments and related matters.

An illustrative guide to corporate due diligence standards across the globe is set out below.

Please see our global map here

The Australian Modern Slavery Act 2018 (Cth) came into effect on 1 January 2019.

New South Wales

The Modern Slavery Act 2018 (NSW) has been passed but is not yet in effect. It has been the subject of a parliamentary inquiry.

The California Transparency in Supply Chains Act 2010 requires reporting on efforts to eradicate child and forced labour in the supply chain and came into effect in January 2012.

A proposal to introduce a Modern Slavery Act to amend the Customs Tariff S-211 would require reporting on risks of forced and child labour.

EU Member States were required to implement the Non-financial Reporting Directive 2014/95/EU by Dec 2017. Implementing legislation requires certain large entities to report annually on non-financial issues, including human rights and environmental matters.

Conflict Minerals Regulation 2017/821/EU (operative provision not yet in force): Certain importers of high-risk metals must conduct and report on due diligence on these supply chains.

The Law 2017-399 related to Duty of Vigilance of Parent Companies and Commissioning Companies, came into effect in March 2017. It requires certain companies to report on the steps taken in relation to human rights and the environment, set out in a published vigilance plan.

The proposed Hong Kong Bill contains a corporate reporting obligation similar to the UK Modern Slavery Act 2015, although the proposed enforcement mechanism differs.

The Dutch Child Labour Due Diligence Act 2019 is not yet effective but would require certain companies to certify that they have conducted due diligence in relation to child labour in their supply chains.

The UK Modern Slavery Act 2015 came into effect in March 2015. It requires certain companies to report on steps taken to address modern slavery in their business and supply chain.

US Dodd-Frank Act Final Rule 1502 (which came into effect in February 2012) imposes reporting obligations on certain companies with links to products from the DRC and bordering countries.

Footnotes

Law n° 2017-399 of 27 March 2017 on the corporate duty of care of parent companies and ordering companies (loi n° 2017-399 du 27 mars 2017 relative au devoir de vigilance des sociétés mères et des entreprises donneuses d'ordre). Click here for further detail.
See informal translation of the law on page 359 of the Study.