Compliance

EU Due Diligence Act: Changes at the European level

Scope of jurisdiction, standards and the significance of the new law for European companies

8 minutes09/16/2021

The EU Due Diligence Act is currently the subject of much discussion. The intention behind the new legislation is to compel companies to play a greater and more active role in ensuring that human rights are protected. In addition, the law aims to establish standards in the fields of occupational health and safety and environmental protection – from top to bottom, starting from the first link in a supply chain and all the way through to delivery personnel. Although some countries, including Germany, have already passed national legislation, a final decision has yet to be taken at the EU level. Nevertheless, there are some initial indications as to what the new law might look like.

EU Due Diligence Act: Looking at the status quo

In April 2020, Didier Reynders, the EU Commissioner for Justice, announced the European Union’s plans to introduce comprehensive legislation on this issue. The aim of the bill is to obligate companies to ensure that human rights and environmental standards are upheld and protected. It also aims to establish sanctions under public law and complaint procedures for affected parties. Just under a year later the European Parliament voted on a proposal for an EU Due Diligence Act. The European Parliament adopted a legislative initiative report with a majority of 504 out of 695 total votes calling for the adoption of a law to ensure that companies are obligated to perform due diligence on human rights and environmental issues. The initiative report is a recommendation to the European Commission to introduce a law on this matter. The European Commission was originally set to put forward a legislative proposal in June 2021 but has since pushed the schedule back to the fall.

Due diligence legislation in the European Union

The UN Guiding Principles on Business and Human Rights (UNGP) provide a set of guidelines for a global economy more in line with human rights. With the European Union currently working on proposals for pan-European legislation, many countries have already developed their own plans and implemented corresponding laws at the national level. However, the speed of implementation and the contents of the proposals put forward and adopted in individual nation states differ significantly. The Netherlands and France were among the first countries to introduce corresponding guidelines, while Portugal is still without an overall plan for implementation. In Germany, the new Supply Chain Act (Lieferkettengesetz) is also known as the Duty of Care Act. A government bill was passed in March 2021 and adopted into law in July 2021. Due to the varying approaches taken by individual countries, there are also differences in how the guidelines are applied in practice. In France, for example, the new legislation places a comprehensive duty of care on large companies in relation to human rights and environmental issues. The Dutch law, on the other hand, only addresses children’s rights and child labor. The discrepancies in these legal frameworks could jeopardize the overarching goals, such as the removal of competitive disadvantages.

A comparison of European due diligence laws

In 2011, when the principle of due diligence on human rights was set down in the UN Guiding Principles on Business and Human Rights, no binding regulations or laws were imposed on companies. National and EU-wide laws are now changing this. The following is a comparison of selected countries:

 

EU

 Germany

France

Name of the law

tbd

Gesetz über die unternehmerischen Sorgfaltspflichten zur Vermeidung von Menschenrechts-verletzungen in Lieferketten (Sorgfalts- pflichtengesetz) (Arbeitstitel)

Loi relative au devoir de vigilance des sociétés mères et entreprises donneuses d´ordre

Shortened title

tbd

Lieferkettengesetz

Loi de vigilance

In effect

Likely from 2024

Legislative proposal scheduled for fall 2021

Gradual introduction from 2023

since 2017

Binding for

All companies, regardless of their size (if they are listed or have operations in a high-risk area, e.g. raw materials, textile industry); companies domiciled in third countries are also liable for operations in high-risk economic areas

German companies with 3000 or more employees (from 2024: 1000 or more employees) and their direct suppliers (in some cases also indirect suppliers)

French companies with 5,000 employees in France (10,000 for international companies), including subsidiaries, subcontractors and suppliers

Key aspects

Binding duty of care for companies in relation to human rights, environmental protection and working conditions

Liability under public law and perhaps criminal law

Broader duty of care, companies obligated to conduct active analysis of potential risks throughout entire value chain – not just for their own operations and direct suppliers, but also for subsidiaries

Import ban on products associated with forced labor

 

Protects human rights

Ensures compliance with the ban on child labor and forced labor

Ensures compliance with fundamental human rights, labor and environmental standards in supply chains

 

Aims to ensure human rights and environmental standards are upheld throughout entire supply chain

Breaches must be remedied; resulting damage must be put right

Hopes for comprehensive European legislation rise

The table above demonstrates that, although some countries have introduced regulations governing certain aspects, no comprehensive duty of care regarding human rights has been introduced with effect for all companies and all sectors. The introduction of legislation at the EU level could standardize these obligations and balance out potential competitive disadvantages brought about by the divergences within varying national laws. A further benefit of such a law would be additional legal certainty provided for companies. There are many voices calling on the European Union to include far stronger obligations in its legislative proposal than individual national laws have put in place to date. The German Due Diligence Act, for example, led children’s rights organizations including UNICEF and Terre des Hommes to call on the EU to explicitly reference the UN Convention on the Rights of the Child in its legislative proposal in order to better protect children as a vulnerable group.

Whitepaper ISO 37301

Stay legally compliant with ISO 37301

This whitepaper sets out the benefits of  ISO 37301 and explains how a company's own compliance management system (CMS) must be designed in order to comply with international legal standards. The focus is not only on rules and standards: the standard also focuses on compliance with social and ethical values. Our guide explains how to:

  • build your CMS, 

  • introduce the standard,  

  • get employees on board,  

  • conduct effective audits and

  • obtain certification.

 

Download now

Criticism of the European Due Diligence Act

The introduction of legislation at the European level has devolved into a protracted process and provided ample room for criticism. Indeed, many parties have been critical of the process to date, highlighting issues that have not been given enough thought during the present planning stage. And, although many admit that developments to date have been promising, the current plans do not address the underlying problem. Ultimately, a lack of social upgrading, power imbalances in global value creation chains, the low proportion of value added in many producer countries and resultant insufficient pay, and continued heavy reliance on exports of unprocessed raw materials are all core issues that the EU law is unlikely to address in its current form. As a result, critics argue, the EU Due Diligence Act is a step in the right direction, but binding international regulations are still needed in the long term.

Impacts on national companies

The pan-European Due Diligence Act has not yet been adopted. However, it is clear that future developments will have a significant impact on companies’ compliance management activities. Companies based in Germany can prepare for the implementation of the German Supply Chain Act by examining the five key measures formulated by the Federal Ministry for Economic Cooperation and Development (BMZ). This ensures that companies are prepared for additional legal obligations when the EU Due Diligence Act comes into force in fall 2021. Recommended steps include:

  • Issuance of a policy statement regarding respect for human rights

  • Risk analysis: carry out an investigation to determine any detrimental impacts on human rights

  • Risk management activities (and remedial measures where needed) to avert potentially negative impacts on human rights

  • Establishment of a complaints mechanism

  • Use of transparent and public reporting processes

Summary and outlook

The EU Due Diligence Act, set to be introduced across Europe in the near future, will bring new challenges for companies. By taking a proactive approach and implementing proactive measures to comply with the expected forthcoming regulations, you can reduce your workload later on and make effective use of the time remaining. The exact scope of the law and its impact on individual companies’ existing processes and supply chains is not set to become clear until a later date. However, companies who take action at an early stage by responding to the upcoming changes and adapting to the new requirements before they are formally inducted will undoubtedly find it easier to adjust to the final version of the law – and reap the benefits further down the line.

Other topics that may interest you

Compliance

ISO 37301 set to replace ISO 19600 for compliance management systems

From 19600 to 37301: Discover the differences and learn how the new standard can help you incorporate national and international laws and regulations – and minimize your liability risk.

Read article
Compliance

The EU Whistleblowing Directive

How does the EU Whistleblowing Directive effect your company? What aspects need to be considered? We have outlined the key facts on whistleblowing systems for the new European legislation.

Read article
Occupational Safety, Compliance, Digitalization

Miba AG

Quentic allows each of Mibas’s employees to contribute to reaching its key health and safety targets. Increasing incident reports, reducing the accident rate and standardized EHS processes. Read more!

Read success story

X