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 minutesupdated: 02/25/2022

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 of how the new law may look.A legislative proposal was recently put forward and its formal adoption into law by the European Parliament and the Council is currently pending.

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 originally planned to present a legislative proposal in June 2021, but this was delayed and not presented until February 2022.

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

DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/193

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 put forward February 2022

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

The draft legislation for an EU directive on corporate sustainability due diligence

On February 23, 2022, the EU Commission adopted a resolution of a draft for a new law to anchor sustainability practices in global supply chains. The draft aims to oblige companies to make their global activities sustainable by exercising due diligence with regard to the observance of human rights, the avoidance of child labor and worker exploitation, as well as mitigation of environmental impact. By doing so, company supply chains will become more transparent for consumers and companies throughout the EU will operate under the same competitive conditions.

The proposed legislation distinguishes between two groups of companies affected by due diligence:

  • Group 1: EU-incorporated limited liability companies with at least 500 employees and a net turnover of €150 million worldwide.
  • Group 2: other limited liability companies operating in resource-intensive industries with more than 250 employees and a net turnover of €40 million worldwide.

Also affected are companies headquartered in non-EU countries that nonetheless operate in the EU and generate turnover comparable with Groups 1 and 2. Small and medium-sized enterprises (SMEs) are not affected by the amendments.

The submitted legal draft formulates concrete requirements for companies. For example, companies must establish due diligence practices in their corporate guidelines. To this end, management is to ensure monitoring and implementation. First, companies must identify the damage that their business activities cause to the environment or human rights. This should then be prevented, reduced or otherwise mitigated. Companies should establish methods by which to constantly monitor the effectiveness of the measures they implement. In addition, companies must set up a complaints procedure and also communicate publicly about how they are fulfilling their due diligence obligations.

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Criticism of the European Due Diligence Act

The introduction of due diligence legislation at the European level has become a lengthy process with much room for criticism. Although many parties admit that developments so far are promising, they doubt that the supply chain law is feasible. While calls are growing louder for a law that wouldrequire companies to take responsibility for climate crises, human rights abuses and exploitations that occur within their supply chains, the current proposal still provides loopholes for companies. Only about 0.2 percent of EU companies would be affected by the guidelines. In addition, civil liability for damages incurred could still be circumvented far too easily.

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. 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. With a draft of the law under consideration as of February 23, 2022, the EU Commission is now addressing the design of the concrete measures.

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