Mandatory Due Diligence Trends in Europe: Promises, Possibilities and Pitfalls

                                                                                                                                                                         Source: Rock Cohen, Flickr

Benjamin Grama

Tilburg University

B.J.Grama@tilburguniversity.edu

Lottie Lane

University of Groningen

c.l.lane@rug.nl

 

Following the endorsement of the UN Guiding Principles on Business and Human Rights (UNGPs), human rights due diligence (HRDD) was established as the preeminent standard by which companies approach adverse human rights impacts resulting from their activities. Until recently companies that carry out HRDD have done so voluntarily against the backdrop of non-legal, incentive-based initiatives which promote HRDD. Now, there is a growing push towards legal measures, at various levels, to make HRDD mandatory. Mandatory due diligence (mHRDD) refers to a legal mechanism which imposes a “legal standard of care” where businesses would be legally mandated to take reasonable action [due diligence] to prevent adverse impacts on human rights and the environment.

On 1 July 2020, as part of the Netherlands Network for Human Rights Research (NNHRR) Annual Toogdag, the Business and Human Rights Working Group arranged an online event with a panel of academic experts to discuss the growing trend towards mHRDD. In particular, the panel discussed two legislative initiatives currently underway in Europe, at the EU level and Swiss level. The panel consisted of Ms Lise Smit (Senior Research Fellow, British Institute of International and Comparative Law), Dr Ekaterina Aristova (Postdoctoral Fellow, Bonavero Institute of Human Rights, University of Oxford) and Dr Nicolas Bueno (Senior lecturer and Postdoctoral Researcher, University of Zurich), moderated by Dr Chiara Macchi (Postdoctoral Researcher, Wageningen University; Co-Chair, NNHRR Business and Human Rights Working Group). This blog will discuss several takeaways from the three presentations and the Q & A session with the audience from the authors’ perspectives.

Promises: The current trend towards mandatory due diligence

At the national level, there is a growing momentum towards mandatory due diligence, including the French Duty of Vigilance Law and the Dutch Child Labour Law, as well as campaigns in most EU Member States for mandatory due diligence. Ekaterina Aristova suggested that potential drivers for this trend are adoption and implementation of the UNGPs; an explosion of interest in environmental, social and governance (ESG) criteria to measure the sustainability of the investment projects; and a shift in attitudes regarding extraterritoriality (due to a growth in extraterritorial measures in other domains). Mandatory due diligence is being pushed by civil society, investors, political parties and increasingly businesses themselves, who view mHRDD as an opportunity to level the playing field and provide them with legal certainty by introducing explicit and clear regulation on business liability for due diligence, which in many jurisdictions currently has to be ‘construed based on existing legal principles and tort provisions’.

On 29 April 2020 the European Commission announced that in 2021 it would launch a legislative initiative on mandatory due diligence for companies to prevent adverse human rights impacts abroad and in their supply chains. This initiative was prompted by a study into due diligence published in February 2020. According to this study, over one third of company responses to a survey indicated that their companies currently undertake due diligence that takes into account all human rights and environmental impacts. This due diligence rarely goes beyond first tier suppliers, however. Risks to a company’s reputation, investor requirements and consumer expectations are viewed as the main incentives for due diligence currently. Risks of litigation, and other penalties arising from regulations, play a more peripheral role. Lise Smit concluded that there is generally dissatisfaction amongst businesses and general stakeholders (i.e. civil society, industry organisations, trade unions, governments, legal experts etc.) with the current regulatory landscape, including the lack of legal certainty, with businesses and stakeholders alike generally viewing the prospect of EU-level regulation on due diligence as beneficial.

In Switzerland in 2016, the Responsible Business Initiative (RBI), a popular initiative backed by a wide array of NGOs, entrepreneurs, politicians and local committees, amongst others, was launched to request an amendment to the Federal Constitution. The initiative was able to garner enough signatures to instigate a referendum on whether due diligence obligations should be included in the Swiss Constitution. The first chamber of the Swiss Parliament considered a counterproposal legislative initiative, which, if accepted by the RBI, would then replace the constitutional initiative going forward. This included a general due diligence obligation acceptable to the RBI. However, the second chamber of the Swiss Parliament put forward a different counter proposal which limited due diligence to conflict minerals and child labour, which was eventually adopted. This was not deemed acceptable to the RBI and a referendum on a general due diligence will go ahead in November 2020. If the Swiss vote in favour, there will be a general due diligence obligation. If not, there will be a due diligence obligation for child labour and conflict minerals only.

Possibilities: The ingredients of a mandatory due diligence proposal

Mandatory due diligence initiatives, whether at the national, regional or international level, can be of varying scopes and focus. This includes the scope of companies covered: size, turnover, structure, ownership, areas of operation, etc. Initiatives can be limited by company domicile or whether companies are active in a particular national or regional market. The scope of issues/standards covered may also vary: child labour, conflict minerals, (inter)national human rights law, (inter)national environmental standards could each be included. For example, both the United Kingdom Modern Slavery Act 2015 and the Dutch Child Labour Law 2019 tackle specific subjects. Additionally, initiatives can include a mixture of general obligations for all companies and specific obligations for larger companies, companies in specific sectors, etc. The French Duty of Vigilance Law 2017, for instance, addresses multinational corporations only.

Initiatives can also vary in terms of the nature of obligations – i.e. to prevent human rights violations, to respect human rights, or a ‘duty of care’ more reminiscent of private law – and in terms of robustness of steps necessary to discharge it – ‘adequate’, ‘reasonable’, in line with existing standards, etc. They can vary between the type of liability involved – civil, administrative or criminal – and the procedural rules around accessing that remedy – burden of proof, access to evidence, standing, jurisdiction etc. Finally, there can be a focus on plaintiffs bringing cases and/or on regulators monitoring compliance.

Potential pitfalls of mandatory due diligence:

  • Remedy for victims or sanctions to ensure compliance

As emphasised by Nicholas Bueno, it is crucial to consider the extent to which we consider due diligence laws as means to ensure companies undertake due diligence or to open up routes for remedy for victims of human rights violations. Access to remedies and prospective claimants’ access to courts is already an issue under some existing initiatives, such as the current French law, as pointed out by Ekaterina Aristova.

  • Loss of European competitiveness?

Another potential issue with EU-level mHRDD concerns the question of whether due diligence laws will make European companies less competitive. Ekaterina argued that due diligence is increasingly becoming part of the regulatory landscape, perhaps excluding certain countries such as Russia and China. Questions of a loss of competitiveness are valid but should not be overstated. There has been no evidence of this disadvantage: French companies do not appear to be leaving France, and after the UK Bribery Act 2010, where similar claims were raised, no companies left as a result. In fact, many companies suggest they have benefitted in dealings, being able to raise the compulsory nature of the law as leverage in their negotiations. If the law is based on markets rather than domiciles, relocating your office will not help you. If, for instance, the EU passed an initiative that companies on its markets must comply with these laws then the only option companies would have to not comply would be to stop dealing with EU markets, which seems unlikely. Furthermore, a level playing field and improvement of systemic problems could help European companies compete.

The way forward

The discussion above demonstrates that while the call for mHRDD for businesses within Europe is loud and clear, the specific way forward largely remains to be seen. It promises to provide legal certainty and a level playing field for business and potentially increase access to justice for victims. However, in order to realise these possibilities, core details such as the material and personal scope of the legislation need to be ironed out. Crucially, to avoid potential pitfalls, issues such as the inclusion of sanctions, and the law’s potential impact on victims’ access to remedies and EU competition, still need to be addressed.

Further Reading

 Bio

 

Benjamin Grama (@benjamingrama) is a PhD candidate in business and human rights at Tilburg Law School and Co-Chair of the Business and Human Rights Working Group of the Netherlands Network for Human Rights Research. His PhD is on the UN Guiding Principles on Business and Human Rights and their endorsement of operational-level grievance mechanisms as a means to improve access to remedy for rightsholders adversely affected by corporate-related activities.

Lottie Lane is an Assistant Professor of Public International Law, a Postdoctoral Researcher on EU Non-discrimination Law for the EU-funded FRICoRe project at the Law Faculty of the University of Groningen, and Co-Chair of the Business and Human Rights Working Group of the Netherlands Network for Human Rights Research. Her current Sectorplan research project addresses the human rights responsibility and accountability of businesses developing and deploying artificial intelligence, from a law and governance perspective. Lottie’s broader research interests include the horizontal effect of international human rights law and good governance approaches to human rights.

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