European Commission unveils corporate due diligence plans

The European Commission released its long-awaited plan to tackle environmental impact and human rights abuses in companies’ supply chains this week, though critics argued the proposal falls short in several key areas.

The due diligence rules would apply at first to EU companies with more than 500 employees and €150 million ($167.7 million) in net turnover worldwide. After two years the rules would extend to firms in “high impact” sectors, such as textiles and minerals, with more than 250 employees and €40 million in turnover.

Companies in the first category will also be required to have a plan to make sure their business strategy is compatible with limiting global warming to 1.5 degrees Celsius. Small- and medium-sized enterprises are not covered by the proposal, though the commission argued they could be affected indirectly as larger companies seek to address issues in their value chains.

The commission explained in a press release Wednesday that companies would need to:

• “Integrate due diligence into policies;
• Identify actual or potential adverse human rights and environmental impacts;
• prevent or mitigate potential impacts;
• bring to an end or minimise actual impacts;
• establish and maintain a complaints procedure;
• monitor the effectiveness of the due diligence policy and measures;
• and publicly communicate on due diligence.”

Věra Jourová, the commission vice-president for values and transparency, said in the press release that the proposal would “project European values on the value chains … in a fair and proportionate way.” It would help consumers make ethical choices while supporting business “by providing legal certainty about their obligations in the Single Market,” Jourová added.

The plan will now be presented to the European Parliament and EU member states for approval. If adopted, countries will have two years to translate the text into national law.

NGOs were quick to point to shortcomings with the proposal, however.

The commission estimates that the rules would apply to about 13,000 EU companies and 4,000 third-country companies, though with SMEs exempt, civil society fear the rules do not cast a wide enough net. The European Coalition for Corporate Justice said in a statement that the plan would apply to just 0.2% of EU companies and that “staff size and annual turnover are not reliable indicators of how a company is impacting the lives of workers and communities worldwide.”

Oxfam’s EU Economic Justice Policy Lead Marc-Olivier Herman called the omission of reforms to directors’ duties and remuneration a historic missed opportunity which “carries the fingerprint of the regressive business lobby.”

“The proposal is too weak to ensure directors will look beyond immediate financial returns and take into consideration human rights, the environment and the climate when making strategic decisions,” Herman said in a statement.

Meanwhile, NGO Finance Watch welcomed the inclusion of non-EU companies with significant EU operations, though it argued that requiring emission reduction objectives only where climate change is a principal risk or impact of a company’s operations would make it too easy to skirt the rules.

The consequences for a lack of compliance will be left to member states but must be “effective, dissuasive and proportionate,” including fines for companies or orders to complete due diligence checks.

A ban on goods made with forced labor did not feature in the proposal. This was covered instead by a separate policy document, released on the same day, which noted that the commission is preparing new legislation on the topic.

The planned decent work legislation “will effectively prohibit the placing on the Union market of products made by forced labour, including forced child labour,” the commission explained, covering “both domestic and imported products and combine a ban with a robust, risk-based enforcement framework.”