EU prepares a European corporate diligence and accountability standard

On March 10, the European Parliament passed the proposed directive on corporate due diligence and corporate accountability, which the European Commission must now develop as a regulation. The proposal establishes a mandatory European standard on corporate conduct to ensure that companies respect human rights and the environment, requiring accountability for business violations and abuse.

The initiative is in response to requests from businesses and civil-law companies for the need to create a mandatory legal framework harmonized in the European market.

The main objectives of the proposals, the main text of which can be found here, are:

• To ensure a European internal market in which companies fulfill their duty to respect human rights, the environment and good governance.
• To establish standardized competition conditions, to stop companies that act correctly from being at a disadvantage.
• To guarantee access to justice for those who have been victims of the activities of European companies or in their supply chain, due to events occurring in Europe or third countries.

The obligations introduced by the standard will apply to large companies governed by the law of a Member State or established in the EU, publicly listed small and medium-sized enterprises and those operating in high-risk sectors, and those not established in the territory of the Union when they operate in the internal market. The proposal provides for the possibility of an exemption for micro-enterprises.

In terms of the due diligence obligation, the European standard provides for a conduct standard that covers both the impacts of the company’s own operations and its contribution to the impacts on the supply chain and commercial relations with other companies, inside and outside the EU.

The impacts to prevent and remedy center around human rights, by reference to all the international conventions, but also include environmental impacts, in an express recognition of their relationship with human rights, including emissions, air and water pollution, effects on biodiversity and natural resources, and corporate governance, highlighting the relationship between human rights and diversity, fighting corruption, and responsible taxation.

Compliance with a due diligence obligation equates to some minimum requirements or elements, without prejudice to stricter national or European regulations for certain risks or products, which define the so-called “due diligence strategy”: Compliance with a due diligence obligation equates to some minimum requirements or elements, without prejudice to stricter national or European regulations for certain risks or products, which define the so-called “due diligence strategy”:

• An evaluation process based on the probability, seriousness and urgency of the risk, with the obligation to consult and engage interest groups, particularly trade unions and worker representatives.
• Regular review, at least one a year, of the effectiveness and suitability of the due diligence strategy, engaging interest groups.
• Inclusion of complaints mechanisms and out-of-court remedies that are effective, accessible and rapid, both to identify risks and complaints and mediate in their resolutions, without prejudice to a victim’s right to pursue this through the courts.
• Publication, communication and dissemination to the business community. In order to avoid repeating enforcements and routine internal checks, the rule establishes that the outcome of the evaluation and of the prevention, mitigation and remedy mechanisms must be disclosed to workers, commercial partners and the supply chain.

In terms of enforcement and penalties, Member States will create one or more national bodies to oversee the transposition of the directive into domestic law, and companies’ compliance of the obligations arising from the directive.

The proposal also provides for tortious civil liability for harm caused by the company or by entities under its control, resulting from the adverse effect of their activities on human rights and the environment. The company will bear the burden of proof that it did exercise due diligence in accordance with the directive to avoid the harm, or that the harm took place even when all due diligence was observed. The proposal advocates a change to European regulations on jurisdiction and the law governing non-contractual obligations to facilitate access to the courts for victims of abuse and violations, even when the events have occurred in a third country.

In conclusion, the proposal, which is part of a new EU political-legislative framework to expressly recognize the need to improve on voluntary compliance and accountability models, is innovative by being the first international regulation that contains obligations and responsibilities for companies in terms of the effectiveness of and respect for human rights.

The initiative expressly recognizes a direct relationship between respecting human rights and the environmental impact of economic activity and corporate governance. Lastly, it is marked by its ambition to establish a regulatory corporate due diligence standard in Europe that will extend globally through supply chains and corporate organizational structures.