This article is part of our special report Putting due diligence at the heart of sustainable business.
The European Commission is set to propose legislation making it compulsory for companies to ensure that their supply chains are free of human rights and environmental abuse and corruption. And the direction of the debate among national and EU lawmakers, and among companies, is only going one way, says MEP Heidi Hautala.
Nearly ten years after the Commission promised an action plan on business and human rights, the EU is on the brink of passing legislation requiring companies to be strict about ethical aspects of their business.
Last week, the European Parliament adopted a report by Socialist lawmaker Lara Wolters setting out its demands for the law which Justice Commissioner Didier Reynders has promised to table by the end of June.
“The Wolters report sent a good signal,” said Hautala, who is the Green group’s spokesperson on due diligence and human rights reporting and founder of the Parliament’s working group for Responsible Business Conduct.
She praised Wolters’ for “a tremendously good job” on the file.
“It contains all the essential elements that I believe need to be in this legislation,” Hautala told EURACTIV, noting that the EU now has a chance to set the international standard for due diligence reporting.
“I’ve heard many people say that ‘We’ve had a GDPR Brussels moment and maybe we will have a due diligence Brussels moment’. Companies from all over the world that want to operate in the EU internal market will have to adapt to these due diligence requirements. There is a grand scheme ahead of us,” she said.
Hautala also pointed to the review of the non-financial reporting directive currently being overseen by Financial Services Commissioner Mairead McGuiness.
“Our thinking has evolved over the last few years. Now it is understood that non-financial reporting means sustainability, covering social, environmental and governance, and needs to be put on the same level as financial reporting and accounting,” she said.
One of the dynamics on due diligence in recent years has been the growing number of companies calling for due diligence laws.
“I’m aware that some business associations are still sceptical,” Hautala said but added that “we see that many companies are now saying that they need a level playing field”.
“They need European regulations because there has been a mushrooming of different national standards,” said Hautala, pointing to laws in the Netherlands, UK and France, while the German government is also preparing national legislation.
“Companies say that we need a market-wide regulation, and the second aspect of the level playing field is that they don’t want to be outcompeted by irresponsible companies.”
Hautala pointed to the growth of sustainable fashion and to the cocoa industry, where there have been recent cases of former child labour cocoa workers in West Africa taking the companies to court.
“Companies are realising that the accountability will be there and that they had better be proactive,” she remarked.
Scope and liability questions
There are still plenty of open questions about the scope of the upcoming due diligence law and what will be in it. The Parliament report would see all large companies, as well as listed SMEs and those non-listed SMEs that operate in high-risk areas being covered.
“The basic idea is that companies will look at their whole value chain and identify the most urgent and serious risks and impacts on human rights, environment and governance. Once they discover issues they need to mitigate, prevent and, importantly, remedy those failures and breaches,” Hautala said of the likely scope of the new law.
“At the end of the day, companies will only be made liable if they cannot prove that they have done everything that is in their capacity to discover, prevent and mitigate those failures,” the lawmaker added.
Another tricky question is how to ensure that victims, typically in countries outside the EU, can have access to justice.
Currently “it is very difficult for victims to get justice because the legal systems are national whereas global supply chains cross boundaries with considerable ease,” Hautala explained.
“There is a need to ensure access to justice for victims and lower the barriers to seeking legal remedy.”
Similarly, the question of what a sanctions regime would look like is also still being debated. “What we want in this instrument is to have is civil liability.”
“The options are a combination of civil liability and administrative sanctions and it’s open on how much we would be able to regulate this at the EU level and how much we would have to rely on administrative sanctions and civil liability regimes at the member state level,” she said, warning that “the transfer of judicial issues to the EU from member states is never easy”.
Small business concerns
One of the more contested provisions of the Wolters report is that its scope should also cover small businesses operating in high-risk sectors, and Hautala is mindful of concerns from business associations, particularly those representing small firms, that the reporting requirements will impose a heavy administrative burden on already stretched businesses.
“This has been a stumbling block and we need to find solutions that will make it easier for small businesses to adapt to these rules, but I think it’s completely doable,” she says, pointing to the possibility of using the EU budget to help support SMEs to cope with the legislation.
The journey to get a draft law has taken the best part of a decade, and there are concerns that divisions among national governments could prolong it further.
However, the Green MEP is optimistic that the debate is only going in one direction, citing a rapidly changed approach from the European Commission.
“What has been really interesting is that DG Trade is looking into this because they realise that there are a couple of very problematic trade deals on the table, Mercosur and the investment agreement with China. In both cases, there are serious issues around human rights and deforestation.”
“This is something that the EU can legislate on, and it could have a very strong impact on some of the problematic issues which we find in some of our trade deals,” she said.
[Edited by Zoran Radosavljevic]