While the new EU directive on corporate sustainability due diligence aims at making EU companies engage more actively in their value chains to improve conditions, some companies argue that the risks of sanctions and civil liability might deter investment to the detriment of economic development.
The new directive was proposed by the EU Commission on Wednesday (23 February) and it would oblige companies to identify, prevent, and mitigate human rights and environmental violations in their value chain.
Companies will also be required to establish a complaints procedure for victims and monitor their own due diligence measures and those of their suppliers, according to the Commission proposal.
The liability risk
The large companies in the scope of this law will be monitored by member state authorities that have the power to sanction the companies, and a civil liability mechanism should make sure that people whose rights were violated along the supply chain of a company can sue for damages in courts of EU member states.
The risk of potentially being sued for rights violations that happen in their value chain makes a minority of businesses feel queasy.
A recent survey conducted by the German Economic Institute, a pro-business think tank, found that about 12 percent of German companies intended to withdraw from countries with weak governance structures in response to a recent German supply chain law.
“The share is especially high among companies with foreign production where 19 percent consider this option,” the study pointed out.
The German supply chain law is similar to the EU’s due diligence directive, but the EU’s directive is stricter and more far-reaching in some aspects than the current German model.
If, instead of trying to improve the conditions in their value chain, European companies simply withdraw their investments from and cut their business ties to countries that seem risky, this could be detrimental to the economic development of these countries.
“Enterprises would be forced to withdraw from potentially risky markets and such a withdrawal does not lead to an improvement of the human rights situation nor the environment,” Thilo Brodtmann, executive director of the mechanical engineering industry association VDMA said in reaction to the Commission’s proposal.
The right balance
Asked about this issue at a press conference, EU-Commissioner Didier Reynders said: “We don’t want to see countries going out of […] developing countries.”
“We will work together with the trade policy and the development aid policy to try to combine the different efforts”, he added, while also pointing to the investment efforts that the EU recently decided to undertake in developing and emerging African economies following the EU-Africa summit.
Member of the European Parliament Lara Wolters, who was responsible for a parliamentary report on corporate sustainability due diligence, stated that a “right balance” would have to be found, so that businesses don’t disengage – “disengagement should only be a last resort”.
“I would want this directive to encourage businesses to do [the due diligence] and not scare them into disengaging from anywhere in the world or any sector or geographical area where there might be problems,” she said.
Overall, the reactions in the business community are mixed. While the large trade association Business Europe called the proposal “suboptimal”, and criticised various aspects, investors seem to be more relaxed about it.
The CFA Institute, a global organisation of investment professionals, welcomed the fact that the Commission had “finally” published the proposal. Its main concern was that the proposal did not go far enough, mostly excluding SME’s from the scope of the directive.
“EU companies should be encouraged to include stakeholders’ interests and a longer-term horizon in their investment decision-making process,” the CFA’s Josina Kamerling said in a statement.
[Edited by Nathalie Weatherald]