We assess ambitious European plans to introduce mandatory due diligence for human rights and ESG
On 10 March 2021 the European Parliament voted by a large majority to adopt an ambitious report of the Committee for Legal Affairs, calling for the introduction of far reaching mandatory human rights and ESG due diligence requirements for companies domiciled or operating in the EU. One week before, the German government had reached an agreement on a draft human rights due diligence law, albeit one which is significantly less ambitious than the legislative proposal endorsed by the European Parliament.
Germany sprints to a compromise
Germany first adopted a National Action Plan for the implementation of the UN Guiding Principles on Human Rights (UNGPs) in 2016. Since then, German politicians have been busy pursuing all manner of discussions, arguments, announcements and two national surveys regarding the need for new national legislation, before a Government paper summarising key elements of a proposed mandatory due diligence law was leaked during the summer of 2020 (we reported on that development here).
This so-called “Supply Chain Law” had first been promised in the coalition contract between the Christian Democratic Union/Christian Social Union (CDU/CSU) and the Social Democratic Party (SPD) in February 2017.
Coinciding with the latest developments in Brussels, the German government appears to be sprinting to the finish.
With the next federal election due in September 2021, it was now the very last minute to come to a solution if the coalition wanted to keep its promise from 2017. To end up with no law at all would have been a shame after all the effort put into this project and the express commitments made by the German government during its EU Presidency in the second half of 2020.
The German government finally agreed on a compromise for a mandatory human rights due diligence law on 12 February 2021. The draft law was sent to stakeholders – from industrial lobby groups to civil society organisations – on 1 March at 12:30 CET with a deadline for comments the same day (!) at 19:00 CET. Two days later, on March 3, the government finally approved the draft.
So what is the outcome of such a lengthy legislative procedure? The key features of Germany’s proposed law are as follows:
- It would apply to all enterprises, irrespective of their legal form or place of incorporation, which have their headquarters based in Germany.
- Although called the “Supply Chain Law”, the law refers to human rights and environmental risks in a company’s own operations in Germany, as well as in supply chains.
- It will be in force from 1 January 2023, for all enterprises with more than 3,000 employees, and from 1 January 2024 for enterprises with more than 1,000 employees
Requirement of “adequate” due diligence
According to the proposed law, an enterprise shall
- Have a risk management policy in place and analyse risks regularly
- Name a responsible person
- Approve a general commitment on a human rights strategy
- Implement measures to prevent adverse human rights or environmental impacts in its own operations and in the first tier of its supply chain
- Take action to remediate adverse impacts
- Extend these measures to an indirect supplier if there is knowledge of a possible breach by this supplier
- Have a grievance mechanism in place
- Document and report on its implementation of these measures (with compliance be monitored by public authorities)
- What constitutes “adequate” due diligence is stated to depend on the kind and size of the business, its leverage (over other parties), the severity of the expected impact and the company’s contribution to the cause of the relevant risk
Enforcement and penalties
- Companies that are not fulfilling their due diligence obligations may be fined but there are otherwise no criminal penalties
- A company failing to comply with the law may be excluded from public tenders for up to three years
- The law does not create any new basis of civil liability (proposals to this effect had been made but were vigorously opposed by certain members of the Government)
- Trade unions and non-governmental organizations shall be able to represent affected persons at court in relation to allegations of non-compliance with the law
The draft law has been strongly criticised by civil society groups and others within and outside German . The “Initiative Lieferkettengesetz”, comprising more than 100 non-governmental organisations and trade unions campaigning for an effective due diligence law in Germany, complained about the “weakened law” and that it sets the bar lower than international standards require.
Professor John Ruggie, former UN Special Representative on Business and Human Rights and architect of the UNGPs, has written an open letter to the German government arguing that certain aspects of the law were not in line with the UNGPs, including that it overlooked risks beyond the first tier of the supply chain and failed to draw attention to the importance of prioritising “salient” human rights risks, meaning the most serious risks to human rights arising in connection with the operations or supply chains of an enterprise..
It is now up to the Bundestag to finally approve the Supply Chain Law. Given the ongoing public criticism, the opposition probably will use this as part of its election campaign. But in the end, the majority of the coalition is likely to prevail. It is note expected that parliamentarians from CDU/CSU and SPD will reopen discussions on the substance of the law after the government’s exhausting struggle to reach agreement the current draft.
MEPs take the early lead, but is it a false start?
We reported previously on the draft Directive proposed by the European Parliament’s Committee on Legal Affairs, which has now been emphatically endorsed by the Parliament. It is a significantly more ambitious initiative than the German one.
For a start, the Directive would require EU member states to impose environmental and human rights due diligence obligations on all enterprises domiciled or operating in Europe. This would include foreign companies doing business in the EU. The due diligence obligations would apply to all business relationships of the enterprise – it would not be limited to the first tier of the supply chain, as will be the case in Germany if the supply chain due diligence is passed by the Bundestag.
As we have noted previously, the introduction of new legislation in Europe must be initiated by the European Commission. While the Commission has indicated that it will bring forward a legislative initiative on due diligence it remains unclear whether it will bear any resemblance to the Directive endorsed by MEPs yesterday.
While MEPs appear to be engaged in a race to the top, it is entirely possible that the Commission will favour a lower level of ambition, particularly in light of reported opposition of some EU Member States to the initiative. While Germany’s proposed new law takes into account that more onerous obligations may be imposed across the EU in due course, it does tend to indicate that the German government may not be fully supportive of some of the more ambitious ideas being promoted at the EU level.
The current expectation is that a legislative proposal will be published by the Commission in the first half of 2021. This would then be subject to debate by both the EU Parliament and the Council before any legislation can enter into force.
If you are losing faith in human nature, go out and watch a marathon
Kathrine Switzer (the first woman to run the Boston Marathon as a registered competitor) said this. However the race towards mandatory human rights due diligence may end, the European and German legislative proposals show how far we have come since the UNGPs were unanimously endorsed by the UN Human Rights Council in 2011, almost a full decade ago. Back then it was barely conceivable that any national government would legislate to make human rights due diligence mandatory. Progress creeps up on you.
The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2021