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European Parliament seeks to hold firms liable for value chain abuses

This week, the European Parliament has passed a non-binding report calling on the European Commission to “urgently adopt” a new law to hold companies accountable for human rights and environmental abuses across their value chains. The report calls for fines and sanctions for those breaching the rules and demands better access to justice for victims of human rights and adverse environmental impacts. The report reflects the outcome of weeks of compromise building between the political groups, giving us an important indication of the European Parliament’s ambitions in the upcoming negotiations on the European Commission’s “Sustainable Corporate Governance” proposal expected this June.

Why the need for an EU-wide proposal?

Echoing multiple national initiatives in France, UK, the Netherlands, and Germany, the proposed SCG legislation will aim to harmonize the patchwork of rules and voluntary schemes across the EU Single Market and create legal certainty for businesses. The aim is to level the playing field and establish binding mandatory human rights (including labour rights and working conditions), and environmental due diligence obligations for all limited liability companies of all economic sectors doing business with the EU.

What does that mean for businesses?

If adopted, both EU and non-EU companies active in the Single Market would be legally required to identify, prevent, mitigate, monitor and account for potential and actual human rights abuses and environmental harm that occur in the company’s own operations and in the company’s value chain. These horizontal requirements will add to existing sustainability reporting obligations large companies already face (e.g. non-financial reporting; taxonomy) and could be coupled with sector-specific rules and guidance, such as the planned legislation to prevent the import of products driving deforestation, also expected by June.

How would it work in practice?

Under the proposed rules, EU companies would be compelled to periodically report on the due diligence processes applied and publicly disclose any relevant information about the undertaking’s value chain. Beyond this reporting obligation, if a supplier to an EU company does not, for instance, identify and prevent health and safety risks (think of the 2013 collapse of the Rana Plaza factory in Bangladesh), the EU company could be held liable under civil law for failing to exercise due diligence over their supply chain. National authorities would then check companies enforce the rules, and could impose penalties and investigate complaints. The proposal would also give victims of human rights violations or environmental harm the right to take EU companies to court.

As the European Commission mulls the draft of its proposal, companies should carefully watch a number of key elements that will determine the legislation’s impact, including how far down the value chain mandatory requirements will go, what constitutes environmental due diligence and what liability mechanism will be applied.

One thing that is certain, however, is that mandatory responsible business conduct is coming, and it is here to stay.

Stay tuned.