Corporate due diligence is not just about auditing. Key to sustaining people and planet, ambition is required.
On June 1st, the European Parliament adopted its position on the landmark legislative initiative for an EU Corporate Sustainability Due Diligence Directive (CSDDD). Despite last-minute attempts to derail a cross-party compromise arrived at in the Committee on Legal Affairs (JURI), its report passed with a substantial majority.
MEPs thus approved a text which builds on the strengths of the European Commission’s original proposal while addressing some of the critical weaknesses in this draft and that generated by the Council of the EU. It is an important signal for a due-diligence law with the potential to insist companies do more to deliver shared prosperity and climate security.
Now all three EU institutions have reached their respective positions—the commission had published its proposal in February 2022 and the council its position last December—‘trilogue’ negotiations are under way among them and we could see a final text towards the end of this year.
The law is an historic opportunity to place sustainability and human rights at the heart of how companies and investors, based or active in the EU, do business. The file has however been under considerable political and industry pressure from the onset.
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This has led to various departures, especially by the commission and council, from the internationally accepted standards: the United Nations Guiding Principles on Business and Human Rights and the (recently updated and strengthened) Guidelines for Multinational Enterprises from the Organisation for Economic Co-operation and Development. The parliament’s text goes a long way towards better alignment with these standards. This has been a key ask from many companies and investors and sets a more constructive tone for the trilogue. Yet serious loopholes remain.
Tangible change for people and planet must be the measure of success. Access to remedy and justice for those affected by corporate harms is a key indicator. And all three proposals foresee civil liability for damages resulting from inaction on due diligence, as well as non-judicial remediation and compensation, all of which still needs to be strengthened. The parliament’s position reduces some of the obstacles to gaining access to the mechanism for civil liability, including a limitation period of at least ten years to avoid expiry of a court’s jurisdiction.
The trilogue negotiations must address a remaining barrier to justice, by rebalancing the burden of proof in civil cases. As long as the onus remains wholly on victims, it will continue to be extremely hard for them to seek justice before European courts, as the information they need is often retained by the company. The legal, financial and emotional struggles victims face to bring legal cases make it always a last resort.
Providing effective access to justice would not bring a flood of vexatious lawsuits, as some fearmongering business associations suggest. It is rather a basic principle of the rule of law, which must not be undermined by any future ‘safe harbours’, such as treating membership of certain initiatives as compliance. Nor should it fail because of persistent hindrances—such as in the case brought by families of perished Pakistani textile workers which judges declared expired before even starting, or that of widows of executed Nigerian community leaders who withdrew their appeal after over 20 years of (unsuccessful) litigation.
Listening to the voices of affected workers, communities and human-rights and environmental defenders is crucial to identifying and assessing risks along value chains, defining and implementing the right measures and providing appropriate remedies. The international standards are clear that effective, safe and good-faith engagement with affected stakeholders is a core ingredient of due diligence—even moreso with the reinforced OECD guidelines.
The commission and council included initial points on stakeholder engagement but it appeared peripheral where it should be central. In contrast, MEPs voted for a stand-alone article mandating such engagement, with protection from retaliation, throughout the due-diligence process. This should be retained and built on.
Explicit inclusion of workers in value chains—not just formal employees—in the definition of ‘affected stakeholders’ was an overdue improvement introduced by the parliament, as well as mentioning worker representatives and trade unions, which the council also did. Taking the best definitions and provisions from the council and parliament texts should make for a strong consensus around the participation and protection of human-rights defenders too. Since 2015, we have recorded more than 4,700 attacks against them and they should be expressly defined as affected stakeholders in the final law.
Over a decade ago, the UN guiding principles and OECD guidelines established a paradigm shift: sustainability due diligence is about addressing risks to people and planet, not just to companies. Yet there has been a tendency in policy and legislative discussions to take what seems/is perceived to work best for business as the starting point.
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This includes conflating due diligence with a mechanical ‘policing’ of suppliers through social audits. This has proved ineffective in tackling abuse and is too clumsy for full-value-chain due diligence, as many companies can confirm. The stances of all three EU institutions include elements that go beyond such box-ticking solutions but there is excessive confidence in top-down, contractual cascading and auditing in the commission and council proposals, which the parliament sought to address. For instance, the parliament’s text includes adjustments to problematic purchasing practices and business models, among a broadened, non-exhaustive set of appropriate measures. As our own research shows, exploitative purchasing practices and corporate strategies can be a key driver of abuse from the very top of supply chains.
Vested interests sought exemptions from the law, particularly for climate-related obligations (where loopholes persist in the parliament text, despite improvements), directors’ duties, and the due-diligence obligations and accountability of financial services. Board involvement is vital for going beyond box-ticking—directors’ oversight of due diligence should therefore be explicitly included. (The removal of a related article from the JURI compromise was the only successful conservative amendment in plenary.)
On finance, the council, mainly driven by France, suggested mandatory due diligence for the sector should be entirely up to member states. The parliament reached a cross-party (if imperfect) compromise to keep finance in, including further outlining requirements for asset managers and institutional investors. Considering the key role financial actors, as the owners of capital, can play in driving abusive or responsible business models and conduct, co-legislators must not give in to lobbying and instead secure a true European level-playing field, within and across sectors.
The same holds true for continuous attempts to limit the parts of the value chain companies need to include in their due diligence, notably the downstream use of products and services. The council proposal is the most restrictive in this regard. The directive’s importance in holding to account high-risk sectors such as technology downstream cannot be overestimated.
Europe is at an historic moment in shaping markets fit for the future. Corporate abuse remains a curse undermining the rights of workers and communities, hollowing out commitment to democracy and threatening action on climate. Since the start of this year alone, the Business & Human Rights Resource Centre has approached European companies more than 200 times in response to allegations of abuse.
Meanwhile, our benchmarks continue to highlight glacial progress on due diligence by most companies, as well as a gap between corporate policy and real impact. Climate change is an imminent threat but Shell just said more oil and gas investments were needed to increase shareholder value. And human-rights and environmental harms in the sourcing of transition minerals endanger the urgently needed green transition.
The CSDDD is no panacea, but it can go a long way towards ensuring a more sustainable economy and planet. EU legislators should seize this opportunity and produce the strongest possible law.