EU Corporate Accountability and Due Diligence: The Impact on EU Businesses

May 24, 2022 | News,

The concept of human rights due diligence was introduced by the United Nations in its Guiding Principles on Business and Human Rights (UNGP), which is regarded as the global benchmark for responsible business conduct. The UNGP describes the ongoing process that all businesses should undertake to identify, prevent, mitigate, and account for its impact on human rights.

Ramesh Panavalli explains how the European Union (EU) is stepping into a leadership position on the need for mandatory measures to increase the breadth and depth of human rights and environmental due diligence, given the urgency of the sustainable development challenges facing us all. The Commission’s initiative is an opportunity with potential to drive sustainability into the heart of how business gets done. 

What is human rights due diligence?

Human rights due diligence is the procedure taken by businesses to identify and act upon actual and potential risks for workers in its operations, supply chain and the services it uses. The concept of human rights due diligence was introduced by the United Nations in its Guiding Principles on Business and Human Rights (UNGP), known as the Ruggie principles, which is regarded as the global benchmark for responsible business conduct. The UNGP describes the ongoing process that all businesses should undertake to identify, prevent, mitigate, and account for its impact on human rights.

Under the UNGP, businesses have a responsibility to implement human rights due diligence, however recent reports have highlighted how the principles have often been neglected, particularly in supply chains.

The identified high risks sectors include:

  1. Textiles: The manufacture of textiles, leather, and related products (including footwear), and the wholesale trade of textiles, clothing and footwear.
  2. Food and beverage: Agriculture, forestry, fisheries (including aquaculture), the manufacture of food products, and the wholesale trade of agricultural raw materials, live animals, wood, food, and beverages.
  3. Mineral resources: The extraction of mineral resources regardless from where they are extracted (including crude petroleum, natural gas, coal, lignite, metals and metal ores, non-metallic minerals and quarry products, fuels, chemicals, and other intermediate products.

The EU mandatory human rights due diligence update

On 23rd of February 2022, the European Union released the Corporate Accountability Due Diligence proposal that aims to foster sustainable and responsible corporate behaviour throughout global value chains. The publication of the proposed Directive is a landmark moment. However, it may be prone to of the proposal by campaign and industry groups, as there would be some who will seek to further limit its scope. The proposal is a ground-breaking legislative project, taking us into uncharted horizons. However, companies have already started asking the question of how to reform company law to address human rights issues in an effective manner in their current and future activities.

What is the scope and extent of this law?

The proposed rules will have a range of limitations to their application, including only applying to companies established in an EU Member State with more than 500 employees on average and a net worldwide turnover of more than EUR 150 million.

However, this is that the Directive will also apply to companies with more than 250 employees on average and a net worldwide turnover of more than EUR 40 million, where more than 50% of that turnover comes from defined higher risk sectors.

What are the core requirements?

The core requirements of the proposal include EU Member States introducing legislative requirements for companies to carry out human rights and environmental due diligence which will form part of the core due diligence strategy. The structure of these requirements are broadly aligned with the UN Guiding Principles on Business and Human Rights (UNGPs) and include requirements that companies need to follow under EU legislation articles from Article 5 to Article 11.

  • Businesses have to integrate due diligence into their all their policies
  • Businesses have to identify actual or potential adverse impacts
  • Prevent and mitigate potential adverse impacts, and bring actual adverse impacts to an end
  • Establish and maintain a complaints procedure
  • Monitor the effectiveness of their due diligence policy and measures
  • Publicly communicate on due diligence

 

What does this mean for brands, retailers, and investors?

When the legislation is adopted, businesses operating in the EU will be required to identify, prevent, and mitigate the adverse human rights and environmental impacts of its operations and value chain.

To complete the identification of adverse impacts, this should be based on quantitative and qualitative information gathered by the business. For instance, regarding adverse environmental impacts, the company should obtain information about baseline conditions at higher risk sites or facilities in value chains which includes undertaking salient risk assessments, human rights impact assessments and engaging with stakeholders.

Identification of adverse impacts should include assessing the human rights, and environmental context in a dynamic way and in regular intervals. This requires undertaking a high-level risk assessment prior to a new activity or relationship or prior to major decisions or changes in the operation. This should happen periodically as well, at least every 12 months throughout the life of an activity or relationship. This includes impacts that take place outside of Europe and will require businesses to make necessary efforts to identify all suppliers.

To be fully effective, due diligence should not be limited to the first tier downstream and upstream in the supply chain but should encompass all suppliers and sub-contractors, particularly those that have been identified during the due diligence process as posing major risks. Effective complaint and grievance procedures need to be created.

How Anthesis can help

Our Anthesis Activator Journey empowers multi-expert teams to design and deploy solutions that grow productive, resilient organisations, ecosystems, cities, communities, and people. By working closely with supply chains, Anthesis can support businesses in developing strategy and direction towards human rights due diligence with a focus on transparency and traceability in supply chains. Using our in-house tools, we can identify and rank where the key human rights and salient risks are located within your business, both geographically and within Environmental, Social and Governance (ESG) parameters.

We can also support you with:

  • Benchmarking to understand where you stand in relation to regulatory compliance compared to various indices and competitors.
  • Developing detailed human rights risk assessments for raw materials used in products that have been identified during a materiality assessment.
  • Policy research, conducting human rights impact assessments, and reviewing reports against existing policy commitments, international standards or industry best practice.
  • Building capacity within your organisation, including training and development on ethical trade, human rights, gender equality, modern slavery and creating grievance mechanisms and worker representation models for global supply chains.

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