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In 2022, the European Commission announced important proposals
for sustainability due diligence, which would impose obligations on
companies to take appropriate measures for their entire value chain
to prevent human rights and environmental law violations.
Multinational companies having business relations with the EU
should consider starting risk assessments of their supply chain to
comply with these upcoming rules.
Introduction
Compliance with laws and regulations has been one of the most
complex issues for large multinational companies for the following
reasons: the cost of training and monitoring employees in all
subsidiaries and affiliates and the number and complexity of laws
and regulations to comply with. For instance, to comply with
competition rules, it is essential to train salespeople in
subsidiaries or local offices. In addition, multinational companies
are required to comply with the competition rules of various
jurisdictions, such as the US anti-trust laws, the EU competition
law and other local anti-trust laws and regulations of the
jurisdictions in which the companies are active.
In 2022, the European Commission (‘EC’) published two
proposals concerning sustainability due diligence rules: a proposal
for the Directive on Corporate Sustainability Due
Diligence1 (the ‘CSDD Directive’) and a proposal
for the Regulation on prohibiting products made with forced labour
on the Union market2 (the ‘Forced Labour Ban
Regulation’). Both of these proposals will require companies to
conduct due diligence regarding human rights and environmental
issues. If enacted, the companies operating commercial activities
worldwide will have to comply with burdensome obligations. First,
companies that fall into the scope of these texts would have to
monitor, in addition to their subsidiaries and affiliates, their
supply chains. In other words, it would be necessary for these
companies to assess the risks of human rights and environmental law
violations by their suppliers. Moreover, the laws and regulations
that the company should comply with are diverse, they encompass all
major international agreements and conventions, EU regulations and
national laws protecting human rights and the environment.
Therefore, multinational companies will have to take into account
all these rules when assessing the risk of violations.
This article aims to describe the outline of these two
proposals, which are in the ordinary legislative procedure, that
is, presented to the European Parliament and Council, and will
enter into effect around 2025 at the earliest. Separately, certain
EU Member States, including France, have already adopted rules on
sustainability due diligence. We will briefly explain French
national legislation on sustainability due diligence, which has
already entered into force and has been discussed in an ongoing
case, to analyse the possible consequences of this proposed EU
legislation in practice.
EU Directive on Corporate Sustainability Due Diligence
Introduction
Before publishing the CSDD Directive on 23 February 2022, the EU
had already enacted three pieces of legislation that impose supply
chain due diligence regarding human rights and sustainability
issues. However, these pieces of legislation only concern specific
industries, that is, the mineral3 and wood4
industries, or require only large companies located in the EU to
report non-financial information, including on human
rights.5
At the national level, some European countries have already
introduced national legislation regarding human rights due
diligence. However, these national laws focus on specific human
rights violations, for example, child labour or forced
labour,6 or target only large national companies. As a
result, these rules have had limited implications for companies
outside the EU.
The CSDD Directive, by contrast, will have a broader personal
scope of application and will require more general human rights and
environmental due diligence than the existing EU and national
legislation. Therefore, the CSDD Directive would have broader
impacts on non-EU companies either exporting products to the EU or
having subsidiaries or affiliates within the EU.
Purpose of the Proposed Directive
The CSDD Directive aims to foster sustainable and responsible
corporate behaviour throughout global value chains.7 For
this purpose, the CSDD Directive provides a set of obligations for
companies regarding actual and potential human rights adverse
impacts and environmental adverse impacts, with respect to their
own operations, the operations of their subsidiaries and the value
chain operations carried out by entities with whom the company has
an established business relationship (Article 1).
Personal Scope
The CSDD Directive will apply to the following companies
(Article 2):
- EU companies having more than 500 employees and a net worldwide
turnover of more than €150 million. - EU companies having more than 250 employees and a net worldwide
turnover of more than €40 million, at least half of which is
generated in specific high-risk sectors, inter alia:
- the manufacture of textiles, leather and related products
(including footwear) and the wholesale trade of textiles, clothing
and footwear; - agriculture, forestry, fisheries (including aquaculture), the
manufacture of food products and the wholesale trade of
agricultural raw materials, live animals, wood, food and beverages;
and - the manufacture of basic metal products, other non-metallic
mineral products and fabricated metal products (except machinery
and equipment).
- the manufacture of textiles, leather and related products
Furthermore, the CSDD Directive will apply to companies outside
the EU that meet either of the following conditions:
- have a net turnover in the EU of more than €150 million;
or - have a net turnover in the EU of more than €40 million and
at least half of the net worldwide turnover is generated in the
high-risk sectors listed above.
Therefore, non-EU companies that meet these thresholds will be
required to comply with the due diligence requirements set by the
CSDD Directive, even if they do not have a subsidiary or affiliate
in the EU or their European subsidiary or affiliate is not within
the scope of the CSDD Directive.
Due Diligence Obligations
The CSDD Directive will require companies to conduct human
rights and environmental due diligence by carrying out the
following actions (Article 4):
- integrating due diligence into their policies;
- identifying actual or potential adverse impacts;
- preventing and mitigating potential adverse impacts, bringing
actual adverse impacts to an end and minimising their extent; - establishing and maintaining a complaints procedure;
- monitoring the effectiveness of their due diligence policy and
measures; and - publicly communicating on due diligence.
The human rights and environmental conventions that companies
should consider when conducting due diligence are listed in the
Annex of the CSDD Directive.
Due diligence obligations will extend to business relationships
with the company’s value chains.8 That is, companies
should identify, prevent and monitor actual and potential
violations of human rights or environmental standards in the
operations of their value chains.
There are additional obligations on large companies and EU-based
companies. Companies that meet the size criteria above, whether EU
companies or not, will be required to adopt a plan to ensure that
their business strategy is compatible with limiting global warming
to 1.5°C in line with the Paris Agreement (Article 15). In any
EU-based company within the scope of the CSDD Directive, directors
will be required to take into account the human rights, climate
change and environmental consequences of their decisions when
fulfilling their duty to act in the best interest of the company
(Article 25). It is worth noting that this provision is
particularly controversial as it is unclear how to assess
sustainability decisions.
The above obligations will have to be satisfied at any time.
However, from a practical point of view, it is preferable to assess
the risk before entering into an SPA, supply agreement or any other
relevant agreements with business partners, and if necessary, take
appropriate measures to comply with the CSDD Directive.
Sanctions
National administrative authorities may impose fines in case of
non-compliance based on the company’s turnover. The EC will set
up a European Network of Supervisory Authorities which will
facilitate the cooperation of the supervisory authorities and the
coordination and alignment of regulatory, investigative sanctioning
and supervisory practices (Articles 20 and 21).
In connection with companies outside the EU, the competent
authority will be that of the Member State in which the company has
a branch. If the company does not have a branch in any Member State
or has branches in different Member States, the competent authority
will be that of the Member State in which the company generates
most of its net turnover in the EU (Article 17). In addition,
companies could be held liable for damages resulting from their
failure to prevent potential adverse impacts or bring actual
adverse impacts to an end (Article 22).
Implications for Non-EU Companies
Companies outside the EU, especially those generating a net
turnover in the EU of more than €150 million and having value
chains in countries with a risk of human rights violations, should
prepare a strategy to comply with the due diligence
obligations.
Furthermore, non-EU companies supplying products within the EU
should also expect that European clients would ask to collaborate
on their sustainability due diligence. When collaborating with
competitors by sharing resources or information, it is essential to
consider compliance with applicable competition law.
The proposal for the CSDD Directive has been presented to the
European Parliament and the Council for approval. Once adopted, the
Member States shall transpose it into national laws within two
years from its entry into force. The companies that meet the size
criteria of the CSDD Directive should comply with the due diligence
obligations by the end of this period. Companies within the CSDD
Directive’s scope because of their activities in high-risk
sectors, on the other hand, should do so within four years after
its entry into force.
It is worth noting that the CSDD Directive is highly
controversial, as an exercise of due diligence in developing and
emerging countries is burdensome for European businesses. Given the
sensitive nature of the rules and current controversies, the
proposal is not likely to be enacted before 2023. That is, the due
diligence obligations on large companies will come into force in
2025 and those on other companies in high-risk sectors in 2027 at
the earliest.
EU Regulation Prohibiting Products Made with Forced Labour
Introduction
Following the CSDD Directive, the EC unveiled a proposal for the
Forced Labour Ban Regulation on 14 September 2022. As the EC
indicated, the Forced Labour Ban Regulation and the CSDD Directive
are interlinked. However, it should be noted that the Proposal has
a different scope of application and mechanism from the CSDD
Directive. The Forced Labour Ban Regulation, which imposes new
sanctions, that is, prohibition on placing products made with
forced labour in the Union market, is another important signal for
companies of the importance of conducting human rights due
diligence in its operations and supply chains.
Scope of Application
While the scope of the CSDD Directive is limited to large or
‘high-risk’ companies, the Forced Labour Ban Regulation
will apply to ‘economic operators’, which means any natural
or legal person or association of persons who is placing or making
available on the Union market. Therefore, theoretically, the Forced
Labour Ban Regulation will apply to any companies supplying
products to the EU market, even if they are located outside the
EU.
Prohibited Products
The Forced Labour Ban Regulation prohibits economic operators
from placing or making available products that are made with forced
labour on the Union market (Article 3).
A ‘product made with forced labour’ includes any
products for which forced labour has been used in whole or in part
at any stage of its extraction, harvest, production or manufacture,
including working or processing at any stage of its supply chain.
Therefore, in parallel with the CSDD Directive, companies placing
or making available products within the EU should ensure that
forced labour has not been used even at the level of their supply
chains.
It is worth noting that the EC specifies sectors where forced
labour has frequently been reported, namely service sectors,
textiles, mining and agriculture. Yet, all industry sectors are
covered by the Forced Labour Ban Regulation.
Forced Labour
Forced labour is defined in Article 2 of the International
Labour Organisation’s Convention Concerning Forced or
Compulsory Labour, that is, ‘all work or service which is
extracted from any person under the menace of any penalty and for
which the said person has not offered him or herself
voluntarily’ and includes forced child labour. It refers to
situations in which persons are coerced to work through the use of
violence or intimidation, or by more indirect means such as
manipulated debt, retention of identity papers or threats of
denunciation to immigration authorities.
Unlike the US Uyghur Forced Labor Prevention Act, which entered
into force in June 2022, the Forced Labour Ban Regulation is not
targeting only certain regions such as the Xinjian Uyghur
Autonomous Region.
Investigation
The investigation process will be carried out in two phases: (1)
the preliminary phase; and (2) the investigation phase.
(1) Preliminary Phase
Unlike the EU competition law, the competent authority is a
national authority designated by each Member State. Competent
authorities will follow a ‘risk-based approach’, meaning
that they should focus their enforcement efforts on the economic
operators likely to violate the forced labour prohibition. In this
regard, competent authorities should take into account the size and
economic resources of the economic operators, the quantity of
products concerned, as well as the scale of suspected forced
labour. In other words, the authorities are likely to focus on
large multinational companies in the sectors where there is a high
risk of forced labour. With regard to the risk assessment, the EC
is required to publish guidelines and make publicly available a
database of forced labour risks in specific geographic areas or
with specific products.
Before initiating an investigation, the competent authority
should request from the company under assessment information on
actions taken to identify, prevent, mitigate or bring to an end the
risk of forced labour based on the applicable rules or legislation,
such as the CSDD Directive; the company under assessment should
respond to the authority within 15 working days. It should be noted
that, if the company under assessment has conducted effective human
rights due diligence based on the applicable rules, the competent
authority will take this into account when they assess whether
there is a well-founded suspicion of forced labour.
(2) Investigation Phase
If the competent authority has substantiated concerns, it will
be required to initiate an investigation. The competent authority
will inform the company subject to the investigation within three
working days from the date of the decision to initiate such
investigation.
Sanctions
If the investigation concludes that forced labour has been used,
the authority will have to, without delay, adopt a decision
containing:
- a prohibition on placing or making the relevant products
available on the Union market; - a request to withdraw the relevant products already made
available from the Union market; and - a request to dispose of the relevant products.
- Nevertheless, the Forced Labour Ban Regulation does not provide
for the recall of products that have already reached end users in
the Union market. Decisions taken by a competent authority in one
Member State will be recognised and enforced in the other Member
States.
Nevertheless, the Forced Labour Ban Regulation does not provide
for the recall of products that have already reached end users in
the Union market. Decisions taken by a competent authority in one
Member State will be recognised and enforced in the other Member
States.
Customs Controls
Once the decision becomes definitive, the competent authority
communicates it to the customs authorities of the Member States.
Based on such decision, customs authorities should identify the
concerned products and carry out controls on products entering or
leaving the Union market. If necessary, customs authorities will
stop products made with forced labour from entering or leaving the
EU market.
Implications for Non-EU Companies
All companies distributing their products in the EU market,
whether or not they have subsidiaries or affiliates in the EU, will
have to comply with the Forced Labour Ban Regulation. Moreover, the
non-EU companies indirectly exporting goods to the EU, that is,
producing and distributing materials or parts for the products
exported to the EU, will also be subject to the Forced Labour Ban
Regulation.
The proposal follows the ordinary legislative process of the EU.
However, it should be noted that, given its contentious nature and
geopolitical dimension, the Forced Labour Ban Regulation is also
highly controversial; therefore, the European Parliament and
Council will likely provide their input.
The Forced Labour Ban Regulation is expected to be adopted and
enter into force in 2024 at the earliest. Then, the new Regulation
will apply 24 months from its entry into force, that is, in 2026.
It should be noted that, unlike EU directives, EU regulations shall
apply within the Member States without being incorporated into the
national law.
French Duty of Care Law
These proposals for the new EU rules on sustainability due
diligence are still unclear from a practical point of view and many
companies are confused about how to comply with such obligations
and what are the potential impacts on the company in the case of a
breach. In order to better understand the practical implications of
sustainability due diligence, it would be helpful to study some
examples in European countries where such duty has already been
imposed on large companies.
In France, there will be a hearing involving the French energy
and petroleum company TotalEnergies before the Paris judicial court
on 7 December 2022, upon a claim filed by NGOs on the basis of
breaches of its duty of care. This case marks the first use of this
concept created by the law of 27 March 2017 on the duty of care of
parent companies and companies giving orders (the ‘Duty of Care
Law’).9
The Duty of Care Law inserted an article L. 225-102-4 of the
Commercial Code which establishes a regime for any French limited
company (société anonyme) that employs, at the close
of two consecutive financial years:
- at least 5,000 employees within the company and its direct and
indirect subsidiaries whose registered office is in France; or - at least 10,000 employees within the company and in its direct
or indirect subsidiaries whose registered office is in France or
abroad.
The companies that meet this criterion must establish and
effectively implement a due diligence plan. The provision specifies
that subsidiaries are deemed to fulfil this duty if the parent
company establishes and implements a due diligence plan.
Due diligence plans should include reasonable due diligence
measures to identify the risks to be prevented, the serious
violations of human rights and fundamental freedoms, the health and
safety of people, and the environment resulting from the actions of
the company (or companies it controls). The plan should in
principle be developed in association with the company’s
stakeholders. The Duty of Care Law provides at least five measures
in the vigilance plan:
- a risk map to identify, analyse and prioritise risks;
- procedures for regular assessment of the situation of
subsidiaries, subcontractors or suppliers with whom an established
commercial relationship is maintained, in the light of risk
mapping; - appropriate actions to mitigate risks or prevent serious
harm; - a mechanism for alerting and collecting reports on the
existence or occurrence of risks, established in consultation with
the representative trade unions in the company; and - a system for monitoring the measures implemented and evaluating
their effectiveness.
The company’s management report must make public the
company’s compliance plan and its effective implementation. It
is also specified that when a company that has been given formal
notice to comply with the obligations set out therein fails to do
so within a period of three months from the date of the formal
notice, the competent court may, at the request of any person with
interest in the matter, enjoin it, if necessary, under penalty, to
comply with them.
In the TotalEnergies case, the NGOs have argued that the
TotalEnergies’ plan does not identify the risks in a precise
manner, which makes it impossible to put in place effective
vigilance measures. It is expected that the French courts will
provide further clarification regarding the extent to which
companies should specify the actions to be taken in the due
diligence plan in this case.
Conclusion
In the EU, the rules on sustainability due diligence, which
impose burdensome obligations on companies operating a business in
many countries, would no longer be a ‘soft’ law but legally
binding provisions that can be enforced by competent authorities or
parties with interest around 2025 at the earliest. Moreover, the
TotalEnergies case illustrates that the failure of the sustainable
due diligence obligations would result in court proceedings, which
could have severe consequences on the company’s operation
within the EU as well as its reputation.
Despite the ambiguity of the proposed texts, it would be
advisable that companies directly or indirectly subject to these
new rules start assessing the risks of violations of human rights
or environmental law within the supply chain.
Footnotes
1. European Commission, Proposal for a Directive on
corporate sustainability due diligence and amending Directive (EU)
2019/1937, Brussels, 23.2.2022 COM (2022) 71 final.
2. European Commission, Proposal for a Regulation of the
European Parliament and of the Council on prohibiting products made
with forced labour on the Union market, Brussels, 14 September
2022, COM(2022) 453 final.
3. So-called the Conflict Minerals Regulation, Regulation
(EU) 2017/821 of the European Parliament and of the Council of 17
May 2017, laying down supply chain due diligence obligations for
Union importers of tin, tantalum and tungsten, their ores, and gold
originating from conflict-affected and high-risk areas.
4. Regulation (EU) No 995/2010 of the European Parliament
and of the Council of 20 October 2010, laying down the obligations
of operators who place timber and timber products on the
market.
5. Directive 2014/95/EU of the European Parliament and of
the Council of 22 October 2014, amending Directive 2013/34/EU as
regards disclosure of non-financial and diversity information by
certain large undertakings and groups.
6. UK Modern Slavery Act 2015.
7. European Commission, press release ‘Just and
sustainable economy: Commission lays down rules for companies to
respect human rights and environment in global value chains’,
23 February 2022, available at https://ec.europa.eu/commission/presscorner/detail/en/ip_22_1145.
8. ‘Value chain’ is defined as activities related
to the production of goods or the provision of services by a
company, including the development of the product or the service
and the use and disposal of the product as well as the related
activities of upstream and downstream established business
relationships of the company (Article 3(g)).
9. TotalEnergies’ trial for non-compliance with due
diligence in Uganda and Tanzania postponed (rfi.fr).
Originally published by Inter-Pacific Bar Association
Journal.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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