What is EU supply chain due diligence?

EU Taxonomy Regulation

What is EU supply chain due diligence?

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In 2020, EU supply chain due diligence was the major focus for the EU, thanks to the novel coronavirus. However, in 2021, the European Commissioner for Justice, Didier Reynders, announced the commission’s desire to propose legislation that will cover environmental risk and human rights across a business supply chain.

This discussion is coming at a time when member states like France and Netherlands are already adapting their legislation on mandatory human rights due diligence. A portal created in 2019 by the Business and Human Rights Resource Centre showed that 13 countries have initiated and adopted human rights due diligence, 11 of which are EU member states.

They include Austria, Belgium, Denmark, Finland, France, Germany, Italy, Luxembourg, the Netherlands, Sweden, and the United Kingdom. The remaining two are Norway and Switzerland, where mandatory due diligence laws would be likely to affect many EU-based companies.

Recent trends have also witnessed growing support for mandatory human rights due to diligence regulation from certain large multinational corporations. Across Europe, various new campaigns have been launched for the introduction of domestic laws requiring mandatory due diligence for human rights and environmental impacts.

This article takes a detailed look at the “Directive on corporate due diligence and corporate accountability” published by the British Institute of International and Comparative Law (BIICL) in partnership with Civic Consulting and LSE Consulting report.

Read on to find out the key features and objectives of this Directive.

The objective of the EU supply chain due diligence directive

The Directive aims to mitigate the adverse impact of governance, environmental, and human rights through an undertaking entire value chain and ensuring that undertakings can be held accountable for these risks and anyone who suffered harm can effectively exercise his right to seek a remedy.

According to the Directive, establishing an EU-wide due diligence framework will also create a level playing ground and foster a “global standard for responsible business conduct.”

Its major aim is to “identify, prevent, mitigate and account for” adverse corporate impacts, which is the language introduced by the UN Guiding Principles on Business and Human Rights (“UNGPs”), and incorporated into the OECD Guidelines for Multinational Enterprises (“OECD Guidelines”) to extend to other areas of responsible business conduct such as the environment and climate change, conflict, labor rights, bribery and corruption, disclosure and consumer interests.

EU-Supply-Chain-Due-Diligence

What risks are covered?

The undertakings will perform due diligence of their value chain with the following risk areas.

  • Human rights risk: This is include everything that may impair the enjoyment of internationally recognized human rights and other things in the International Bill of Human Rights, Charter of Fundamental Rights of the EU, key ILO conventions, and national constitutions and laws. This also includes trade unions, social and labor rights.
  • Environmental risks: This is defined as an impact that will impair the health of the environment, such as climate change, pollution, deforestation, and greenhouse emission.
  • Governance risks: This is defined as impacts that may impair good governance of a country, region, or territory, including corruption and bribery, as well as illegal campaign contributions or failure to comply with the applicable tax legislation.

Which businesses would the report target?

The Directive obligation applies large undertakings defined as businesses operating in the European Union (irrespective of place of registration) with more than €50 million annual turnovers, 250 employees; €43 million balanced sheets, listed publicly as high risk and companies providing financial services and products. To comply with this Directive, companies that fall in this category must:

  • Take measures and make efforts to prevent potential adverse impacts in three fields of corporate responsibility: human rights, the environment, and good governance;
  • Put appropriate processes in place; and
  • Publicly communicate their approach to due diligence in a due diligence strategy document.

What action is required for EU supply chain due diligence?

Undertakings would be required to set up a structure compliance system and carry out a risk assessment of their operations and business relationships to know what contributes to relevant risk.

Once a risk is identified, due diligence stated must be put in place. Value chain due diligence must be “proportionate and commensurate” to the undertaking’s specific circumstances, including its size, capacity, resources, and leverage.

The undertaking would also need to consult with stakeholders when establishing and implement due diligence that is right for their size and context of operation. Additionally, undertakings would need to establish a safe and accessible grievance mechanism to operate as both an early-warning risk-awareness and as a remediation system to allow stakeholders to voice concerns regarding the existence of relevant risks.

EU supply chain due diligence Due Diligence Strategy

Affected companies will be required to create a due diligence strategy which must be publicly communicated in line with overall business strategy. This strategy will be evaluated annually and need:

  • Specify the company’s potential or actual adverse impacts on human rights, the environment, and good governance;
  • Map the company’s value chain
  • Indicate the appropriate policies and measures adopted by the company, with a view to ceasing, preventing, or mitigating the identified potential or actual adverse impacts; and
  • Set up the company’s prioritization strategy.

Penalties and supervision

Member states must provide for penalties in case of legislation infringement. Repeated offence when committed intentionally, will constitute a criminal offense. Member states must also constitute a government body to supervise the enforcement of the framework. Possible sanctions include

  • Large administrative fines
  • Exclusion from public procurement, state aid, or public support scheme; and
  • Import bans in the case of severe human rights violations (such as child labor).

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