Due diligence laws: the good and the bad of European regulations limiting corporate impunity

Due diligence laws: the good and the bad of European regulations limiting corporate impunity

When the outbreak of the Covid-19 pandemic caused global demand for goods to plummet in 2020, many companies chose to suspend commitments to producers in non-EU countries, directly impacting workers in global supply chains. Pictured here, hundreds of female garment workers (employed by Western clothing companies) demand their unpaid wages in Dhaka, Bangladesh.

(Ahmed Salahuddin/NurPhoto via AFP)

Last March, the European Parliament approved a legislative initiative on due diligence. According to the Parliament, this initiative “paves the way” for legislation requiring “companies to address human rights and environmental standards within their value chains”. Member countries have two years to pass national due diligence legislation. Some countries, including France, Germany and the Netherlands, have already passed laws to this effect, while others, like Spain, have begun the process of prior consultation that will lead to a draft bill.

Though the initiative received widespread support in Parliament (504 votes in favour, 79 against and 112 abstaining), it received little media coverage despite its potential significance as a model for how legislation throughout Europe can hold companies to account. According to the European Parliament, in order to prevent companies from causing “harm to people and planet with impunity,” they will be required to “identify, address and remedy their impact on human rights and the environment throughout their value chain” in terms of human and labour rights, the environment and good governance (i.e. preventing corruption and bribery). According to the European Commission, consumers will gain more transparency, while businesses will benefit from greater legal certainty and avoid unfair competition.

The concept of due diligence is an extension of the principle of corporate responsibility, as defined by both the United Nations (UN) and the Organisation for Economic Co-operation and Development (OECD). The latter defines due diligence as “the process through which companies identify, prevent and mitigate actual and potential adverse impacts and account for how these impacts are addressed”.

For Makbule Sahan, a European Parliament adviser on employment and social affairs for the Greens-EFA, due diligence legislation “is a response to the recognition that non-binding guidelines alone are not sufficient. There have been numerous known human rights abuse scandals involving European companies”.

While Sahan believes that regulators are taking steps in the right direction, she also sees weaknesses in the directive. For one thing, it only affects large companies and not small and medium enterprises. Sahan also argues that steps should be taken to ensure that trade unions play a leading role in developing this regulation.

Pedro Ramiro, a member of the Observatorio de Multinacionales Españolas en América Latina (OMAL), is more critical: “Due diligence is a legal elaboration of corporate social responsibility (CSR), and more specifically of the guiding principle of applying corporate due diligence to human rights, pioneered by the late John Ruggie [an influential Austrian-born diplomat] at the UN. In the late 1990s, CSR was introduced as a paradigm of corporate behaviour based on voluntarism. Due diligence represented a shift from voluntary to unilateral responsibility, the duty to respect human rights was transferred to companies” who are obliged to prepare and review business plans on human rights risks.

The global campaign against corporate impunity

Ramiro believes that the laws that already exist under the due diligence framework, such as the UK’s law on modern slavery as well as laws in Germany and Norway, do not effectively curb corporate impunity in practice. As he argues, the European directive “does not improve access to redress for victims. It’s a timid text drafted to protect companies from more ambitious initiatives”. Ramiro is particularly concerned about a sentence in the preamble: “the Directive does not require companies to guarantee in all circumstances that adverse effects will not occur or that they will be stopped” as it only includes obligations of means and not of results. In other words, if companies have complied with their legal obligation to draw up and review their risk prevention plans, they can easily exempt themselves from any further liability.

OMAL is one of the more than 250 organisations, social movements and trade unions that form the Global Campaign to Dismantle Corporate Power and Stop Impunity. The Global Campaign has launched a process within the UN to draft a Binding Treaty on Business and Human Rights, currently in the process of deliberation. The result would be binding laws that oblige companies to respect human rights with the same force of law that binds states to honour their commitments to companies when they face the International Centre for Settlement of Investment Disputes (ICSID).

The lack of instruments to enforce human rights and environmental sustainability legislation beyond European borders is of particular concern. “Right now, there is a legal limbo that makes it difficult or even impossible to hold companies accountable in regions like Latin America. But with these new laws, companies can be directly exempted from any liability as long as they’ve submitted their plans in a timely manner,” says Ramiro. “Legislation must have both preventive obligations as well as sanctions that dissuade companies from violating the rights of workers and communities,” says Sahan.

Regulatory asymmetry

For Ramiro, the haste with which the European Commission designed the due diligence directive reveals its intention to “block the possibility of a legally binding international treaty that would impose strong obligations and really monitor transnational corporations”. The Commission, he believes, “is going forward with its directive, which shows the way forward for all states, and also internationally”.

In short, we have moved from a paradigm based on non-binding standards (CSR) to one based on mandatory standards, but “the trick is that these standards are devoid of content,” says Ramiro, who draws a parallel with the signing of the 2015 Paris Agreement: “The only commitment countries made in Paris was to submit five-year national emissions plans. They made no concrete commitments to reduce greenhouse gas emissions or stipulate timetables for doing so.”

The Global Campaign is demanding that due diligence laws not be a central concept in the legal structure of the directive but rather an ancillary obligation linked to prevention and established as a direct obligation for transnational corporations.

According to the Campaign, a framework law is needed that can be as legally effective as the arbitration tribunals, like the ICSID, that defend the rights of companies at the international level.

“If the laws only have this framework it’s clear that there’s no real will to put limits on the omnipotent power of these companies. What we have instead is regulatory asymmetry. All types of laws are made all the time that favour the business of transnational capital, trade treaties thousands of pages long are drawn up at the multilateral level, the bilateral level, etc., but the obligations they adhere to are unilateral,” says Ramiro.

This article has been translated from Spanish by Brandon Johnson