EU Corporate Sustainability Due Diligence Directive

The EU Corporate Sustainability Due Diligence Directive (the directive) has now been adopted.

The directive will apply to certain large EU and non-EU companies and require them to conduct, and publicly report on, human rights and environmental due diligence.

It also requires companies to develop and implement a climate change mitigation plan that aims to ensure its business model and strategy are compatible with the transition to a sustainable economy and with limiting global warming to 1.5 °C (in line with the Paris Agreement).

Due diligence required:

The due diligence required involves taking appropriate measures to:

• identify and assess adverse human rights and environmental impacts arising from their own operations, their subsidiaries and their business partners (where related to the company’s chains of activities)
• prevent potential adverse impacts and, where this is not immediately possible, adequately mitigate them
• bring actual impacts to an end, minimise their extent and provide remediation (rectify and/or provide a remedy)
• establish and maintain a notification and complaints procedure
• carry out meaningful engagement with stakeholders (including people affected and investors)

Penalties and civil liability:

Penalties for non-compliance may include fines of up to five per cent of the company’s net worldwide turnover. In addition, the directive introduces civil liability where a company intentionally or negligently fails to comply with its obligations to prevent potential impacts or bring actual impacts to an end. Under the directive  individuals could bring claims for damages where a protected right has been infringed by the company’s failure to fulfil its obligations under the directive.

A company could be liable where it jointly caused the damage with its subsidiary, direct or indirect business partner. However, a company will not be liable if the damage was caused only by its business partners in its chain of activities.

Context

Companies are increasingly making voluntary commitments to and policies on preventing human rights violations and environmental damage. However, mandatory due diligence that goes beyond reporting requirements can prevent companies just paying lip service to this. This contrasts with the UK’s Modern Slavery Act 2015, where the reporting requirement can be met merely by issuing a statement that the organisation has taken no steps to ensure that slavery and human trafficking are not taking place in its business or supply chain.

The directive is underpinned by the UN Guiding Principles on Business and Human Rights (UNGPs) and follows developments in other jurisdictions to bring these principles into national law. These include the French Corporate Duty of Vigilance Law (requiring companies to assess and address adverse impacts of their activities) and the German Act on Corporate Due Diligence Obligations in Supply Chains (requiring human rights due diligence in relation to companies’ operations and supply chains).

In the UK, corporate accountability has been established through case law, including the landmark Supreme Court judgments in Lungowe and others v Vedanta and another (2019) and Okpabi and others v Shell (2021). A duty of care (a legal duty to take reasonable care to avoid causing foreseeable harm to the person the duty is owed to) needs to be established for negligence claims.

The imposition of a legal duty of care on a parent company for human rights abuse and environmental damage arising from a subsidiary’s operations depends essentially on the extent of its actual or publicly stated intervention in functions of the subsidiary that are relevant to the harm that occurs. Mandatory due diligence will impose legal obligations on all companies in the directive’s scope, including those that make no voluntary commitments.

In the UK, a private members’ bill has been put before the House of Lords – the Commercial Organisations and Public Authorities Duty (Human Rights and Environment) Bill. This seeks to introduce mandatory corporate due diligence and civil liability and “ensure the UK keeps pace” with developments in other jurisdictions in this area. This was recommended by the Joint Committee on Human Rights in its 2017 report on business and human rights. Leigh Day made submissions to the Joint Committee, including recommending mandatory human rights due diligence and reporting.

Access to justice

Litigation against multinational companies is invariably complex, lengthy, costly and risky, and entails a huge power imbalance between claimants, who are generally impecunious, and defendants with substantial legal and technical resources at their disposal. As claimants are unable to pay lawyers, obtaining legal representation, which is critical, depends on claimants’ lawyers being willing to accept the financial risk of acting on a contingency basis. Lawyers’ willingness to accept this risk depends on claimants’ ability to overcome a series of legal, procedural and practical barriers to justice, key examples of which are identified in Pillar III of the UNGPs. The more these barriers are dismantled, the greater the incentive on claimants’ lawyers to accept the risk.

In providing a legal basis for a claim, the directive addresses a significant legal barrier to justice. However, demonstrating that a parent company caused or jointly caused the damage (to establish liability) may prove the be a barrier where companies distance themselves from the operations of companies in their supply chain (depending on interpretation of this provision). Further, other barriers that may present a significant disincentive include, in particular, the ability to obtain access to corporate documents required to prove a legal case and the availability of court procedures to bring collective (class) actions which enable large numbers of claims to be pursued cost effectively.

For example, in France although the Corporate Duty of Vigilance Law is in force, there are limited possibilities to obtain disclosure from companies and the scope of collective action mechanisms is limited (although there are indications that this is due to change). The permissibility of contingency fee agreements (which are not presently lawful in many states) and rules that enable recovery of legal fees, are also crucial to securing legal representation and hence the practical effectiveness of corporate due diligence legislation. Therefore, while the directive is progressive, its effectiveness will ultimately depend on the extent to which legal, practical and procedural barriers are dismantled.