The EU is set to propose cross-sectoral legislation requiring EU companies to conduct due diligence on the human rights and environmental track record of their suppliers. The modalities of the proposal, set to be announced in the first quarter of 2021, are not yet clear, but the EU seems set to choose an approach of sanctioning EU companies that do not comply with the new rules rather than incentivizing them to comply. Affected life sciences companies can weigh in on the proposal through an upcoming stakeholder consultation.
Human Rights and Environment: EU to Propose Legislation Requiring Due Diligence Through Supply Chains
On April 29, 2020, European Commissioner for Justice Didier Reynders announced that the European Commission (Commission) is preparing a proposal for legislation requiring that EU companies conduct due diligence on respect for human rights and environmental rules through their supply chains. The announcement follows the publication of a 500-page Commission study on due diligence requirements through EU companies’ supply chains.
The proposal will be part of the EU’s Green Deal, which seeks to make the EU economy sustainable, and it comes at a time where actors such as the World Economic Forum have publicly referred to the importance of making supply chains sustainable.
Framework for the proposal
While details are still lacking, Reynders’ comments suggest that the Commission’s proposal may contain the following elements:
- Mandatory obligations, based on a duty of care, requiring EU companies to conduct due diligence on human rights and environmental issues through their entire supply chain.
- The obligations could be derived from international frameworks such as the United Nations’ Guiding Principles on Business and Human Rights and the Organization for Economic Cooperation and Development’s Due Diligence Guidance for Responsible Business Conduct.
The requirements would apply horizontally in all sectors, including life sciences, and to all EU companies, regardless of their size (but with potential special treatment for small and medium-size companies).
Reporting obligations on the actions that EU companies take to comply with their due diligence obligations.
- A sanctioning mechanism to enforce compliance with the new rules. The proposal could also contain access to a remedy for victims of human rights and environmental abuses through EU companies’ supply chains, potentially modeled on the ongoing legislative proposal for representative actions to safeguard collective consumers’ rights.
A stick but no carrot for affected companies
The sanctioning mechanism ensures that the EU can penalize companies that do not comply with its due diligence requirements. Unfortunately, at this time, the Commission does not appear to be considering tying benefits to compliance. Such benefits could include import tariff suspensions or fast-tracked customs procedures.
Tying benefits to compliance could help in getting buy-in from companies for stricter due diligence requirements and could be an opportunity to address what many EU companies perceive as key shortcomings in utilizing benefits in free trade agreements (e.g., overly complex rules of origin).
The Commission is preparing a stakeholder consultation on the proposal, which is to take place in the coming weeks. Life sciences companies that could be affected by the proposal may wish to put forward their positions. Civil society stakeholder the European Coalition of Corporate Justice already published its views.
Reynders noted that the Commission aims to present the proposal to the European Parliament and the Council of the EU in the first quarter of 2021.