EU Moves Toward Mandatory Supply Chain Due Diligence

International pressure on EU-based businesses to implement robust due diligence processes, including ethical sourcing across supply chains, has intensified. Little has changed in these areas, according to a recent report by the European Commission. 

The findings indicate that only one in three businesses is currently conducting appropriate due diligence measures with regards to its value chain. Harsh working conditions and sub-standard domestic regulation in South Asia have sharpened focus on ethical sourcing. 

A 2019 government report on India found that most workers earned less than half the minimum wage, 71% did not have a written employment contract, 54% did not get paid leave, and nearly 80% worked far beyond the eight-hour workday. 

The catastrophic collapse of the Rana Plaza factory in Bangladesh in 2013, which claimed more than 1,000 lives, underscored the need for European lawmakers to establish a strict liability regime for corporate supply chains.

New EU due diligence legislation

Several EU member states, including France, Germany and the Netherlands, already operate under national policies for supply chain due diligence and ethical sourcing. None of those, however, come close to the impact of a new proposed directive adopted by the European Parliament in March.

If ratified, the EU Directive on Mandatory Human Rights, Environmental and Good Governance Due Diligence would substantially redraw the scope of due diligence oversight with material sanctioning powers spanning EU and non-EU businesses and their supply chains.

The European Commission has been tasked with drafting a formal legislative proposal for the Directive and will present the proposal to the European Parliament in summer 2021. The Directive will not come into force until late 2022 or early 2023. Nonetheless, EU businesses must start looking ahead and begin preparing for the future.

Sweeping due diligence reform in the EU

The draft Directive is unprecedented in terms of mandate, scope, and enforceability. Notably, the Directive will increase EU scrutiny of business operational impact on the environment and people globally and not just in the 27-country bloc. Transposing it into national systemic laws will require significant efforts from EU member states. 

The draft law will require companies to monitor, identify, prevent, and remedy risks to human rights, the environment, and governance in their operations and business relationships, including suppliers and subcontractors. Labour rights such as minimum age requirements and occupational safety will be included in the mandate.

Companies will be required to take all proportionate and commensurate measures and make efforts within their means to prevent potential adverse impacts in three fields of corporate responsibility: 

  • Human Rights, including social, trade union, and labour rights
  • Environment, including the production of waste, sustainable use of natural resources, greenhouse gas emissions, deforestation, biodiversity, and ecosystems
  • Good Governance, including combating bribery, corruption, and illegal campaign contributions.

Once companies have put appropriate processes in place, they will have to publicly communicate their approach in a due diligence strategy document.

Should human rights or environmental violations emerge, the draft Directive requires a company to publicly disclose the details of the risk and take specific steps to remedy them. National authorities must monitor companies for compliance and investigate complaints and can impose hefty, enforceable fines where a breach of law occurs.

Victims of human rights violations will have the right to take companies to court in the EU. Companies will be obliged to consult trade unions, indigenous peoples, and civil society when developing their required due diligence plans. 

Customized solutions for due diligence

How can EU-domiciled businesses with far-reaching, cross-border supply chains and third-party relationships begin to prepare for the extensive changes that an approved Directive will call for? 

In seeking solutions to help them adapt and reconfigure their due diligence plans, it will become clear that a one-size-fits-all approach can’t begin to address these challenges. 

One thing companies will need are tools for monitoring and generating reports that are relevant and proportionate to their risk exposure and operational needs. It will entail formulating three-dimensional models of each business case. Anything less opens the door to potential reputational damage.

Identifying key issues relating to bribery, corruption, financial crime, governance, ethical violations, and any number of other potential risks, can only be accomplished through a detailed review of new and existing clients, business partners, and third parties. 

The new Directive under consideration by the EP and EU promises to be a game-changer for everyone. ethiXbase provides configurable Enhanced Due Diligence reports that are relevant and proportionate to your risk exposure and business needs. Contact us to find out more.

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