Addressing the responsibility and accountability of companies in relation to their environmental and human rights impact has long been at the top of the agenda at the European level. On 10 March 2021, the European Parliament voted by a large majority for new EU laws that would oblige companies to conduct environmental and human rights due diligence within their value chains. This development paves the way for effective Environmental, Social, and Governance (ESG) initiatives and sets a standard for responsible business conduct in the EU and beyond. The European Commission will present its legislative proposal for a European Directive on mandatory due diligence later this year that would require EU Member States to transpose such new legislation into national law.

Mandatory due diligence

The proposed EU due diligence rules would require companies to carry out effective due diligence of its value chain, which includes its operations, direct and indirect business relations, and investment chains, in relation to the three limbs of ESG:

  • Environmental impact contributing to climate change;
  • Potential infringement of human rights; and
  • Good governance to prevent and mitigate corruption and bribery risks.

Scope and enforcement of EU due diligence rules

The new rules are envisioned to not only bind companies established within the EU, but also those established outside the EU that have access to the EU internal market, and would be applicable regardless of the size and sector of the company and the public or private nature of its ownership. Those factors, however, might play a role in tailoring the due diligence process to the needs of the business. The European Parliament emphasised that due diligence efforts of a company should involve taking proportionate measures based on the business activity, sector, the size and length of the company and value chain, and the likelihood and severity of potential harm. Further, the European Parliament called for measures to ensure EU trade agreements should steer clear of importing goods linked to severe human rights violations, such as child labour.

In order to ensure effective reparation for victims, national authorities in Member States will be empowered to conduct investigations of due diligence activities and integrity of related statements and impose fines where inadequate action has been taken. Civil action may also be brought by victims against companies for any potential or actual harm suffered.

The UK’s position

UK domestic law on human rights due diligence is enshrined in the Modern Slavery Act 2015 (the MSA), which brings the UK to the forefront of tackling modern slavery and human trafficking activities in Europe and beyond. The due diligence provisions of the MSA, however, are not mandatory. In May 2019, the UK government published an independent review of the MSA, which includes some but not all of the recommendations from stakeholders to strengthen the MSA. Such stakeholder recommendations of tougher measures include casting the net wider so that more companies are required to make modern slavery statements, making the six reporting criteria in Section 54 MSA mandatory in all modern slavery statements, introducing a reporting deadline for such statements, making due diligence mandatory, and introducing enforcement measures and penalties in the event of non-compliance.

Considering that the proposed EU due diligence rules apply to companies with access to the EU market and many UK companies may wish to continue trading with the EU in post-Brexit, there is even more reason for the UK to strengthen the MSA. This EU development should prompt all UK companies and organisations to increase their due diligence efforts in identifying modern slavery risks in their operations and supply chains and consider submitting a modern slavery statement to the recently launched UK government registry.

Stephanie Pong, London Trainee Solicitor, contributed to the drafting of this alert.