On March 10, 2021, the European Parliament adopted a resolution calling for mandatory human rights, environmental and governance due diligence standards across the value chain for companies operating in the EU internal market (the “Resolution”). The Resolution was accompanied by an annex setting out recommended text (the “Recommendations”) for a Directive on Corporate Due Diligence and Corporate Accountability (the “Directive”), for consideration by the European Commission. The Commission has announced that it will submit a legislative proposal for the Directive later in 2021.
If adopted, all EU Member States will be required to implement the Directive into their national laws. This will result in substantive due diligence requirements being imposed on companies, whether based in the EU or selling their products and services into the EU, across their entire value chain, with potential sanctions for non-compliance.
This latest development arrives in the context of a significantly enhanced focus on environmental, social and governance (ESG) issues at the EU level. It follows, for example, the entry into force on January 1, 2021 of the EU Conflict Minerals Regulation, requiring EU-based importers of tin, tantalum, tungsten and gold to perform due diligence across their supply chains to ensure that they meet international responsible sourcing standards, as well as the phasing in, starting March 10, 2021, of the EU Sustainable Finance Disclosure Regulation (SFDR). A cornerstone of the European Commission’s Action Plan on Sustainable Finance, the SFDR imposes on EU fund managers and certain non-EU fund managers heightened due diligence and reporting requirements with respect to the sustainability impacts of investment decisions.
If the Recommendations are adopted, the new rules will apply to the following companies:
All such companies selling goods or providing services in the EU internal market will be bound to comply with the new rules, including companies established outside the EU.
If the Recommendations are adopted, the duty of due diligence will require companies to “identify, assess, prevent, cease, mitigate, monitor, communicate, account for, address and remediate the potential and/or actual adverse impacts on human rights, the environment and good governance that their own activities and those of their value chains and business relationships may pose.”
The proposed due diligence framework targets three categories of “potential and/or actual adverse impacts,” namely, those on:
The proposed duty of due diligence will apply to a company’s own activities, and also in connection with its “business relationships” throughout its “value chain.” Under the Recommendations:
A company therefore will have to make all efforts within its means to ensure that its business partners (both direct and indirect, and upstream and downstream) have in place human rights, environmental and good governance policies that are in line with the company’s obligation of due diligence. The Recommendations contemplate that this may be achieved, for example, by means of framework agreements, contractual clauses, codes of conduct or certified and independent audits.
The Recommendations spell out the core components of the proposed obligation of due diligence, which will require a company to:
Lastly, as part of its duty of due diligence, when the company identifies that it has caused or contributed to, or that it is directly linked to, an adverse impact, it must participate in the remediation process to the best of its abilities. The appropriate remedy for victims of adverse impacts is to be determined in consultation with the affected stakeholders, and may consist of financial or non-financial compensation, reinstatement, public apologies, restitution, rehabilitation or contribution to an investigation. The company must also give guarantees of non-performance. A company’s proposal for remediation must not be to the exclusion of judicial remedies. Nor shall ongoing proceedings before a company’s grievance mechanism impede victims’ access to the courts. Decisions resulting from an internal grievance mechanism shall be duly considered by courts, but shall not be binding on them.
Under the Recommendations, enforcement of the proposed framework will operate at a national level, with Member States responsible for investigating and sanctioning a company’s non-compliance with its due diligence obligations.
If the failure to comply could lead to irreparable harm, the adoption of interim measures by the company concerned or the temporary suspension of activities may be ordered. In the case of companies governed by the law of a non-Member State, the temporary suspension of activities may imply a ban on operating in the EU internal market.
The Recommendations stipulate that sanctions for non-compliance must be effective, proportionate and dissuasive, taking into account the severity of the infringement. They may include, for example: fines; exclusion from public procurement, State aid or public support schemes, including schemes relying on Export Credit Agencies and loans; seizure of commodities; or any other appropriate administrative penalty.
Under the Recommendations, the fact that a company abides by its due diligence obligations shall not absolve the company of civil liability for harm arising out of potential or actual adverse impacts that the company, or any entity under the company’s control, has “caused or contributed to” by acts or omissions.
The Recommendations suggest, however, that having a “robust and adequate” due diligence process in place “may help” companies to avoid a finding that they have caused or contributed to harm (without specifying whether a failure to conduct due diligence shall be tantamount to such a finding).
Thus, it shall be a defense to a civil liability claim if the company can demonstrate that it acted with due care and took all reasonable preventative measures.
The Resolution (including its Recommendations) was adopted by a clear majority of Members of the European Parliament. While not binding on the Commission, it provides a strong indication as to the substance of the Commission’s legislative proposal, which is expected as early as June 2021. The Directive, as finally adopted, must then be transposed into national legislation before it becomes binding on companies.
Shearman & Sterling’s Environmental, Social & Governance (ESG) team provides advice and advocacy to companies across multiple ESG impact areas. We would be pleased to answer any questions or to provide any further analysis of the above.
 European Parliament resolution of March 2021 with recommendations to the Commission on corporate due diligence and corporate accountability (2020/2129(INL)).
 Regulation (EU) 2017/821 of the European Parliament and of the Council of May 2017 laying down supply chain due diligence obligations for Union importers of tin, tantalum and tungsten, their ores, and gold originating from conflict-affected and high-risk areas.
 Regulation (EU) 2019/2088 of the European Parliament and of the Council of November 2019 on sustainability‐related disclosures in the financial services sector.
 For further details, see Shearman & Sterling, Perspectives: SFDR – Implications for EU and Non-EU Fund Managers, March 15, 2021.
 See Directive 2013/34/EU of the European Parliament and of the Council of June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC (“EU Accounting Directive”), Article 3.
[6} See EU Accounting Directive, Article 3.
 Recommendations, Article 1(2).
 Recommendations, Article 3(2).
 Recommendations, Article 3(5).
 See Recommendations, recital 44, Article 4(8).
 Recommendations, Article 4(8).
 Recommendations, Article 4(2).
 Recommendations, Article 4(3).
 Recommendations, Article 4(4)(iii).
 Resolution, § 16; Recommendations, recital 34.
 Recommendations, Article 4(4)(iv).
 Recommendations, Article 5.
 Recommendations, Article 6.
 Recommendations, Article 8.
 Recommendations, Article 9(1)–(2).
 Recommendations, Article 9(7).
 Recommendations, Article 10(1).
 Recommendations, Article 10(3).
 Recommendations, Article 10(4).
 Recommendations, Article 10(5).
 Recommendations, Article 10(5).
 Recommendations, Article 13(6).
 Recommendations, Article 18(1).
 Recommendations, Article 18(2).
 Recommendations, Article 19(1)–(2).
 Recommendations, recital 52.
 Recommendations, Article 19(3).
[33} 504 votes in favor, 79 against and 112 abstaining.