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EU looks into supply chain due diligence as sustainable finance agenda turns to social issues

Study finds appetite for mandatory ESG due diligence as part of corporate governance reforms

A study has found that the majority of stakeholders surveyed, including some multinationals, would support mandatory due diligence of supply chains as a new sustainability-related legal standard for company boards.

The study, commissioned by the European Commission (EC) as part of its Action Plan on Financing Sustainable Growth, falls under ‘Action 10’, sustainable corporate governance – a topic which has become one of the priorities of the EU’s Green Deal in recent months.

The Action Plan mandates the EC to assess whether boards should have a sustainability strategy, including “appropriate due diligence throughout the supply chain”, as well as whether company laws should be clarified to enhance long-termism of directors’ duties.

The EC commissioned the British Institute of International and Comparative Law (BIICL) to carry out the study exploring possible EU regulatory options, the findings of which have been published in a 500-page report.

BIICL, in partnership with Civic Consulting and LSE Consulting, surveyed more than 600 stakeholders on four options:

  1. No policy change
  2. Introducing new, voluntary guidance
  3. Regulation requiring due diligence reporting, and;
  4. Regulation requiring due diligence as a duty of care.

According to BIICL’s findings, the majority of stakeholders surveyed said the latter option would bring potential benefits for businesses in terms of “harmonisation, legal certainty, a level playing field … although they differed on aspects of liability and enforcement”.

The study noted that individual multinational companies increasingly support the introduction of mandatory due diligence regulation. By contrast, “the majority of industry organisation survey respondents appear to be in favour of the least enforceable regulatory options.”

One anonymised interviewee from a multinational company is quoted in the study saying that having everyone play by the same rules reduces complexity, brings clarity and would help to drive mainstreaming good practices.

The interviewee said: “You need all the actors along the supply chain to also have good reasons to pay attention and to put the resources towards solving those issues.”

Another interviewee from a multinational food and drinks company is quoted saying that legislation can give the right incentives for companies to address their human rights.

“As a principle we would welcome a legislation, potentially one that is covering the entire EU would most probably be preferable than having a patchwork of legislations with different kind of criteria or addressing different kind of issues which is also an issue.”

"The majority of stakeholders surveyed said regulation requiring due diligence as a duty of care would bring potential benefits for businesses"

The study highlights that France’s Duty of Vigilance Act of 2017 is the only law which has to date introduced general mandatory due diligence requirements for human rights and environmental impacts – beyond sector or issue specific examples.

Ivano Alogna, Arthur Watts Research Fellow in Environmental and Climate Change Law at BIICL, is quoted saying that there is a "bricolage" of legal instruments in this field but only the French law requires companies “to exercise a ‘duty of vigilance of parent and outsourcing companies’ for environmental harm”.

Alogna said: “Other environmental laws or standards are either soft law instruments, or they apply legal duties to States…The French law is the first legislative model worldwide that places the burden of responsibility of prevention on the multinational company, which incurs its civil liability for its activities and environmental externalities.”

Beate Sjåfjel, Professor of Law at the University of Oslo and corporate governance expert told BIICL that action 10 of the EU's Plan on Financing Sustainable Growth has opened up for the first time the opportunity to integrate sustainability into the duties of the board.

The call for mandatory due diligence for human rights and Action 10 should be combined, she said.

Sjåfjell is also involved in EU-commissioned research on sustainable corporate governance as project coordinator of the Sustainable Market Actors for Responsible Trade Project (or SMART), whose findings will be published soon. 

Notably, the new report is one of the most concrete moves towards including social issues in the EU’s sustainable finance agenda so far. Although the Commission refers to ‘sustainability’ throughout its policy package, the reforms it has made so far deal almost exclusively with climate change. The next step for its high-profile ‘taxonomy’ is to expand from climate mitigation and adaptation to other environmental issues, but it has continued to shy away from bringing clarity to social issues. Some insiders say policymakers are concerned that including social issues – which can often be even more politically charged than environmental ones in Europe – in proposals could make it harder to get any changes through Council and Parliament.

NGO Global Witness welcomed the findings of the BIICL report and said binding legislation must now follow.

Richard Gardiner, Campaigner at Global Witness, said in a statement: “The release of this study provides the European Commission with justification and support to bring forth legislation to ensure that companies, including financial institutions, carry out responsible business conduct due diligence to guarantee that their activities are not harming people and the planet.”