Guest Post: Making Corporate Accountability Mandatory in the EU

We are very pleased to share this guest post by Ross Fitzpatrick, Policy and Advocacy Officer for Christian Aid Ireland. The post draws on the recent paper which Ross wrote for the Institute of International European Affairs: Making Corporate Accountability Mandatory in the EU. You can follow Ross @r_fitzpatrick92

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On 23 February 2022, the European Commission published a legislative proposal for a Directive on Corporate Sustainability Due Diligence, which it is hoped will usher in a new era of responsible business conduct.

Central to the Commission’s proposal is a commitment to introduce mandatory human rights and environmental due diligence for businesses based in the EU. It would, in effect, make access to the EU internal market conditional upon complying with certain core requirements that are explicitly defined in international human rights law.

In light of the poor level of implementation of human rights and environmental standards by businesses across the EU and internationally, there has been a growing recognition that the reliance on a voluntary approach to corporate accountability, based on the UN Guiding Principles, is no longer adequate.

Furthermore, this has amounted to significant gaps in implementation of human rights due diligence by businesses at the national level. In Ireland, a recent study found that of the 60 largest publicly listed companies, as well as the 10 largest state-owned enterprises, 34% scored zero on embedding respect for human rights in their operations and supply chains.

At first glance, the draft Directive takes important steps towards enhancing corporate accountability across the EU.

Upon its adoption, it would establish a due diligence duty for businesses to ensure that the human rights and environmental impact of their operations adhere to international standards. It would also introduce directors’ duties for the implementation of human rights due diligence and provide for the establishment of national supervisory authorities that would be responsible for monitoring compliance. Significantly, the draft Directive would codify the right to remedy for victims in situations where a company fails to undertake adequate human rights due diligence.

However, the draft Directive contains significant gaps which threaten to undermine the overall impact of the proposal and long-term efforts to tackle corporate abuses of power.

Under the new law, due diligence rules would only apply to EU companies with 500 or more employees and €150 million net turnover, companies in certain high-risk sectors with 250 employees and €40 million net turnover, and non-EU businesses which exceed these turnover thresholds. Small and Medium Enterprises (SMEs) would not be impacted. In other words, the scope of the Directive is limited to about 17,000 firms or 0.2% of EU companies and would exclude 99% of Irish businesses.

While the new law aims to hold companies liable for harms committed at home or abroad by their subsidiaries, contractors, and suppliers, the draft Directive contains a legal loophole which could make it easier for businesses to evade responsibility for human rights and environmental abuses committed lower down their supply chains by inserting clauses in contracts which would allow them to offload verification to third parties.

Another flaw in the draft Directive is the absence of a commitment to engage with those most affected by corporate abuses of power, despite calls from civil society organisations and the European Parliament for the involvement of a wide range of stakeholders. For example, the role of trade unions is limited to filing internal complaints about violations rather than being afforded full involvement in the design, monitoring and enforcement of due diligence measures.

Moreover, the draft legislation fails to acknowledge how women are disproportionately affected by rights abuses in global supply chains. Women are often most at risk of corporate human rights abuses in sectors where many of the companies operating are small and medium sized, such as in the garment industry, horticulture, and tourism sectors. However, the exclusion of SMEs from the scope of the Directive means that women in these sectors could not rely on the Directive to assert their rights.

The draft Directive will now proceed through a formal legislative process and will be debated in the European Parliament and the Council of the EU before a final text emerges. Formal adoption is expected around 2023. At this point, it will take another two to four years before it is transposed into national law across EU Member States.

Significant improvements are required to ensure that the legislation does not end up being a toothless ‘box ticking exercise’ for businesses operating in Ireland and the EU. Unless steps are taken to address the shortcomings inherent in the draft legislation, businesses operating in the EU and Ireland will continue to evade responsibility and liability for egregious human rights and environmental abuses occurring in their operations and supply chains.

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