EU’s new human rights due diligence law: What it is and what to expect
On June 1st 2023, Hannah Storey of Amnesty International commented: “The European Parliament has sent a clear signal that it intends to support access to justice for victims of corporate-related human right abuses.” This remark was made in response to the European Parliament’s vote in favor of introducing ‘mandatory due diligence’ laws throughout its 27 member states to strengthen companies’ duties regarding human rights. Following this call by the legislative arm of the European Union (EU), significant legislation is soon to be enacted in the European continent, which could signify a substantial milestone in protecting human rights on a global scale.
What is human rights due diligence?
Business corporations have a history of violating human rights in their operations worldwide. Some contemporary examples include a lawsuit filed against the Biden administration just a few months ago. This legal action was based on major US chocolate companies’ ongoing reliance on child labor for cocoa harvesting. Additionally, Human Rights Watch published a 90-page report that highlights how international shipping firms knowingly endanger their labor workers. These workers are often exposed to toxic fumes and have no proper safety measures in place to prevent or address accidents, including injuries caused by falling chunks of steel or pipe explosions.
Corporate human rights due diligence is crucial in preventing, mitigating, and holding corporations accountable for such adverse human rights impacts. It involves a process by which businesses and organizations identify and address the potential and actual impacts their operations have on human rights. Some legal scholars liken it to financial due diligence - just as financial institutions evaluate risks before making large investments, human rights due diligence is a process where enterprises investigate and manage the risk of human rights violations in their business activities and supply chains.
So far, there have been efforts by some individual states worldwide to mandate the monitoring of corporate human rights abuses. France introduced the “Duty of Vigilance Act” back in 2017, becoming the first country to mandate human rights due diligence. Germany has also followed suit with the “German Supply Chain Due Diligence Act”, which came into effect on 1st January 2023. Recently, South Korea has also proposed legislation to mandate human rights due diligence for Korean companies with more than 500 employees or annual revenue exceeding 200 billion KRW (£1.2 million). The forthcoming EU law not only paves the way for a collective European movement towards protecting the rights of labor workers but is also expected to broaden the scope of application of such national laws.
What to expect
The new rules will address issues related to child labor, forced labor, slavery, health and safety obligations, and workers’ free speech, among others. They will include requirements for companies to enhance human rights standards in their supply chains, with non-compliance resulting in substantial fines. These new human rights due diligence rules will be released alongside environmental due diligence obligations relating to sustainability in supply chains. It is anticipated that approximately 13,000 EU companies and 4,000 non-EU companies will be directly affected by the Directive.
One of the key milestones to pay attention to in the forthcoming law is its impact on the financial sector. During the early stages of discussion, there was a lot of uncertainty and debate over whether financial institutions would be excluded from such legal regulations. The European Council had also considered leaving the decision up to the member states regarding the application of these rules to the finance sector. However, the vote at the European Parliament in June confirmed that financial institutions will also fall under the scope of mandatory human rights due diligence rules, and all member states will be required to incorporate this decision in their regulatory measures. This means that financial institutions will soon be expected to conduct human rights and environmental due diligence before entering contracts with business partners, as a mandatory aspect of their business development process. Considering the vital role that financial sector actors play in the world economy and the broader business sector, the inclusion of financial institutions in mandatory due diligence will be instrumental in promoting and upholding human rights within the business community.
Nevertheless, the forthcoming rules will not be faultless and will still leave room for improvement, especially concerning the responsibilities of company directors. Alongside the debate surrounding the inclusion of the financial sector within the scope of the new EU Directive, there have been discussions about whether the rules should encompass directors’ obligations to ensure due diligence within their companies. Corporate directors provide leadership and guidance to their organizations, making them essential for maintaining governance practices and setting the tone for a company’s culture and values. However, it has been analyzed that the European Council’s general position is to exclude directors’ duties, arguing that these matters should fall within the responsibility of the company’s own competence and its relevant bodies and stakeholders. Such a decision overlooks the crucial role that company leaders play in translating a company’s provisional goals into tangible change and could hinder an efficient transition into mandatory human rights due diligence.
Other concerns include defining clear standards, monitoring compliance, and addressing issues related to the complexity of global supply chains. These are matters that should be thoroughly addressed by the legislative bodies during the “trilogue” negotiation process, which is expected to conclude by 2024, if the new law is to have actual regulatory implications and bring about a significant change in human rights protection.
What this means for the UK
As of now, there is no legal framework in the UK mandating human rights and environmental due diligence for companies and investors. While there are some laws in place trying to tackle businesses’ negative impact on human rights, they have had little actual regulatory impact in the past. This situation needs to change if the UK is to align with the EU’s introduction of mandatory human rights due diligence for companies. Since the EU’s new legislation will oversee the value chains of multinational companies operating in the EU, its implications will undoubtedly have a global reach, including the UK. In essence, the UK and its companies are likely to be subject to these rules as part of the value chain of numerous European companies. Failure to meet these standards will put UK businesses at a competitive disadvantage compared to their EU counterparts. Therefore, proactive steps must be taken to begin evaluating the impact of UK business operations on adverse human rights.
This can be accomplished swiftly and effectively only when a national framework is established to coordinate various businesses in meeting specific due diligence standards. In other words, making human rights due diligence mandatory in the UK is essential. In fact, there is a growing trend in the UK business market advocating for mandatory human rights and environmental due diligence legislation. This shows that the adoption of such rules into national legislation is necessary not only to fulfil a moral responsibility in protecting the rights of workers but also for pragmatic reasons. A mandatory human rights due diligence law now appears inevitable if the UK is to remain competitive in the global business market, and the UK government must recognize this sense of urgency.
Image courtesy of Tiia Monto via Wikimedia, ©2019. Some rights reserved.
The views and opinions expressed in this article are those of the author and do not necessarily reflect those of the wider St. Andrews Foreign Affairs Review team.
