European Parliament votes for action on corporate accountability
On 1 June 2023, the European Parliament voted to support an amended version of the draft Corporate Sustainability Due Diligence Directive (“CSDDD”) that would impose mandatory human rights and environmental due diligence requirements on a range of corporate actors. This is a promising development, but what this will mean in the long run, especially for companies in the UK, remains to be seen.
Many will recall the Rana Plaza disaster in Bangladesh on April 24 2013, in which over 1,100 garment factory workers were killed when an eight storey building collapsed in 90 seconds. One of the deadliest accidents in industrial history had been entirely foreseeable and preventable, and was described by workers’ union IndustriALL, as a ‘mass industrial homicide’.
The disaster led to an immediate reckoning around workplace safety for garment workers. Reforms led to the ‘Bangladesh Accord’, resulting in factories being regularly inspected, but many of those victims still endure permanent disabling impacts and are attempting to get justice.
More broadly, the question of how to impose standards of behaviour on companies, as regards their human rights and environmental impacts, and what those standards should be, remains a complex and crucial one.
The global implementation of the Business and Human Rights Guiding Principles by John Ruggie, which were first endorsed by the UN Human Rights Council in June 2011, was an example of an important early voluntary development. Since then, a fragmented mix of voluntary guidelines and national legislation has set out obligations on companies to monitor and reduce harms associated with their business operations and supply chains.
Ten years on from Rana Plaza, the big step change from previous efforts to ensure accountability is that the CSDDD will be both mandatory and especially comprehensive, covering a wide range of corporates, jurisdictions, and potential harms. The European Commission’s proposal for the CSDDD was first published in February 2022 and the European Council adopted their position on the Directive in December 2022. Following the European Parliament’s vote, which sought to strengthen many of the obligations on corporates, further negotiations between the EU’s different bodies, including Member States, will now take place to determine the Directive’s final text.
As it currently stands, the draft Directive supported by the European Parliament requires companies to identify, prevent, or mitigate their negative impacts in a range of areas, including the environment, child labour, slavery, and biodiversity. Companies would also be required to adopt transition plans to limit global warming to 1.5°C in accordance with the EU Green Deal.
These obligations would apply to EU companies with more than 250 employees and a worldwide turnover over €40 million and to EU parent companies of corporate groups that have 500 employees and a worldwide turnover of more than €150 million. They would also apply, however, to non-EU companies that have a turnover of at least €40 million in the EU and to non-EU parent companies whose corporate group has a turnover of at least €40 million in the EU and more than €150 million in worldwide turnover.
Importantly, such companies would also be obliged to monitor their ‘value-chain’, including their suppliers and contractors.
Companies which breach their obligations could face a range of sanctions, including fines of 5% of their worldwide turnover. Non-EU companies could be excluded from public procurement processes.
The European Parliament’s proposals are detailed and comprehensive. It remains to be seen whether they will be watered down in subsequent negotiations. This is a particular risk given the reported tensions with some Member States who have adopted a more conservative stance with respect to which companies should be included within the Directive’s scope, and how the provisions affecting value chains should apply. Moreover, agreeing a final draft will take time and the obligations may only take effect several years after that, depending on the relevant company’s size. Nevertheless, the Directive should still represent a crucial development in corporate accountability.
While the UK is no longer an EU Member State, the CSDDD will impact UK based companies. It will directly apply to companies with sufficiently large turnover in the EU, and indirectly to companies who contract with EU companies which do fall under its remit.
That the CSDDD might impact UK companies is important given the relatively less rigorous obligations that apply currently. The Modern Slavery Act 2015 does require sufficiently large companies (broadly, those operating in the UK with an annual turnover of at least £36 million) to disclose what steps they have taken to ensure their operations and supply chains are free from slavery. However, companies can state that they have taken no such steps, sanctions for non-compliance are not well-developed, and the comprehensiveness of those statements that are made has been criticised. Reforms to the Modern Slavery Act have been proposed and were included in the May 2022 Queen’s Speech, but subsequent changes of government seem to have put those proposals on hold.
Other due diligence and reporting developments do or will apply directly to at least some UK companies: the Environment Act 2021’s monitoring requirements relating to illegal deforestation, for example, or the Financial Conduct Authority’s proposals for sustainability disclosure requirements. However, the CSDDD has the potential to be a particularly impactful piece of legislation given the range of corporate actors and areas of activity it covers, and it will be important to monitor how subsequent negotiations progress prior to it becoming law.