Human Rights and Environmental Due Diligence as a Standard of Care
Lise Smit and Claire Bright discuss the key findings of a study conducted for the EU Commission, including the need to go beyond a “tick-box” approach and for regulation to provide for access to remedy.
On 29th April 2020, European Commissioner for Justice Didier Reynders presented a study conducted for DG Justice and Consumers on due diligence requirements through the supply chain, which surveyed over 630 stakeholders across Europe (“the study”). Based on the findings of the study, he announced that the European Commission would put forward a legislative initiative on mandatory human rights and environmental due diligence as part of the EU's COVID-19 recovery package. As we approach the legislative consultation, it is helpful to draw out a few key findings of this study which could inform the formulation of the regulation.
A “do no harm” standard of care rather than a tick-box list: The study found that due diligence as a standard of care is 'based on the basic tort law or negligence principle – phrased differently but similar in nature across civil and common law jurisdictions – being that a person should take reasonable care not to cause harm to another persons' (p. 260). Stakeholders across the board emphasised the need to follow the context-sensitive concept of human rights due diligence (HRDD) set out in the UN Guiding Principles on Business and Human Rights (UNGPs), which expects a company to identify and address human rights risks relevant to rights-holders on an ongoing basis, whilst allowing for prioritisation based on the severity of the risk or the irremediability of delaying a response. In contrast, it was highlighted that a superficial “tick-box” approach, whereby a company ticks off certain issues or steps off a pre-defined list, does not benefit anyone, is overly cumbersome and inefficient, and draws away resources and attention from real-life issues.
It is accordingly important that the regulation itself does not create such a checklist. Hence the need expressed by the majority of survey respondents for a general cross-sectoral legal duty which requires courts and enforcement bodies to take into account the specificities of each particular case, including the sector, size of the company, and operating context. The study explained:
"Regulators cannot realistically list every single circumstance, or combination of circumstances, which could possibly apply to companies on a daily basis in different parts of their global operations. Instead, regulators use due diligence as a legal standard of care to expect the company to assess its own risks and address them in accordance with the standard of care. If the company exercises reasonable or adequate due diligence, it meets the standard. If it does not, for example because it overlooked certain risk factors which it should have taken into account, then it does not meet the standard."Study on due diligence requirements through the supply chain, p. 261-2
To complement this general standard of care, the study recommends that the regulation be accompanied by non-binding guidance to inform the understanding of what HRDD looks like in relation to a specific sector or issue.
A due diligence standard of care understood in this way could be distinguished from a duty which triggers a strict or absolute liability (which would follow automatically once a harm occurs, regardless of whether the company acted with fault or negligence in relation to the steps it took or absence thereof), and is also different from due diligence for legal compliance. The fact that a human rights harm occurred (or is about to occur) in the company’s operations or supply chain will not automatically result in liability, nor will tick-box compliance with a due diligence obligation automatically exclude it. The question will be what proactive steps did the company take on the facts to find out about this harm, to prevent and address it, and whether these steps were reasonable in the particular circumstances (p. 264-5). The fact that local law prohibits or allows the conduct is not decisive, as the UNGPs provide that the corporate responsibility to respect human rights ‘exists over and above compliance with national laws and regulations protecting human rights’. The study states that: ‘In this way, the due diligence standard incentivises effective, high quality and practical due diligence processes which target real risks and priorities’ (p. 262).
Human rights due diligence as described in the UNGPs does not encourage or require divestment. On the contrary, in order to meet the standard of care the company would need to show proactive meaningful engagement, and concrete attempts to increase leverage where such engagement is not leading to improvements. The UNGPs are clear that termination of the relationship should only be considered as a last resort, and if so only when the human rights impacts of ending the relationship has been taken into account. The study states:
"Due diligence expressly does not automatically expect companies operating in high risk contexts to leave, and does not intend to penalise those companies which operate in certain countries or sectors. Indeed, it has been well-demonstrated that there are no countries or sectors which pose no risks at all to people, the environment or the planet."Study on due diligence requirements through the supply chain, p. 262
A corporate duty to exercise due diligence as a standard of care for human rights and environmental harms in the company’s operations and value chain is also different from corporate governance rules and fiduciary duties of directors. Despite a recent trend to extend the understanding of “materiality” to include “environmental and social materiality”, this focus still relates to the risks to the company, rather than the risks to the rights-holders. The study states that:
"[T]he question as to whether an external harm will, in the long or short run, affect the company’s performance is irrelevant for the purposes of due diligence as a legal standard. Due diligence as a legal standard or duty of care requires companies to exercise the care required to prevent and address external harms, regardless of whether these are harms beneficial, detrimental or neutral to the company’s performance in the long or short run."Study on due diligence requirements through the supply chain, p. 268
Stakeholders in the study, especially those from civil society, emphasised the need for the regulation to provide for access to remedy.
The UNGPs provide that effective grievance mechanisms play an important role as part of both the state duty to protect and the corporate responsibility to respect. However, non-State-based grievance mechanisms can only complement and not replace State-based judicial remedies. Indeed, the duty to provide remedy, as set out in international human rights law as well as Pillar III of the UNGPs, is that of States.
The obligation to undertake due diligence would be a corporate duty, and will not (in all Member States) automatically lead to access to judicial remedies unless it is expressly provided for in the legislation. The regulation would therefore need to require Member States to ensure that any statutory due diligence duty is accompanied by access to judicial remedies for victims who are affected by a breach of the duty. Depending on the legal system of the jurisdiction, an express judicial remedy might need to be provided for in the implementing statute.
Perspectives from Business, Public Sector, Academia and Civil Society
This post is an excerpt from our collation of perspectives on Mandatory Due Diligence ahead of the German EU Council presidency. Click through below to read all of the contributions from around the globe.