Yesterday, the EU Commission finally published its proposal for a corporate sustainability due diligence directive (‘the proposal’) – nearly a year after the Parliament’s resolution to the same effect. Tensions were running high among policymakers, businesses, and civil society alike following several delays, DG Internal Market weighing in on the DG Justice file, and two negative verdicts by the obscure Regulatory Scrutiny Board. Have these distortions left their mark on the final text, as many had feared? Yes and no, as I shall explain.
At the outset, it is noteworthy to stress that the proposal constitutes a fairly comprehensive package, composed of a detailed explanatory memorandum, a total of 71 recitals, 32 substantive articles, and a six-page annex. It strives to anchor due diligence practices both during business operations as well as in corporate structures. As such, the proposal also addresses directors’ duties (see, Articles 15, 25, and 26). This choice, albeit unsurprising, is not without its critics – among others, the late John Ruggie had argued against a bundling of directors’ duties with mandatory due diligence, not least because the latter enjoys a higher degree of public support than the former.
In this contribution, my focus lies exclusively on the proposal’s operative environmental dimension – after all, the initiative is framed as part of the EU’s Green Deal and is riddled with references to environmental objectives. As a byproduct of global commodity chains, corporations cause massive amounts of ecosystem damage, most of them in source countries. Due diligence legislation promises to combat the ‘outsourcing’ of environmentally harmful corporate activities by prescribing procedural obligations to prevent adverse impacts at the top of value chains. In addition to an array of soft and voluntary international initiatives, many domestic jurisdictions have introduced binding laws to rein in businesses’ environmental footprint (including economic powerhouses such as Germany or France). It is this increasingly dense regulatory space that the Commission proposal complements, implements, and partially supersedes.
Given the recency of the proposal, my modest aim here is twofold: (1) to answer some basic questions about content and structure, and (2) to reflect on what these choices imply for the Commission’s new-found environmental ambitions. Does the proposal deliver on the lofty language the recitals invoke, or does it incentivize performative, empty greenwashing?
Personal Scope: The One Percent
The first controversy surrounds the proposal’s subjective reach: Which companies are included? The parliamentary resolution was relatively vague on this point, while national initiatives have resorted to employee thresholds. Civil society organizations have repeatedly advocated a broad scope, whereas corporations pushed back against this as they feared it would place excessive administrative burdens upon small and medium enterprises (a concern echoed by the Regulatory Scrutiny Board). It seems fair to say that the proposal’s solution marks a victory for the business lobby. Article 2 specifies that the directive would apply to EU companies with (a) more than 500 employees and more than EUR 150 million in annual turnover (Group 1), or (b) more than 250 employees, more than EUR 40 million in annual turnover and operates mainly in any of several high-risk sectors listed (Group 2). To the extent that their net turnover is generated in the EU, the same conditions apply to foreign companies. According to the Commission’s estimates, roughly 9400 EU corporations and 2600 foreign ones will fall within Group 1, and 3400 and 1400, respectively, in Group 2.
As reporters were quick to point out, this means that no more than 1% of EU companies will be affected by the directive – only the biggest of the big fish. In fact, the Commission’s explanatory memorandum makes it abundantly clear that small and medium-sized enterprises are explicitly excluded from the directive’s scope. This decision is bound to spark backlash. From an environmental point of view, though, there is clear evidence that the biggest corporate fish also eat the most. Relatively few global players are responsible for disproportionate quantities of plastic pollution, deforestation, or greenhouse gas emissions. In this sense, there is a chance the proposal could prove relatively effective, particularly so in conjunction with cogent enforcement mechanisms. Additionally, one might hope that targeting the most important players is more conducive to changing market structures, e.g., by spurring investment in best environmental practices.
Material Scope: Four Categories of Environmental Harm
Perhaps equally pivotal as the subjects addressed is the proposal’s conceptualization of environmental harm. The ‘environment’ is a notoriously fuzzy notion and what constitutes legally actionable harm is far from clear-cut, as Colin Mackie recently explained. For instance, the German Lieferkettensorgfaltspflichtgesetz controversially includes only mercury emissions under the Minamata Convention, persistent organic pollutants under the Stockholm Convention, and waste movements under the Basel Convention, whereas the French Loi de Vigilance mentions ‘grave environmental harm’ in more general terms, but refrains from specifying ‘gravity’.
The Commission proposal lies somewhere in the middle between these two options. Broadly speaking, it recognizes four different bands of environmental harm. First, Article 3(b) defines ‘adverse environmental impact’ as violations of ‘the prohibitions and obligations’ enshrined in a list of annexed international conventions. That list is only slightly more extensive than the German approach; such a narrow conception of harm captures only a tiny fraction of environmental transgressions. Indeed, the annexed provisions can be said to reflect a perennial flaw of international environmental law, which largely lacks clear and unconditional prohibitions directed at individuals. Although the Commission does not justify its choice, I assume it arises from a desire to avoid accusations of illegitimate environmental unilateralism. While one might sympathize with that sentiment, the norms specified in the annex are hardly exhaustive or even representative of the quickly evolving and emerging international legal landscape relating to environmental responsibility and accountability.
Fortunately, the proposal knows a second category of harm, one that bears greater similarity with the French formulation. Article 3(l) describes ‘severe adverse impact’ to include any harm related to human rights or the environment that is either particularly significant, large-scale, irreversible, or irremediable. Less laudably, the relevance of this second category of exceptionally severe damage has almost no practical relevance in the proposal: it applies only to the idiosyncratic risks specific to Group 2 companies (instead of the regular 3(b) conception, which applies to Group 1 companies). Needless to say, this is quite a high threshold to meet. It is difficult to fathom why companies operating in a high-impact sector should only take account of the worst forms of environmental (or human rights) catastrophes. What is perhaps even more outrageous is that this restriction was introduced to respond to the concerns of the Regulatory Scrutiny Board – a technocratic, untransparent, thinly legitimized institution –, as the explanatory memorandum lays out on page 21.
Interestingly, the circumscribed purview of the proposal’s two categories of ‘adverse environmental impact’ (regular or severe) is compensated for through the elevated role of environmental rights. Article 3(c) refers to the annexed ‘prohibition of causing any measurable environmental degradation’ as far as the latter impairs human rights or ‘affects ecological integrity’. This formulation, in turn, is a generous interpretation of the human right to a healthy environment. The mandatory link to other human rights, however, limits environmental claims under the rights heading to an anthropocentric conception.
Finally, the proposal features a provision exclusively devoted to climate change (Article 15). It obliges Group 1 companies to adopt a plan on their strategic alignment with the Paris Agreement’s 1.5 °C goal, including relevant emission reduction targets where applicable. Curiously, these climate-related duties prescribe different standards of conduct than the due diligence rules on adverse impacts, to which I turn next.
The Six Step Model to Due Diligence
The operationalization of due diligence obligations is laid out in Article 4(1), which introduces a six-step-approach, drawing inspiration from the OECD’s Due Diligence Guidance (see Recital (16)). It involves:
(a) the integration of due diligence into corporate policies (Article 5),
(b) the identification of actual or potential adverse impacts (Article 6),
(c) the prevention, minimization, and mitigation of actual or adverse impacts (Articles 7 and 8),
(d) the establishment of a complaints procedure (Article 9),
(e) the supervision of due diligence policies’ effectiveness (Article 10), and
(f) the public communication of due diligence information (Article 11).
These steps are expanded upon – sometimes in considerable detail – in Articles 5–11, arguably the proposal’s hard core. While there is no space here to discuss each step in-depth, I would like to highlight two points.
First, Articles 5–11 and the chapeau in Article 1(a) draw a much broader perimeter of affected corporate activities than the provisions on personal scope in Article 2. Due diligence obligations apply not only to the immediate objects of regulation, but they also entail a mediate responsibility to act against adverse impacts caused by subsidiaries or by established business partners within their value chain. In other words, the proposal differentiates between activities according to their proximity to the ‘big fish’. A simple example of this is Article 5, which requires companies to draw up a policy that outlines the company’s own approach to due diligence, but also establishes a code of conduct for subsidiaries, and describes measures to extend that code of conduct to established business relationships. The radiative force of due diligence obligations along supply chains bears great resemblance to the proposal’s German and French cousins.
Second, the proposal ostensibly imposes ‘obligations of means’ – it does not punish adverse impact directly, unless due diligence has been violated (see recital (15)). This preventive rationale has a long history in environmental law, where it is reflected in the preventive and precautionary principles, among others. Whether procedural duties suffice to nip ecological damage in the bud remains to be seen. The proposal’s involvement of relevant outside stakeholders in the appraisal, monitoring, and remediation of environmental risks, however, is laudable and already reflects intrinsic values such as stewardship, participation, and consultation that have long guided environmental decision-making.
Enforcement: A New Hope?
Surprisingly, enforcement is where the proposal shines the brightest. Both the German and the French initiatives have been criticized for lacking teeth: the former because of its technocratic approach and its aversion to civil liability claims, the latter for weak compliance to date and a lengthy judicial enforcement procedure.
The Commission largely circumvents these pitfalls. It relies on a polycentric enforcement regime consisting of designated national supervisory authorities, who are organized in a pan-EU network (Articles 17, 18 and 21). These authorities can either investigate cases on their own motion or in response to ‘substantiated concerns’ raised by natural or legal persons (Article 19). While the German law allows only affected persons to trigger an investigation, its French sister additionally allows NGOs, trade unions or municipalities to notify a company of obligations. The EU law goes beyond both by granting any natural or legal person the right to submit a complaint, as long their concerns are substantiated ‘on the basis of objective circumstances’. Where infringements are detected, member states are required to impose ‘effective, proportionate and dissuasive’ sanctions based on the company’s turnover (Article 20).
Perhaps the most surprising innovation here vis-à-vis the German law is the introduction of civil liability in Article 22. Civil charges can be pressed where the company’s failure to prevent or end an adverse impact (Articles 7 and 8, respectively) causes damage. Despite lacking a direct reference to the EU’s cross-border litigation regime in private international law, Article 22 may provide a new jurisdictional anchor for victims to drag corporate wrongdoers before EU courts. In many cases of severe and negligent environmental damage, it had previously proven prohibitively difficult for those affected to attain compensatory or injunctive justice. In addition to this restorative function, liability risks could combine with the sanctions regime to deter corporations from engaging in environmentally damaging operations in the first place. On the flipside, the proposal delegates the design of civil litigation schemes to the member states. For instance, it does not specify who has standing to bring claims and fails to harmonize the widely divergent litigation landscape across the EU in this regard. This is a clear missed opportunity for the Commission to strengthen the role of NGOs and environmental organizations in line with the Aarhus Convention.
The Continuing Transnationalization of Environmental Law
To many environmentalists, the Commission’s proposal will come as a disappointment. The drawbacks of the restrictive personal and material reach can hardly be remedied by the inclusion of a civil litigation mechanism. Only a careful second look reveals that the proposal may not be as gloomy as the first glance suggests. Indeed, many of the proposal’s weaknesses – the lack of hard prohibitions, the proceduralization of environmental protection, the anthropocentric outlook – are deeply rooted in environmental law. Nonetheless, I would argue that the draft marks a progression from previous instances, particularly in comparison to the pale German law. It continues the transnationalization of environmental governance, strengthens ties between corporations and civil society, and encapsulates the potential for more structural changes in the way business is imagined and conducted. The next legislative steps will show whether these seeds of hope can germinate.