Harmonization Pains but Stakeholders’ Gain
The EU Corporate Sustainability Due Diligence Directive and its Implications for the Meaningful Engagement Provisions of Member States with a Due Diligence Law
This contribution seeks to compare and contrast the Article 13 meaningful engagement provisions of the recently adopted EU Corporate Sustainability Due Diligence Directive (CSDDD) with similar provisions in the national due diligence laws of France, Germany and Norway. The intention is to highlight how, despite the fact that a number of differences between the EU CSDDD and these national laws are likely to give rise to some “harmonization pains”, one silver lining exists: stakeholders are likely to gain some leverage.
The Beginning of a new era
The first quarter of 2024 has been tumultuous for supporters of the CSDDD. A worrisome 11th hour change of tune by Germany, France and Italy threatened to undo all the progress hitherto made towards the adoption of the CSDDD. Thankfully however, a political compromise was able to be secured and the Directive was adopted.
This paves the way for the beginning of a new era of transposition of the CSDDD into the law of Member States, and the eventual application of the CSDDD to covered companies all over Europe, as well as outside of Europe given the extraterritorial reach of the Directive.
It is worth pondering what this significant development means for EU member states that have already enacted a mandatory human rights due diligence (mHRDD) law. This contribution seeks to partially fill this gap, by specifically zooming in on the requirement for meaningful stakeholder engagement.
Cause for Celebration of a Historical Development but Without Forgetting Historical (Colonial) Baggage?
On the 24th of April 2013, more than 1,100 workers died when the Rana Plaza factory collapsed. To date, this remains the worst ever industrial incident to afflict the garment industry. Rana Plaza shone the spotlight on the need to take more effective measures to protect the human rights of workers in Global Value Chains (GVCs). More than a decade since this disaster, the progress towards an EU CSDDD can be rightly described with the words of Lara Wolters as a “historic breakthrough…that puts the well-being of people and the planet before profits and short-termism.” Joining mandatory human rights due diligence (mHRDD) laws such as the French Loi de Vigilance, the German Lieferkettensorgfaltspflichtengesetz (LkSG) and the Norwegian Transparency Act, the CSDDD contributes to the hardening of once soft norms regulating the behaviour of business enterprises.
Undoubtedly, imposing binding obligations on covered companies requiring them to respect human rights and environmental norms will go a long way towards compelling companies to internalize the human rights and environmental costs of their business activities, costs that have been externalized to global south rightsholders in the GVCs of such Transnational Companies (TNCs) for far too long.
And yet, we must situate developments such as the EU CSDDD within their proper neo-colonial context. Despite their global reach these laws are made by global north actors with little involvement of global south stakeholders. While this birth defect is not necessarily fatal, going forward, it will matter how these laws are interpreted and implemented in reality. Deliberate and concrete efforts must be made by companies and regulators to ensure that human rights due diligence in covered companies is a concerted effort between corporate actors and (global south) stakeholders. In other words, going forward it is primarily through meaningful engagement with global south stakeholders that historically asymmetrical power relations can begin to be rebalanced. In fact, meaningful engagement, if and when properly conducted, has the potential to enhance the regulatory effectiveness of due diligence laws by contributing to the transformation of due diligence obligations into rituals akin to cultural norms.
As recommended by the United Nations Guiding Principles on Business and Human Rights (UNGPs), meaningful engagement is an essential component of the human rights due diligence process. The idea at its core is that in identifying, preventing, mitigating and remediating the human rights and environmental risks arising within the context of their business operations, companies must consult those people most likely to be affected by their activities, as well as other relevant stakeholders. After all, who is best placed to assist companies in identifying the fault lines in their operations other than the very persons who experience violations on the ground?
As the next section will show, one major contribution of the CSDDD is its robust provision on meaningful engagement of stakeholders, as captured within the ambit of Article 13.
Harmonization Pains but Stakeholders Gain?
As indicated earlier, France, Norway and Germany already have due diligence legislation in place. The French law was adopted in 2017 and came into force in 2018. The German LkSG was adopted in June 2021 and came into force in 2023 for companies with 3,000 employees and above, and in 2024 for companies with 1,000 employees and above. The Norwegian law was also adopted in June 2021 but unlike its German counterpart came into force six months earlier on 1 July 2022. Similar to the EU CSDDD, all three laws oblige covered companies to carry out a number of due diligence obligations. Crucially however, the final draft of the CSDDD contains a number of provisions that go beyond those captured in the French, German and Norwegian laws. A number of examples in this regard will suffice.
Firstly, none of the three national laws impose climate change related obligations. In contrast, Article 1 (c) of the CSDDD introduces an obligation to adopt and put into effect a transition plan for climate change mitigation. This is subsequently fleshed out in Article 22. Secondly, as per Article 2 (1) (a) of the CSDDD, the law will apply, in the first instance, to companies with 1,000 employees and a turnover of €450 million per year. In addition, it is now anticipated that after the entry into force of the Directive, the various in-scope companies will fall within the ambit of the law in stages based on company size and turnover. This is a much more limited scope than what had initially been agreed upon, and significantly reduces the number of companies that fall within the CSDDD’s ambit. Thirdly, whereas Section 3 (3) of the German LkSG makes clear that the law does not create a separate civil liability regime, Article 29 of the EU CSDDD contemplates precisely this kind of liability for companies that violate their obligations and provides for the right to full compensation. Fourthly, as per Article 24(1) the Directive requires the setting up of national supervisory authorities to oversee implementation of the national laws. While Germany already has the Federal Office for Economic Affairs and Export Control, or Bundesamt für Wirtschaft und Ausfuhrkontrolle (BAFA), as the supervisory body for monitoring and enforcement of the German due diligence law, and Norway has the Norwegian Consumer Protection Authority (NCPA), there is no supervisory body designated under the French Law. Finally, as per Article 1 (a), the CSDDD imposes obligations on covered companies with respect to their own operations, the operations of their subsidiaries, and the operations carried out by their business partners in the chains of activities of those companies. As defined in Article 3(f) business partners include both direct and indirect partners. This is in stark contrast to the German Act for example, which imposes due diligence obligations only on direct suppliers in the first instance (as per Section 6(4)) and requires due diligence in the context of indirect suppliers where there are substantiated concerns of violations as per Article 9(3).
Harmonization Pains
Given these divergences, what does the coming into force of the CSDDD mean for those EU member states which already have an mHRDD law? Some “harmonization pains” are definitely on the horizon for Germany, France, and Norway. Of course to be fair, these “harmonization pains” will be much less than the “legislative pains” that will be experienced by those EU countries that have no mHRDD law at all. In any event, Article 4 of the CSDDD is titled “level of harmonization” and requires member states to ensure that their national laws do not diverge from the requirements of the CSDDD, even though such national laws may diverge if they are more stringent. In other words, the EU CSDDD is a minimum harmonization rule.
Silver lining
Nevertheless, there may be a silver lining in these harmonization requirements, at least within the limited context of the rights of stakeholders in the due diligence process. The EU CSDDD’s provisions on meaningful stakeholder engagement are much more robust than those contained in the French, German and Norwegian mHRDD laws. The French law, rather weakly, provides that the vigilance plan is intended to be drawn up in association with society’s stakeholders without clarifying what this means in practice. Similarly, the German law requires covered companies to give ‘due consideration’ to stakeholder interests. The Norwegian law requires companies to ‘communicate with affected stakeholders and rights-holders regarding how adverse impacts are addressed.’
In comparison, Article 5 (1) (e) of the CSDDD requires companies to carry out meaningful engagement with stakeholders according to Article 13. This Article 13 titled “carrying out meaningful engagement with stakeholders” introduces a number of obligations for covered companies including: provision of relevant and comprehensive information (Article 13(2)); identifying and addressing barriers to engagement and ensuring that participating stakeholders are not subject to retribution or retaliation (Article 13(5)). Additionally, the CSDDD clarifies the instances when stakeholders should be consulted (Article 13(3)): when gathering information on actual or potential adverse impacts; during the development of prevention and corrective action plans; when making the decision to terminate or suspend a business relationship; when adopting appropriate measures to remediate adverse impacts and when developing qualitative and quantitative indicators for monitoring. Where it is not possible to carry out effective engagement with stakeholders to the extent necessary, companies shall additionally consult credible experts (Article 13(4)).
These provisions are a definite improvement on the stakeholder engagement provisions in the German, French and Norwegian due diligence laws, and, and once duly incorporated, will go a long way towards giving (global south) stakeholders a seat at the due diligence table.
Granted, the meaningful engagement provisions in the final draft have been significantly weakened when compared to the provisions in the parliament draft. For instance, the categories of affected and vulnerable stakeholders have been eliminated. In addition, the requirement that engagement should be comprehensive, structural, effective, timely and culturally and gender sensitive was also jettisoned in the final draft. Also, the expectation that companies will “pay particular attention to the needs of vulnerable stakeholders and overlapping vulnerabilities and intersecting factors, ensure a gender-responsive approach, and fully respect the United Nations Declaration on the Rights of Indigenous Peoples” was deleted in the final draft.
On balance however, despite the differences in meaningful engagement provisions in the Parliament draft and in the final draft, stakeholders have gained in the final draft, at least when compared to the meaningful engagement provisions in existing national laws.
The Future of Human Rights Due Diligence in Europe
Only time will tell whether due diligence laws such as the EU CSDDD will prove to be an effective tool in the quest to reduce the corporate accountability gap for violations of human rights and the environment in global value chains.
Ultimately however, no matter how the cookie crumbles, one thing is for certain, the full participation and meaningful engagement of (global) south stakeholders is a crucial component of any truly effective human rights and environmental due diligence regime.