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Increased human rights supply chain scrutiny with UK and EU legislative proposals

In September 2020, the UK and the EU announced initiatives to strengthen human rights due diligence and reporting. The UK Home Office will bolster the UK Modern Slavery Act 2015 (MSA) to enhance transparency in both the private and public sector, and the European Parliament Committee on Legal Affairs reinforced the call for EU-wide legislation on corporate human rights due diligence and accountability. With further measures expected in 2021, companies operating in the UK and EU will need to assess, and where appropriate adjust, their human rights due diligence and reporting.

 

Corporate Due Diligence and Corporate Accountability in the EU

The European Commissioner for Justice, Didier Reynders made a long awaited announcement in April 2020 that the Commission will propose legislation in 2021 on mandatory corporate sustainable due diligence. In September 2020, the European Parliament Committee on Legal Affairs issued a draft report for adoption by the Parliament with specific recommendations to the Commission for its Proposal to implement "mandatory human rights, environmental, and good governance due diligence legislation" to ensure "harmonization, legal certainty and the securing of a level playing field."

The report refers to the setting of a "global standard" on corporate due diligence and accountability, and is part of an increasing focus on sustainability and Environmental, Social and Corporate Governance (ESG) issues in the EU, with the final report on EU Sustainable Finance Taxonomy published in March 2020 and the entry into full force in 2021 of the EU's Conflict Minerals Regulation.

The Committee's recommendations for mandatory due diligence are far-reaching:

  • the Directive should apply to all undertakings governed by the law of a Member State or established in the territory of the Union regardless of their size, sector, and whether they are private or state-owned. In order to create a "level playing field", it should extend to non EU-headquartered companies which sell goods or provide services in the EU.
  • The Directive should establish minimum requirements for undertakings to identify, prevent, cease, mitigate, monitor, disclose, account, address and remediate the human rights, environmental and governance risks posed by their own operations and also their value chain, including business relationships:
    • Due Diligence Strategy - If an undertaking identifies such risks, it should assess whether its operations and business relationships cause or contribute to any such risks and where this is the case, establish a due diligence strategy in order to cease, prevent or mitigate those risks. This includes the carrying out of "value chain due diligence" proportionate to its circumstances and resources. Where relevant, the undertaking should set up a "prioritisation policy" for cases in which all risks cannot be addressed at the same time. If no risks are identified, a positive statement should be made to this effect. The due diligence strategy should be reviewed at least once a year and published on a centralised platform set up in each Member State.
    • Stakeholder involvement - Stakeholders and relevant trade unions should be entitled to involvement and consultation in all stages of the due diligence process. The concept of a stakeholder should be broadly interpreted to include all persons whose rights and interests may be affected by the decisions of the company such as workers, local communities, indigenous peoples, citizens' associations and shareholders.
    • Grievance mechanism - Undertakings should establish a legitimate, accessible and transparent grievance mechanism in partnership with stakeholders, which will function both as a risk awareness and remediation system for stakeholders who have concerns regarding the existence of human rights, environmental or governance risks.
    • Executive involvement - Members of the administrative, management and supervisory bodies of an undertaking should be responsible for the adoption and implementation of the due diligence strategy.
    • Advisory committee - Large undertakings should set up an advisory committee tasked with advising the governing body of the undertakings on these due diligence matters.
    • Sectoral due diligence action plans - Member States may encourage the adoption of sectoral due diligence action plans, with the aim of coordinating due diligence strategies within economic sectors. These may have corresponding sectoral grievance mechanisms.

In terms of enforcement, each Member State should designate a national authority to investigate undertakings, supervise the correct implementation of their due diligence obligations, and impose penalties where these are not met, with repeated infringement constituting a criminal offence.

Since the EU legislative proposal will be in the form of a Directive, this must be implemented at Member State level and the recommendation is that Member States should enact legislation complying with the Directive within two years of its coming into force. The Commission is also expected to publish general non-binding guidelines for undertakings on how to fulfil the due diligence obligations set out in the Directive within 18 months from the date of entry into force of the Directive.

 

Strengthening the UK's Modern Slavery Act

Since 2015 the UK's MSA has required all "commercial organisations" that provide goods or services in the UK with an annual global turnover above £36 million to publish an annual slavery and human trafficking statement. The UK Home Office has published additional best practice guidance and warned 17,000 businesses to comply with this reporting requirement or risk the public disclosure of non-compliant companies.

In September 2020, the UK Home Office published its response to a consultation on transparency in supply chains. The response commits to a new set of measures and changes to primary legislation that aim to bolster the MSA's transparency provisions:

  • Statement content - The six reporting areas currently recommended for inclusion in annual statements will become mandatory. If an organisation has taken no steps within an area, it must state this clearly.
  • Board Approval - Statements must include both the date of Board approval and the Directors' signatures.
  • Identifying group companies - Where more than one entity in a group is required to publish an annual statement, group annual statements must name each of the entities covered.
  • Centralised reporting - Organisations captured by the MSA will have to publish their annual statements on a new Government-run reporting service.
  • Single reporting deadline - A single reporting deadline will be introduced so that organisations will report on the same 12 month period (1 April – 31 March) but will have six months to prepare their statement for the deadline of 30 September.
  • Application to public bodies - Public bodies with budgets of over £36 million will also now be required to produce an annual statement.

The proposals signify a clear legislative intent to strengthen the MSA's transparency provisions. The changes will provide organisations with greater clarity as to the expected content of statements and reporting periods, and will enable investors, consumers and civil society to scrutinise more easily whether an annual statement has met the minimum requirements. Requiring individual directors to sign off on Statements will also likely raise the profile of these Statements within companies.

It is expected that the UK Home Office's next step will be to issue a further update on civil penalties for failure to publish an annual statement or a fully compliant statement.

 

National Legislation Evolving

These measures in the UK reflect a broader trend in modern slavery reporting requirements across the globe. These proposals align the content of UK statements with the requirements of the Australian Modern Slavery Act, where large entities carrying on business in Australia must report annually on the risks of modern slavery in their operations and supply chains and their actions taken to address those risks. In the Netherlands, mandatory child labour due diligence has been adopted, so that all Dutch companies and companies supplying in the Netherlands will need to determine whether there is a reasonable suspicion that child labour was used to produce their services and products. France has adopted the far reaching corporate duty of vigilance law, which requires companies with more than 5,000 employees in France or 10,0000 world-wide to establish annual due diligence plans and report on their implementation, with civil penalties for non- implementation.

In Germany, key points for a supply chain law enacting a mandatory human rights due diligence for companies with more than 500 employees are currently being discussed. A first draft of the law is expected for the beginning of 2021 and the government intends to have this adopted within the next year. The German government has confirmed that it also wants to work towards EU-wide regulation.

In addition, the UK government has announced a separate legislative proposal for supply chain due diligence for commodities at "forest-risk" – such as beef and leather, cocoa, palm oil, pulp and paper, timber, rubber and soya - and large businesses, including supermarkets, would face substantial fines if they cannot prove that their commodity supply chains are not linked to illegal deforestation. Although there are still questions raised by this proposal (not least routes for enforcement and the definition of 'illegal'), it is a further example of the changing regulatory landscape for commodities supply chains.

 

Comment

All these proposals will be subject to further scrutiny and consultation before implementation and will not be in force for at least a year, or longer - certainly in the case of the EU measure which requires a proposal to be put forward and adopted by the EU Parliament and the Council, and then implemented into national legislation, which may be within two years of the directive entering into force.

However, these measures are part of a general trend. Companies that already implement best practice in accordance with the UN Guiding Principles on Business and Human Rights (UNGPs) will be well-prepared for the greater scrutiny announced under such legislative proposals.

 

Joe Paisley (White & Case, Trainee, London) assisted with the preparation of this publication.

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