EU Parliament backs due diligence laws for company


Dollar General, the discount retailer, was fined $265,000 by the federal government last week for systemic hazards in violation of federal workplace health and safety standards, for example by stacking boxes that block access to aisles, emergency exits, and fire extinguishers. Since 2017, the Occupational Safety and Health Administration (OSHA) has conducted 240 inspections of Dollar General stores and fined the company more than $21 million. Last week’s fines received scant public attention because regulatory actions like this are now so routine. But this was not always so. OSHA didn’t exist until 1970, the year the Nixon Administration and Congress created the agency to ensure “safe and healthful conditions” for workers. Over the last five decades, OSHA has developed hundreds of workplace standards, which are enforced by about 1,800 inspectors.

Around the world, hundreds of millions of people work in factories, on farms, and in mining operations where life-threatening hazards are routine and government oversight is minimal. In countries in the Global South, local laws protecting workers are weak, and enforcement weaker still. Global companies make a business case for outsourcing production to these countries, mostly to reduce costs. But in this largely unregulated environment, the outsourcing of responsibility for the well-being of workers can no longer be ignored. Global companies make a business case for outsourcing production to the developing world, mostly to reduce costs. But in this largely unregulated environment, the outsourcing of responsibility for the well-being of workers can no longer be ignored.

The European Parliament, the legislative arm of the European Union, last week endorsed a directive calling for “mandatory due diligence” laws throughout Europe. These laws would regulate the human rights and environmental performance of companies throughout their values chains. This directive still needs endorsement from the EU Council, which includes representatives of EU member states, and the European Commission, which is the EU’s administrative body comprised of about 32,000 European civil servants. Most predict that this will happen within the next year. Once finally approved, the EU directive will require each of its 27 member states to adopt national legislation within two years.

The expected due diligence laws will require companies to track carbon emissions and improve their environmental performance. They also will require companies to abide by international labor standards, such as those forbidding child and forced labor and addressing workplace health and safety. The new rules will apply to companies doing business in Europe, whether or not they are based there.

The EU directive builds on legislation already enacted in certain member states. In 2017, France adopted its Duty of Vigilance law requiring companies doing business in France to “identify, prevent and mitigate the human rights-related risks” linked to their business relationships and activities. This responsibility extends to corporate subsidiaries, contractors, and suppliers. In February 2023 a lawsuit was filed in a French court against the energy giant TotalEnergies by two men who alleged that they were detained and mistreated at a gas plant used as a prison in Yemen. The suit charges that TotalEnergies failed to identify and prevent human rights violations as required by the Duty of Vigilance law.

Germany adopted its Supply Chain Duty Act in 2021, and the law’s reporting requirements went into effect this January. It requires businesses to ensure that human rights abuses don’t occur within their business operations or throughout their supply chains. The act defines “supply chain” as everything used “to produce a product or provide a service, from the extraction of the raw materials to the delivery to the final customer.” The Federal Office for Economic Affairs and Export Control will have broad supervisory powers for example, to inspect business premises, demand information, specify concrete actions companies need to take to fulfill their obligations and impose fines if they fail to do so.

Lara Wolters, a Dutch parliamentarian who has helped steer the process for the EU, commented in an EU statement posted after the directive was endorsed by the parliament that while most companies are taking their human rights and environmental obligations seriously, EU governments soon will have the authority to “cut off those few large cowboy companies that flout the rules.” If European countries follow the EU directive as adopted by the EU parliament, these “cowboy” companies will face fines of up to 5% of their net global sales. Government authorities also will have the power to take a company’s goods off the market or to ban them from applying for government contracts.

Not surprisingly, many large European and American corporations and trade associations are trying to delay the implementation of the EU directive and weaken its requirements. For example, a number of financial services firms are seeking exemption from these laws altogether. Many companies maintain that they are adequately addressing these issues internally, through their corporate social responsibility or sustainability offices.

As envisioned by its proponents, the EU mandatory due diligence laws will offer a more effective means of enforcement, building meaningful assessments and corporate accountability with respect to the environment and human rights. While some U.S. corporate leaders will resist European regulation of their global practices, it is useful to observe how European companies have adhered to U.S. regulations challenging corruption. Adopted in 1977, the Foreign Corrupt Practices Act prohibits companies and their officers from attempting to influence foreign officials with personal payments or rewards. It applies not only to U.S. companies but also to those doing business in the U.S.

Over 45 years, the U.S. government has enforced this law with respect to dozens of European and other foreign-based companies. In December 2008, for example, Siemens, the massive German electronics firm, pleaded guilty to bribery and agreed to pay $800 million in penalties to the U.S. Department of Justice and Securities and Exchange Commission. These fines were punishment for corrupt payments made by Siemens representatives to government officials in Nigeria, Bangladesh, China, Greece ,Argentina and Russia.

As currently drafted, the EU due diligence directive will require companies to identify actual or potential negative impacts on human rights and the environment. It also will require them to monitor the effectiveness of their policies and, most importantly, to take corrective action to address violations when they are discovered and communicate their actions publicly.

The success of this endeavor will depend on three things. First, assessing due diligence needs to go beyond an evaluation of internal management systems and corporate policies. It also must evaluate actual outcomes or performance – in other words, whether company actions have improved the lives of workers.

Second, it will be critical to develop sector-specific standards and compliance metrics. It will not be possible to measure the human rights performance of H&M, Tesla, Shell, and Meta using the same substantive standards. Finally, European governments will need to build systems requiring companies to gather and disclose more and better data. When companies know they are being held to a clear standard that is informed by more accurate data and that there will be material consequences if they fail to meet that standard, meaningful improvements are likely to follow.

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