Final steps for EU's due diligence on supply chains law

For years, major companies have been subjected to increased criticism for the impact of their operations on human rights and the environment.

In 2021, well-known fashion brands such as Nike, Adidas, Zara and H&M faced scrutiny for their supply chain connections to China's Xinjiang region, where Beijing has been accused of human rights abuses against the Muslim ethnic Uyghurs.

But Shell's oil exploitation polluting the Niger Delta and Total's oil project in sensitive environments of Uganda and Tanzania also illustrate how the environmental footprint of some multinationals' operations can be high.

In response to consumer expectations and international calls for action, several EU countries — such as France, Germany and the Netherlands — already have policies on corporate social responsibility, based on both optional and mandatory provisions.

But the EU has acknowledged that voluntary schemes that implement due diligence (mainly through internal codes of conduct and social audits) are weak, especially in some high-risk sectors such as garment, mining and agriculture.

On top of that, the risk of a patchwork of supply chain rules and competitive disadvantage for some EU companies has prompted Brussels to come forward with a hard law to ensure that businesses are held accountable for human rights and environmental abuses in their supply chains, in line with UN and OECD international standards.

This means that retailers, for example, can face civil liability if the items they are selling in the EU have been manufactured using child labour.

Difficult negotiations ahead

After internal disputes in the EU commission — which forced the delay of the proposal on at least two occasions, the EU executive in February 2022 presented its much-awaited proposal for a new cross-sectorial due diligence law.

EU member states a few months later agreed on their position, narrowing the scope of the legislation and lowering liability obligations for companies.

Last week, the European Parliament adopted its position on the text, with 366 votes in favour, 225 against and 38 abstentions — which shows unease in the hemicycle, following an attempt by several MEPs tried to water down the legislation.

Ahead of the vote, conservative lawmakers, especially from the centre-right European People's Party (EPP), echoed concerns raised by some business groups about the lack of legal clarity of some provisions and the potential impact of this law on SMEs and competitiveness.

Inter-institutional talks between MEPs and EU countries to agree on the final text (known as trilogues) will kick off on Thursday (8 June) in a bid to ensure that the law enters into force at the beginning of 2024.

But negotiations will not be easy.

The inclusion of the financial actors, enterprises' liability obligations and provisions on access to justice for victims will be very high on the trilogues' agenda, said lead Dutch socialist MEP Lara Wolters, after the plenary vote.

Although the burden of proof is still on victims, MEPs have lowered the hurdles to access justice for victims, in comparison to the member states' position.

Under the parliament position, the law also would allow victims to take a company to court in the EU if it does not comply with the law, including civil society representation in court and the right to access evidence held by companies.

Outsourcing due diligence?

Meanwhile, concerns remain over whether this law might incentivise companies to continue outsourcing their due diligence obligations to third parties instead of embedding them in their internal processes and operations.

MEPs want to include in the upcoming law specific criteria and minimum standards to ensure quality auditing — but advocacy groups fear that the EU's due diligence law will maintain loopholes regarding the liability of social auditing firms.

"It's quite unclear how accountable and liable would social auditing companies be in [a] case of human rights violation[s] occurring in situations they had positively audited," Muriel Treibich, campaigner at NGO Clean Clothes Campaign, told EUobserver.

For example, the Italian auditing firm RINA Services refused to take on responsibility when the certified Ali Enterprises factory in Pakistan suffered a fire that killed 250 people in 2012.

Additionally, the lack of transparency obligations for auditing firms is also seen as problematic.

When social auditors go to manufacturing facilities to carry out their audits, they do not have the obligation to publish or inform workers — who are the ones most affected by potential violations about the results of their findings, Treibich explains.

"Social auditing (…) seeks to protect the reputation and liability of companies, instead of genuinely looking for how human rights are respected in a given situation and supporting workers' rights," she warned.

The law will oblige EU countries to set up national authorities responsible for checking if companies comply with the new rules. Companies will face fines if found in breach of the law.