Thursday

26th May 2022

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'Corporate due diligence'? - a reality check before EP votes

  • According to the directive, a cafe owner has to "identify, assess, prevent, cease, mitigate, monitor, communicate, account for, address and remediate" whether he, his wholesalers and the company's coffee farmer has any adverse impact on the environment (Photo: Daniel Chong)

The European Parliament is going to vote on its report on corporate due diligence next week, calling on the EU Commission to propose a mandatory code-of-conduct for businesses.

It would mean that every company active in the single market, regardless of its size, has to comply with requirements along its whole value chain in order to minimise adverse impacts of its activities on human rights, environmental and social standards.

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In some member states, such as France, the Netherlands and Germany, there are already national norms in place or a debate is going on introducing rules alike.

The report to be voted on next week's plenary already contains a draft directive.

By this the European parliament attempts to make pressure on the commission that when drafting its future proposal, to be launched in June 2021, it should be shaped along the parliament's recipe.

Therefore there is a lot at stake.

As it is a complex legal text, I have compiled a hypothetical example to make it easier to understand.

It is a kind of reality check based purely on the text adopted by the parliament's legal affairs committee, just to illustrate how the proposal would affect businesses in practice.

My story is extreme, I admit, but I can support each line of it with making reference to a certain article of the draft.

Let's take the example of a 60-year old owner of a small, cosy café in a small town in an EU member state.

He has ran this café for 40 years with his family members.

He prepares his delicious coffee specialities from coffee grown by a company at a coffee-producing country outside Europe.

The new directive on mandatory due diligence is already in force.

The cafe-owner's member state decided not to exempt the micro entrepreneurs from the legislation and the European Commission defines agriculture as a high-risk sector, so the café falls within the scope of the new directive.

According to the directive, the cafe owner has to "identify, assess, prevent, cease, mitigate, monitor, communicate, account for, address and remediate" whether he, his wholesalers and the company's coffee farmer's way of producing has any adverse impact on human rights or environment.

Let's assume that the farmer decided to use a cheaper, non EU-conforming pesticide. Now, under the due diligence directive, the cafe-owner is liable for the farmer's way of treating his coffee plantation.

The cafe-owner contacts his wholesalers and the farmer, and all of them assure him that they make no adverse impact on the planet and mankind. And he also consults the relevant stakeholders.

He discloses his strategy on his website, stating that he has not identified any risk, in the belief that everything is in order.

A few days later green activist knocks on the door of the coffee shop. He represents an NGO called "Protect the Soil, Insects Matter", active in raising awareness about the danger that certain pesticides imply on the local flora, fauna and soil in the coffee-producing country.

The cafe-owner had not previously consulted with this NGO, as he worked with another organisation called "Coffee and Earth" when developing his own due-diligence strategy.

The activist argues that the cafe-owner did not do everything that he could have done in the framework of his due diligence strategy, so it was his fault to be unaware of the farmer's business model.

Therefore, the activist wants the cafe-owner to pay a significant amount of financial compensation, and he also expects the cafe-owner to publicly apologise for buying coffee from the farmer.

The activist denounced the cafe-owner also to the member state's national authorities, from whom the cafe-owner gets a heavy fine, and, in addition, he is excluded indefinitely from state subsidy projects.

Two months later we have another wave of Covid and the cafés and restaurants have to close again.

The member state's government wants to help the business owners but our cafe-owner is no longer eligible for financial assistance because once upon a time he made cappuccino using the farmer's coffee beans.

So after 40 years in business the cafe goes bankrupt and the owner has to close his family business.

I am convinced that – and not neglecting the good intentions of the initiators – this hypothetical example describes the immense administrative burden the EP would impose on small companies.

I am extremely worried about micro-, small-, and medium-sized enterprises that might be put out of business, as they do not have the means and capacity to comply with all requirements.

Especially not in the middle of the present crisis caused by the Covid pandemic.

Furthermore, it would harm the competitiveness of European companies at global level.

Not to mention that it would abrupt the supply chains with EU's traditional trade partners.

This could lead to further impoverishment of the developing world, or a shift in their trading partners. Only our international competitors, China and other regions would benefit from that.

Therefore, I urge the decision-makers, the European Parliament, the EU Commission and the member states to legislate driven by common sense, instead of ideological convictions.

A thorough impact assessment prior to launching the draft directive should be conducted, with a focus on the competitiveness of European businesses at global level and the possible trade shifts from the EU to other regions.

Do not shoot ourselves in the foot, please.

Author bio

Enikő Győri is an Hungarian Fidesz MEP, and member of the committee on international trade.

Disclaimer

This article is sponsored by a third party. All opinions in this article reflect the views of the author and not of EUobserver.

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