Mandatory Due Diligence – Threat or Opportunity?

In previous blogs, the European Directive and the concept of mandatory due diligence were introduced. The contents of the European Directive have since been explained and then compared to various attempts at national mandatory due diligence legislation, such as in Germany, the Netherlands and France. All these pieces of legislation are in some way based on the UN Guiding Principles on Business and Human Rights (UNGPs), which first introduced a framework to implement mandatory due diligence obligations. The European Directive goes as far as to include several references to the UNGPs in its recitals. Given the criticism that the European Directive has received from various stakeholders in terms of its applicability and scope, it could be called into question to what extent the European Directive in fact incorporates and reflects the UNGPs. It is this question we shall explore in this blogpost.

The focus will be placed on two aspects: the scope of applicability and the scope of the due diligence duty. In terms of the scope of applicability, according to UNGP 14, “[the] responsibility of business enterprises to respect human rights applies to all enterprises regardless of their size, sector, operational context, ownership and structure.” However, in the current proposal of the European Directive, the scope does not extend to all business enterprises. Instead, according to Article 2 of the proposal, the directive only applies to companies with 500 employees and a turnover of over €150 million (with some exceptions). Shift, the self-proclaimed leading centre of expertise on the UNGPs, criticised this limited scope because, without any stated risk-based reasons for doing so, this has the potential to create an uneven playing field.   

The scope of the due diligence duty concerns the relations in which this duty applies. In other words: for which companies in its value chain is a company expected to fulfil this duty? In the UNGPs, this duty is not limited necessarily to a particular set of companies. However, in the Commissions’ original proposal for this directive, the scope of this duty was limited to “established business relationships”. Aside from this being an “untested concept”, this definition could incentivise companies to only enter into short-term business relationships to avoid falling within the scope, as pointed out by Shift. In the meantime, however, both the European Parliament and the Council have expressed their opposition to this term. Instead, their preference is to opt for a more risk-based approach. This would bring the European Directive more in line with the UNGPs. 

Overall, the question arises what will happen if the European Directive is not completely in line with the UNGPs. What will that mean for its effectiveness? The European Directive’s ambitions are large: to contribute to sustainable development by preventing and addressing adverse environmental impacts and human rights  abuses. Yet without all the key elements considered necessary to do so, as contained in the UNGPs, it remains to be seen whether these ambitions can be achieved. Moreover, rather than striving to meet the standards of the UNGPs directly, companies might choose to ‘only’ comply with the European Directive and not go the extra mile, since there would be a discrepancy between the two. 

Of course, at the moment, we do not yet possess the final text of the European Directive. Moreover, the change in the scope of the due diligence duty already brings the directive closer to the UNGPs. However, the scope of applicability remains small, and in the general approach adopted by the Council, this scope could be narrowed even further. It thus remains completely up in the air, and our questions remain, for the most part, unanswered. Our plan is to update you as and when changes occur, for example when the text of the proposal is finalised after the trilogue between the European Commission, the Council and the European Parliament.