On March 10, 2021, the European Parliament approved a legislative measure by an overwhelming 504-79 majority that paves the way for a landmark set of regulations setting a corporate duty of care regarding environmental protection and sustainability, internationally recognized human rights principles, and good governance practices – collectively referred to as ESG standards. Although the Parliament’s measure is not legally binding, it is expected that the European Commission will adopt regulations in general accordance with Parliament’s legislative measure by the end of the year.
These regulations will likely require both small and large companies operating in the European Union to respect human rights, protect the environment, and comport with ethical business practices in their operations and supply chains, including through their direct commercial partnerships with other business entities and suppliers. U.S. companies as well as others based outside the European Union, but that operate within the European Union would very likely also be subject to comprehensive ESG-related due diligence requirements.
By calling for a binding set of due diligence requirements, the E.U. Parliament recognized that “voluntary due diligence standards have limitations and have not achieved significant progress in preventing human rights and environmental harm and in enabling access to justice.’’
The E.U. Parliament’s measure calls for companies with business activities in E.U. markets to establish a robust corporate social responsibility due diligence strategy that would also be publicly disclosed. As part of this new framework, companies will also need to prevent and/or remedy serious environmental and human rights harms that are identified in the course of the due diligence exercise.
The new measure also expects that companies will fully implement and enforce their commitments to ESG, and accordingly calls on companies to ensure that they provide adequate grievance mechanisms to human rights-holders and other stakeholders who could be harmed by a company’s activities. Furthermore, the measure calls on companies to engage with affected stakeholders through “effective, meaningful and informed discussions” when establishing and implementing their due diligence strategy.
Additional recommended enforcement measures include investigations by regulatory authorities to ensure that ESG due diligence is carried out, sanctions that can be ordered in cases where investigators find a company non-compliant, and opportunities for aggrieved stakeholders to file civil suits against companies that fail to prevent and meaningfully remedy harms stemming from their activities. The new legislative measure states that remediation proposals by companies do not prevent stakeholders from bringing civil proceedings in accordance with national law. In particular, victims “shall not be required to seek extra-judicial remedies before filing a claim before a court, nor shall ongoing proceedings before a grievance mechanism impede victims’ access to a court.”
The human rights component of the E.U. due diligence measure is clearly drawn in part from the U.N. Guiding Principles on Business & Human Rights (UNGPs), which are based on the principle that commercial enterprises should not cause harms to rights-holders. The UNGPs state that governments have a duty to protect human rights, while companies are strongly expected to respect human rights in their operations, activities, and supply chains. The UNGPs provide a clear framework for companies to carry out due diligence often and as early as possible and in consultation with affected stakeholders; to identify actual and potential human rights impacts associated with their commercial activities; and to remedy harms by enforcing human rights policies, closing…