7 June 2023

Promising Commitments to Accountability from European Parliament for the EU Corporate Sustainability Due Diligence Directive

At last, the European Parliament has approved its negotiating position on the EU Corporate Sustainability Due Diligence Directive, completing an important step toward ensuring that corporate actors across all sectors of the economy, from finance to extraction, production, and distribution, operate with respect for human rights and planetary ecology. The Parliament’s position follows that of the European Council, reached toward the end of last year, which included many worrisome compromises to the European Commission’s initial proposal.

The Parliament’s position recalibrates to the original intent of the proposed directive to ensure that major corporate actors account for their human rights impacts and reduce their negative impacts on the planet in furtherance of a sustainable future. Of the many notable improvements, five in particular stand to make the final law successful:

(1) Applicability to the Finance Sector. The negotiating position reached by the European Council at the end of November last year would allow Member States to exclude financial services companies from the law, but the Parliament has voted for universal applicability, recognizing that financial actors are inextricable from value chains. Accordingly, Amendment 19 of the Parliament’s negotiating position requires financial actors, such as banks and insurers, and their corporate clients of a certain size to assess and monitor for adverse environmental, climate, and human rights impacts. Further, financial actors may not simply rely on information derived from credit rating agencies, sustainability rating agencies, or benchmark administrators to satisfy due diligence requirements. Instead, they must proactively monitor and respond to unintended impacts using, among other things, effective grievance and remediation mechanisms.

(2) Requirements for Grievance Redress and Accountability Mechanisms. The Parliament’s position identifies effective grievance mechanisms as a tool to identify adverse human rights impacts and provide remediation as a part of ongoing human rights due diligence, as is articulated by Principles 29 and 31 of the United Nations Guiding Principles on Business and Human Rights (UNGPs). Amendment 34 instructs all regulated actors to establish or participate in non-judicial grievance mechanisms to help monitor and verify the effectiveness of their due diligence and to engage effectively with affected stakeholders.

Notably, the negotiating position of the European Council also calls on regulated actors to “establish and maintain a complaints procedure” to allow stakeholders to raise concerns about actual or potential adverse impacts in a company’s chain of activities.

(3) Integration of Soft Law Instruments to Ensure Cohesiveness with International Norms. The Parliament’s position expressly references the UNGPs, the OECD Guidelines for Multinational Enterprises, and the OECD Due Diligence Guidance for Responsible Business Conduct, to assert the now decades-old expectations that companies should protect human rights and work to minimize environmental and ecological harm. Since the initial call for input on the proposed directive by the European Commission, Accountability Counsel has urged that it center on business and human rights frameworks, especially to the extent that those frameworks require the establishment of effective mechanisms to hear and redress issues raised by impacted people.

(4) Ingraining the Right to and Duty to Provide Remedy. More than simply assessing risks and monitoring for unintended impacts, the Parliament calls on all regulated actors to provide remedy when they have contributed to harm. By expressly recognizing the right to an effective remedy under various human rights treaties (e.g., Article 8 of the Universal Declaration of Human Rights and Article 47 of the EU’s Charter of Fundamental Rights), the Parliament calls on Member States to not only ensure that aggrieved persons have unhindered access to courts, but also to ensure that regulated companies offer remedy for actual adverse impacts, including through non-judicial grievance mechanisms.

(5) Heightened Due Diligence Requirements in Conflict-Affected and High-Risk Areas. The European Parliament recognizes the need for heightened monitoring and sensitivity when engaging in areas affected by conflict, war, and oppression. Accordingly, its position calls for thorough conflict analyses based on meaningful and conflict-sensitive stakeholder engagement to better understand how to avoid contributing to fragility and violence in a given region. Companies are expected to respect the obligations and standards identified by international humanitarian and criminal law instruments, and to abide guidance from relevant international bodies such as the International Committee of the Red Cross and the United Nations Development Programme.

What’s Next?

The approval of the European Parliament’s position now allows the Commission, Council, and Parliament to begin the work of finalizing the law through deliberation and scrutiny. The process is expected to conclude by the end of this year or early in 2024. If the law is to be effective in ensuring that corporate activities respect people and the planet, it is critical that it be applicable across all sectors, and that due diligence include grievance redress and remedy.