March 17, 2022
On February 23, 2022, the European Commission released its long-awaited Proposal for a Directive on Corporate Sustainability Due Diligence (Draft Directive).1 The directive represents a milestone in the field of corporate sustainability and business and human rights.
Although there has been consensus about the responsibility of business to respect human rights since the adoption of the UN Guiding Principles on Business and Human Rights (UNGPs) in 2011, many companies still haven't taken the necessary steps to prevent and mitigate harm. The Draft Directive introduces mandatory human rights and environmental due diligence obligations at the EU level in the most extensive effort to date. It aims to translate the principles laid out in the UNGPs and the OECD Guidelines into legal requirements for companies. These new standards will increase legal certainty and avoid legislative fragmentation across EU member states, leveling the playing field and incentivizing action. BSR welcomes this move toward mandatory due diligence, and we look forward to seeing the Draft Directive’s potential to reshape and boost companies’ efforts to prevent, mitigate, and remedy their human rights and environmental risks.
The Draft Directive sets out obligations for companies to undertake due diligence for actual or potential adverse human rights and environmental impacts in their own operations, those of their subsidiaries, and of “established” business relationships in their upstream and downstream value chains.
Over the past 30 years, BSR has worked with companies to identify and address adverse human rights impacts, including hundreds of human rights assessments and implementation plans. Drawing on these learnings, we identify seven practical recommendations for companies to prepare for upcoming due diligence requirements in ways that strengthen respect for human rights.
Keep the UNGPs and OECD Guidelines as Your North Star
The Draft Directive takes a narrower approach than the EU Parliament’s Resolution and diverges from the UNGPs and OECD Guidelines in some respects, but it goes beyond in others. Amid regulatory uncertainty as the final text is negotiated in the EU Parliament and Council, companies should seek to comply with the UNGPs and OECD Guidelines, which underpin the Draft Directive and emerging national laws. Following these standards is the best way to future-proof your approach to due diligence in preparation for upcoming legal requirements and growing expectations across global value chains. This means all companies should conduct due diligence, in a manner proportionate to their type, size, sector, and operational context, including SMEs and financial companies.2
Connect ESG issues
BSR has long promoted a holistic approach to identifying, addressing, and reporting on human rights, environmental, and governance matters. We’re pleased to see the Draft Directive (in parallel with other EU legislation, such as the Corporate Sustainability Reporting Directive) covering both human rights and environmental impacts—noting the EU Parliament’s Resolution went even further, extending to good governance issues and corruption. Meeting these expectations will require companies to break internal siloes, improve coordination, and take more integrated approaches to risk assessment.
Engage Leadership
Aligned with broader trends toward active stewardship by boards of directors, the Draft Directive expands existing duties and creates new responsibilities for directors to oversee their company’s due diligence efforts and to consider sustainability consequences of their decisions in the short, medium, and long term. Boards will need to be actively engaged and upskilled on human rights, climate, and environmental issues that are relevant to their business. BSR's new business transformation service offering aimed at boards of directors includes practical methods like training on key sustainability topics, foresight and scenario planning sessions, and stakeholder engagement.
Map Your Value Chain
Although the Draft Directive limits the scope of due diligence to own operations, those of subsidiaries, and those of “established” business relationships in its value chain, the UNGPs and OECD Guidelines make clear that companies have a responsibility to address adverse impacts to which they are connected through all business relationships. The concept of “established business relationships,” used to limit the scope of due diligence, is taken from the French Corporate Duty of Vigilance Law but constitutes a key divergence from international standards. We recommend companies map their activities beyond established relationships—which capture only well-known partners and lasting commercial partnerships—to extended connections up and down their value chain, including supply and subcontracting chains and products and services. We need all players involved to drive effective change.
Identify and Address Your Impacts
Effective due diligence starts with identifying and assessing your human rights impacts. In line with the UNGPs, BSR’s approach to human rights assessments identifies impacts on people rather than risks to the business and assesses these based on the severity of impact on those affected. We also encourage companies to consider how impacts on people, the environment, and climate change increasingly interact and to go beyond social audits, certifications, and reliance on contract clauses, which are known to be of limited effectiveness in identifying and preventing human rights abuses in complex global supply chains.
Create Meaningful Engagement with Affected Stakeholders
The Draft Directive mentions consultation with affected stakeholders but takes a narrower approach than the UNGPs and OECD Guidelines. BSR believes that effective human rights due diligence is grounded in stakeholder engagement—especially with the most vulnerable. To effectively identify their impacts and ensure any mitigation and remediation measures address the needs of those affected, companies should meaningfully engage with affected stakeholders across their value chain, with special attention to vulnerable groups who are most likely to be negatively affected by business activities.
Review and Strengthen Your Approach to Remedy
Access to effective remedy is a core component of the UNGPs and the OECD Guidelines. The Draft Directive requires companies to have complaints procedures and creates liability where a company fails to conduct adequate due diligence. But it currently lacks a substantive and clear obligation on companies to provide effective remedy, especially for the most vulnerable. Companies should assess the effectiveness of grievance mechanisms in place against the effectiveness criteria set out in UNGP 31 and ensure that their remediation processes address the needs of affected stakeholders and vulnerable populations. See our report on access to remedy for more insights.
Whether you’re just getting started or are more advanced in your journey, following the above recommendations and adhering to the UNGPs and OECD Guidelines will enable companies to comply with the Draft Directive and meet upcoming legal requirements at the EU level and beyond, as well as increased stakeholder expectations.
This blog is the first of a three-part series. Next time, we will take a closer look at the new directors’ duties in the context of broader changes to board accountability for sustainability matters and how to connect the dots between human rights and environmental due diligence.
1 Human rights due diligence is a way for companies to proactively manage potential and actual adverse human rights impacts with which they are involved. It involves four core components as set out in the UNGPs and requires companies to prevent, identify, mitigate, and remedy these impacts.
2 Unlike the UNGPs and OECD Guidelines, the Draft Directive only applies to large companies, thus excluding SMEs from any obligations to conduct due diligence, and limits the extent of these obligations for financial companies.
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