The International Business Transactions Blog

Human Rights and Environmental Due Diligence for Large Business Operating in the European Union

By Sharon Foster
Law Student Editor

The European Union’s Commission, revealed its draft directive on Human Rights and Environmental Due Diligence on February 23, 2022. While human rights, environmental law, and business have operated in seemingly separate legal spheres, the Commission recognized that promises to respect human rights and the environment have proved inadequate. This directive, the result of two years of drafting and negotiations, is a step toward achieving the EU’s sustainable corporate governance objectives. Before the draft directive, a business firm had no legal human rights and environmental obligations on the European level. A business firm could voluntarily agree to follow the UN Guiding Principles on Business and Human Rights (UN Guiding Principles) or the OECD’s Guidelines for Multinational Enterprises and Due Diligence Guidance for Responsible Business Conduct. However, these guidelines lack the force of law, have no enforcement mechanism, and have not been shown to establish proper accountability for human rights and environmental impacts. As a result, the EU has drafted the new directive to create binding, enforceable requirements on companies to respect human rights and the environment.

The EU’s draft directive will affect large business firms and business firms operating in high-risk sectors, in which serious human rights and environmental hazards are rampant. The directive also applies to non-EU companies with significant operations in the EU. As currently drafted, the directive applies to about 13,000 EU companies and 4000 non-EU companies. The rules apply based on the size of the company.  In general, the directive applies to EU companies that have at least 500 employees and a global turnover of more than €150 million. However, companies operating in sectors with high risk of human rights abuse must comply if they have at least 250 employees and €40 million in global turnover. The rules define these high-risk sectors to include agriculture, apparel, and natural resource extraction. For non-EU companies, the directive applies to companies with significant operations within the EU.  Specifically, they must have a global turnover of at least €150 million from EU operations or, if they operate in a high-risk sector, at least €40 million in turnover from EU operations.

The directive would require companies to identify existing and potential negative impacts from both their operations and “from ‘established business relationships,’” meaning their supplies, customers, and business partners.  Business firms are also required to prevent, end, and reduce human rights and environmental impacts.  The draft directive clarifies that companies must remedy harms and provide compensation to victims. The directive also directly imposes duties on company directors to oversee these due diligence procedures. Further, member states must adopt laws establishing administrative penalties and civil liability for violation of the directive’ mandate.

The directive takes significant steps toward corporate accountability for human rights and the environment for companies with major EU operations. If the directive proves successful in curbing corporate abuse of human rights and the natural environment, civil society may press for similar laws in other countries.