EU Due Diligence Proposal Expected Before end-February

Investors and companies are urging the European Commission to adopt supply chain scrutiny rules “without further delay”.  

Companies and investors have called for the European Commission to swiftly adopt proposals for mandatory human rights and environmental due diligence, expected to be published on 23 February as part of its much-delayed Sustainable Corporate Governance initiative.

Investor signatories include Aviva Investors, Triodos Bank and EFG Asset Management; corporates such as Danone, Epson and IKEA also signed the declaration.

As well as requiring firms to monitor environmental impacts across their supply chains, the initiative will introduce due diligence requirements for corporates to identify, prevent and account for human rights abuses, in line with UN Guiding Principles on Business and Human Rights (UNGPs) and the OECD Guidelines for Multinational Enterprises.

The ability of companies and investors to understand environmental and social impacts along supply chains has become an increasingly urgent issue. Last month, the UN-convened Net Zero Asset Owner Alliance noted difficulties in obtaining accurate data on investee firms’ Scope 3 emissions, which refers to the carbon emissions of suppliers and consumers.

study released today by environmental disclosure platform CDP reports that more than half of suppliers (56%) do not have any climate targets, with only 28% of companies reporting having a low-carbon transition plan in place to meet their climate goals.

The study, co-authored by Boston Consulting Group, draws on environmental data disclosed through CDP in 2021 from 11,400+ corporate suppliers globally. It also found that only 38%, 47% and 16% of reporting companies are engaging with their suppliers on climate change, deforestation and water security, respectively.

Broad backing for due diligence proposal

In the statement addressed to the Commission, over 100 companies, investors and business associations outlined five key principles they believe should be included in the legislation.

These include ensuring due diligence obligations extend across corporates’ full value chains, embedding requirements in appropriate governance structures such as corporate boards, and introducing credible accountability mechanisms.

Following its expected publication towards the end of this month, signatories have urged the Commission to “adopt [the] legislative proposal without further delay”.

The Commission has declined to confirm precise timing for the publication of the proposals, noting only that staff “are working intensively on preparations”.

Julia Otten, Policy Officer at law firm Frank Bold, told ESG Investor that the statement is “very helpful and very timely”, noting that mandatory human rights and environmental due diligence is “a key part of the corporate regulation puzzle”.

“It’s an important signal that the broader business community and investors will be supportive of such a proposal,” she said.

Otten added that the proposal should clarify board obligations for oversight of sustainability-related processes such as reporting and due diligence.

“The involvement of directors is paramount to ensure that companies are able to take the necessary strategic decisions with regards to the management of sustainability risks and impacts, and integrate them into overall corporate strategies and business operations,” she said.

Multiple delays

This follows multiple prior delays to the publication of the Sustainable Corporate Governance initiative proposal.

Anticipated in Q1 2021, it was most recently expected by the end of the year, having been pushed back again in October. Reasons for this have included supplemental aspects added by various committees and interested parties in the Commission.

Draft proposals were also reportedly twice rejected by the Commission’s independent Regulatory Scrutiny Board in 2021.

“The delays boil down to the fact that big decisions weren’t made in time and there wasn’t enough pressure to really come to those decisions,” said Otten.

Continued delays have previously incited concern from industry experts that the resulting proposal will be watered down.

Some EU member states have passed their own domestic human rights laws, such as Germany and Norway, with similar laws under consideration in the Netherlands and Finland.

“We will be closely monitoring how they and other member states approach the proposal and how it moves forward,” noted Otten.

Read more articles like this on Regulation Asia’s sister publication, ESG Investor.

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