The European Commission has opened an important new consultation. It asks about the possibility of introducing a mandatory duty for all companies operating in the EU to conduct human rights and environmental due diligence across their supply and/or value chains. The duty would be enforced either by national governments or through national courts.

A new legal duty of this kind could have significant implications for businesses. It could require companies to put in place and maintain processes to prevent, mitigate and account for adverse environmental and human rights impacts, including regarding labour rights and working conditions. Depending on the outcome of the consultation, the proposed duty could apply:

• throughout companies’ supply chains, encompassing the entire network established to produce and distribute a product, including companies’ subsidiaries, suppliers and even subcontractors;
• throughout companies’ value chains, encompassing entities involved across the full range of activities that add value to raw materials in designing, producing and delivering a product to a customer; and
• not only to companies established in EU Member States, but also to third-country companies carrying on business activities in the EU.

Companies have a lot to gain in terms of managing sustainability-related risks, increased legal certainty and a level playing field in the sphere of sustainable corporate governance. However, a due diligence duty along the lines proposed would create a new and potentially very wide field of regulatory compliance risk. It would also potentially create liabilities to anyone facing human rights or environmental harms arising out of companies’ operations and broader value chains.

Hogan Lovells is currently setting up a roundtable discussion with clients before the end of January to talk about the Commission’s consultation. Businesses’ input will feed into a response to the consultation. 

Key questions we intend to discuss include:

1. What are the benefits and disadvantages for companies of a new human rights-based due diligence duty? (Consultation Question 3)
2. What should the content of a new due diligence duty be? (Consultation Question 15)
3. How could companies’ – in particular SMEs’ – due diligence burden be reduced? (Consultation Question 16)
4. Should new due diligence rules apply to non-EU companies operating within the EU? If so, what link should be required to make these companies subject to the rules? (Consultation Question 17)
5. How should a new due diligence duty be enforced? (Consultation Question 19)

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