Environmental, Social and Governance (ESG) compliance is of increasing importance for companies. Changes are not only driven by evolving stakeholder expectations. Governments are also showing an increased interest in this topic, triggering a move from voluntary regimes to mandatory enforceable laws. This creates both risks and opportunities; companies will have to consider, prepare and adapt accordingly.
Developments in the ESG compliance landscape
Already triggered by existing concerns on global climate change, biodiversity loss and human rights situations, the COVID-19 pandemic reinforced calls for companies to become more sustainable, socially responsible and environmentally-friendly. Indeed, the European Commission considers sustainable corporate governance and due diligence as an essential part of the European Green Deal and its COVID-19 Recovery Plan.
At the same time, a study report published by the Commission in February 2020 indicated that existing voluntary regimes across Europe did not succeed in changing the way in which companies manage their social and environmental corporate governance responsibilities. EU institutions are taking actions to address this, whereby they are guided and supported by initiatives of national governments.
European Union
Following the 2020 study, the Commission announced its intention to introduce new cross-sectoral legislation on mandatory human rights and environmental due diligence obligations for companies. In March 2021, the European Parliament adopted recommendations in this regard for the Commission, which has the legislative right of initiative (2021/2129(INL)). The recommendations propose to introduce a mandatory due diligence obligation to identify, prevent, mitigate and account for potential or actual adverse impacts on human rights, the environment and good governance in the value chain. Such obligation would apply to large and publicly-listed companies as well as high-risk small and medium-sized companies (to be defined), including such non-EU companies that are active on the EU internal market. The recommendations also foresee that companies can be held accountable for non-compliance, including through regulatory enforcement or civil litigation. A legislative proposal from the Commission is expected later this year.
Ahead of this proposal, the Commission and the European External Action Service published non-binding guidance on “due diligence for EU businesses to address the risk of forced labor in their operations and supply chains” on 12 July 2021. This guidance seeks to provide companies with practical advice on the implementation of effective human rights due diligence practices. To this end, it makes specific recommendations including on the design of a due diligence process, red flags, actions for addressing risks, remediation measures, responsible disengagement of business partners.
The EU’s focus on promotion and protection of human rights is also reflected by the introduction of a new EU Global Human Rights Sanctions Regime in December 2020. This regime provides for a possibility to impose far-reaching restrictive measures on (dealings with) designated parties who are perceived to be involved serious human rights violations or abuses worldwide.
Moreover, Commission President Von der Leyen announced in last month’s State of the Union Address that the Commission intends to introduce a ban on the import of products into the EU market that have been made with forced labor. This follows from a previous appeal from the European Parliament for “a legislative proposal on an effective traceability mechanism for goods produced through forced and child labor”, which “could pave the way for a complete ban on the importation into the EU of goods produced through modern forms of slavery or forced labor”. No legislative proposal has been published yet, but this will likely be continued.
National developments
The same trend is visible in the Netherlands. The Senate adopted the Dutch Child Labor Diligence Act (Wet zorgplicht kinderarbeid) in May 2019. This Act envisaged to apply to companies selling or delivering goods or services to end-users in the Netherlands, and to require them to take appropriate measures and make public statements on implementation of adequate due diligence to prevent involvement of child labor in their supply chain. Its entry into force has however been suspended pending adoption of implementing legislation. In light of the above EU developments, the Dutch government has recently indicated that it prefers broader due diligence obligations on an EU-level rather than national thematic obligations. The government will therefore await these EU developments and has, for now, put the entry into force of the Act on hold.
Other European countries have already implemented statutory ESG-related obligations. For example, the French Duty of Vigilance Law (Loi de vigilance) imposes comprehensive due diligence obligations with regard to human rights and environmental risks on relevant companies in France. Germany recently adopted similarly extensive statutory obligations through the Supply Chain Due Diligence Act (LkSG). Also the UK has disclosure requirements in relation to forced labor under its UK Modern Slavery Act. Companies will therefore also need to be aware of any national requirements in the countries in which they are active.
Key takeaways
Focus on ESG compliance is increasing and here to stay. Companies are therefore recommended to verify, monitor and prepare for any existing and upcoming requirements that will apply to them. This includes regularly reviewing and auditing their supply chains and business operations for adverse human rights and environmental impacts, as well as implementing appropriate due diligence and compliance measures (such as internal controls, contractual arrangements and training) to mitigate potential financial, legal and reputational risks.
