Sigillum Analysis: A new approach to more sustainable business practices. From voluntary to mandatory due diligence in the Global Supply Chains

Globalized supply chains can sometimes produce negative impacts, related to human and labor rights violations or environmental damage. Accordingly, multinational companies have been encouraged to take responsibility for their supply chains on a voluntary basis. However, over last years several European countries went a step further by introducing mandatory due diligence laws. This approaches can require companies to identify, address and remedy their impact on human rights and the environment throughout their supply chain.

The French Parliament adopted the Corporate Duty of Vigilance Law in 2017.[1] It establishes a legally binding obligation for parent companies to identify and prevent adverse human rights and environmental impacts resulting from their own activities, from activities of companies they control, and from activities of their subcontractors and suppliers, with whom they have an established commercial relationship. The French Law is applicable to companies whose head office is located in France and that employ at least 5000 employees (within it and in its direct or indirect subsidiaries), or to companies whose head office is located in France or abroad, with at least 10000 employees.

The Bundestag has adopted the Act on Corporate Due Diligence in Supply Chains last June.[2] The German LkSG law applies to companies that have their central administration, headquarters or registered office in Germany. It will enter into force in 2023 and will initially apply to companies with 3000 or more employees, and from 2024 to companies with 1000 or more employees. The law obliges these companies to comply with their due diligence obligations related to human rights and environmental standards in their supply chain (at direct suppliers and, if necessary, also at indirect suppliers).

Also last June, the Norwegian parliament has adopted an Act on Business Transparency and Work on Basic Human Rights and Decent Working Conditions (the “Transparency Act”).[3] The purpose of the act is to promote companies’ respect for fundamental human rights and decent working conditions in connection with the production of goods and the provision of services, and ensure the public access to information on how companies deal with negative consequences for basic human rights and decent working conditions. The law applies to larger companies (e.g. with more than 50 employees or an annual turnover of more than NOK 70 million) that are domiciled in Norway and to larger foreign companies offering goods and services in Norway, and which are taxed in Norway according to Norwegian domestic law.

In The Netherlands, the Child Labour Due Diligence Law (mHRDD law) was adopted in 2019. However, this year a bill was proposed that includes duty of care and a due diligence obligations in production chains.[4] The duty of care would apply to all companies incorporated in the Netherlands and Caribbean Netherlands, and large foreign companies conducting activities in the Netherlands or selling a product on the Dutch market. The due diligence obligation would only apply to large corporations.

Aligned with this trend, the European Union is drawing up its own mandatory due diligence legislation that would apply across the single market. The European Parliament has given recommendations to the Commission on corporate due diligence and corporate accountability. The European Parliament’s Draft Directive proposes an EU law requiring companies to monitor, identify, prevent and remedy risks to human rights, the environment and governance in their operations and business relationships – including suppliers and subcontractors.[5]

The change from voluntary standards/practices to mandatory due diligence laws is a current trend in European countries, and a further step toward the sustainability regulation. This change make global companies responsible for ensuring that their articles are not sourced from suppliers with violations related to human rights or environment. Multinational companies should prevent harmful direct and indirect impacts of their activities and make efforts to identify and assess whether their operations and business relationships cause or are linked to those potential adverse impacts. Among other measures, a risk based monitoring methodology,  procedures for regular assessment of direct and indirect suppliers, mechanism for alerting and collecting reports, improving transparency regarding their local suppliers and working together with them, etc. are important steps in this way.