EU Due Diligence Initiative Back in Focus After Delays

Much-postponed proposal now expected in December, following the unveiling of EU deforestation supply chain due diligence measures.

The European Commission is expected to adopt in December a legislative proposal requiring firms to conduct due diligence on human rights and environmental impacts across their supply chains, following several delays.

It had been most recently scheduled for adoption by the Commission by October 27 but was pushed back. “We are expecting the Commission to present its sustainable corporate governance proposal by the end of this year,” Julia Otten, Policy Officer at think tank Germanwatch, told ESG Investor. “It is expected to be voted on towards the end of December,” she said, although it will be several years away still from becoming full European Union (EU) law.

The legislation is expected to introduce due diligence requirements to identify, prevent, mitigate and account for abuses of human rights, including the rights of the child and fundamental freedoms, serious bodily injury or health risks, environmental damage, including climate.

At the same time a progressing its general due diligence in supply chain legislation, the EU moved forward with rules specific to preventing deforestation.

Otten said the two initiatives should be considered complementary but with specific goals. “We need sectoral approaches,” she said.

A key reason for the delays to the broader legislation was the supplemental aspects added by various committees and interested parties in the Commission, which could help bolster the proposed legislation. Otten says these have come late in the process, which is unusual.

“We know that the question of how to regulate it in detail and how to connect it to corporate governance is causing some delays,” she said. “This question has been politically contentious.”

Otten remains optimistic that the legislation will be robust and won’t suffer from being watered down, despite earlier fears caused by the delays.

The Commission has been pressured to accelerate progress on due diligence laws, in part because member states have begun to enact their own measures.

The new German government has pushed for EU-level legislation, having committed to the due diligence rules passed in Germany earlier this year.

The Netherlands, which paused its own domestic legislation, is also keen for progress. “There has been a consensus that you have to put forward due diligence legislation and this pressure is coming from the member states,” said Otten.

Tackling deforestation

In November, the Commission proposed a separate set of three initiatives around mandatory due diligence rules for operators which place specific commodities in the EU market associated with deforestation and forest degradation.

These products include soy, beef, palm oil, wood, cocoa and coffee and some derived products, such as leather, chocolate and furniture. Operators will be required to collect the geographic coordinates of the land where the commodities they place on the market were produced. The traceability is meant to ensure that only deforestation-free products enter the EU market, a statement said.

A benchmarking system operated by the Commission will identify countries as presenting a low, standard or high risk of producing commodities or products that are not deforestation-free or in accordance with the legislation of the producer country, it added. The obligations for suppliers and authorities will vary according to the level of risk of the country of production. Simplified due diligence duties will be entailed for products coming from low-risk and enhanced scrutiny for high-risk areas.

The legislation will also include stipulations on working with partner countries, including governments, academia, the private sector and civil society, to address deforestation and forest degradation.

Tougher regulation is seen as necessary by asset managers because of inconsistent reporting and due diligence practices by buyers and sellers of commodities across the food and agriculture sectors, making it hard for investors to identify ESG risks.

Clotilde Henriot, Trade and Environment Lead, at environmental law group ClientEarth, praised the EU’s proposed deforestation regulations for covering the whole value chain.

“It will be important to have reporting so that we know exactly the elements that should be publicly disclosed. It will also ensure accountability,” she explained to ESG Investor. “It is a law that should be used as a prevention against companies that can have a detrimental impact on the environment. It is also a way to mitigate the detrimental impact.”

Henriot added that its effectiveness will depend on how the legislation will be framed, emphasising the need for wide applicability across commercial sectors.

Both Henriot and Otten were hopeful the wider initiative would contain sufficient measures to be effective in creating better due diligence practices.

“There is huge support amongst the business community for the EU due diligence framework to be a cornerstone of regulating business activities if we want to transform the economy into a long-lasting, sustainable one. Due diligence is key,” added Otten.

The UK’s due diligence legislation, which is part of the wider Environment Bill 2020, was passed into law in November 2021.

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