February 8 marks the end of the public consultation on Sustainable Corporate Governance opened by the European Commission in view of designing an unprecedented European Duty of Care. A milestone in European company law, by aiming at addressing regulatory and market failures, the proposal will add an additional layer of legal responsibility to identify, prevent and mitigate adverse impacts on the environment, social and human rights along supply chains.
However, while the Parliament Legal Affairs committee tried to set the tone for the upcoming legislative process, aspects like the scope, responsibilities, leal certainty are still not clear, raising questions about unwanted negative consequences for European businesses.
First of all, it is not yet clear how the new legislative framework will strike the right balance between providing enough legal certainty and designing a flexible and risk-based approach adaptable to the size, operations, and sector of activities of the affected companies. DG JUST seems well aware that a one-size-fits-all approach would likely fail to meet the declared objectives and indicated on several occasions that a cross-sectoral approach looking at sectoral specificities seems to be the way ahead.ù
However, major doubts remain. For instance, when defining the new Duty of Care, the proposal will hold companies accountable to assess, prevent, mitigate and monitor the adverse impacts of a company’s operations and business relationships. However, the new legislation also envisage accountability for the actual adverse impacts deriving from failing in implementing those duties, as that may be already covered by other EU and national legislation.
The very definition of “adverse impact” is also vague and not yet linked to any existing legislative framework. Neither is clear whether an action that is legal in a third country can still fall under this definition.
Moreover, information from the Parliament and Commission suggest that the new legislation should cover the entire value chain. However, this assumption does not seem to consider that a majority of European companies are SMEs lacking the ability to manage risks related to all their upstream suppliers. While the Parliament suggest a flexible approach for SMEs, this is not further clarified. Moreover, this obligation seems to shift what is normally a state obligation to private actors.
SMEs deserve particular attention because of their limited resources and leverage within supply chains. A new layer of responsibility will lead to additional costs for companies regardless of their size. However, as the COVID-19 pandemic take a toll on the assets of companies, SMEs were disproportionately affected. A new layer of responsibility on SMEs will further jeopardise their recovery and eventually impair their capacity to effectively contribute to the objectives of the new legislation.
Even with a flexible approach reducing administrative burdens and implementation costs, they may end up “in between the anvil and the hammer” of large customers’ demands and their limited leverage on their own suppliers.
The Duty of Care will also need to be coherent with policy and legislative frameworks it will operate in. For instance, coherence with the Non-Financial Reporting Directive should be sought; similarly, alignment with international standards and initiatives promoted by the UN, ILO or the OECD is instrumental to maintain the competitiveness of businesses relying on complex, globalised supply chains.
In terms of global and European competitiveness, the new legislation will also need to deliver a level playing field across the Single Market, to ensure harmonised interpretation by the public authorities on one hand and avoid free-riding of uncompliant businesses operating in the EU on the other.
All in all, the goals and this new initiative are laudable and shared by representatives of the industry and civil society alike. However, one can expect a lively debate about the shape that the EU Duty of Care should take to be able to effectively contribute to more sustainable supply chains while at the same time protecting and improving the competitiveness of European businesses on a global scale.