European business calls for more proportionate view of supply chain liability

A host of European business groups, including BusinessEurope, have called on the EU to ensure that its coming Corporate Sustainability Due Diligence Directive (CSDD) is harmonised across all 27 member states and is implemented in a proportionate and risk-based manner. The directive will basically require companies to identify and assess environmental harms and human rights violations across their value chains, and then take action to prevent and eliminate them. If they fail to do so they, and potentially their directors and officers, will face penalties and legal action. In a joint statement, the business groups say the EU needs to be careful about how legal liability for companies along their supply chain is applied under the directive. “Companies cannot be made liable for damages they have not – intentionally or negligently – caused,” state the groups. They also argue that regulating directors’ duties does not belong in a due diligence framework such as the CSDD. BusinessEurope explains that European companies remain supportive of the directives objectives but urges co-legislators to work on a “reasonable” approach that is manageable for firms in practice. “The European economy – including SMEs, which will be impacted even if formally out of the scope – need a workable due diligence framework that is drafted in a balanced and proportionate way,” they state. “There should be no room for legal uncertainty and fragmentation that will hamper the possibility for European companies, already facing a legally complex and crisis-abundant environment, to contribute to the sustainability transition,” adds the groups. They ask for a number of key recommendations and concerns to be taken into account during the next stages of the legislative process. First, they call for full harmonisation to ensure a level playing field and avoid further internal market fragmentation. “This is also in the spirit of the 30th anniversary of the internal market. Divergent national legal regimes on due diligence would not only be costly and burdensome for companies of all sizes but, more importantly, risk undermining the achievement of the goals of the legislation in an efficient and effective manner,” they state. Second, the groups request that the directive is truly consistent with a risk-based approach. It reminds the EU that international instruments in the UN and OECD recognise that companies cannot be expected to focus on every single element of their value chains. “The ability to prioritise the identification of and action to address the most salient risks is a necessity that must have a crucial impact on compliance with the due diligence process and its consequences. More prominence to industry and multi-stakeholder schemes is needed to help companies better comply with the new rules,” they argue. Third, the European business groups say legal liability provisions, including sanctions, need to be balanced, follow legal traditions around breach-damage-causality and truly incorporate the widely accepted principle that due diligence is first and foremost an obligation of means. “The complexity of value chains cannot be underestimated when analysing impacts that can have multiple competing causes, players and dynamics. Therefore, companies cannot be made liable for damages they have not – intentionally or negligently – caused,” they state. The groups acknowledge that, where relevant, due diligence requires engagement from relevant stakeholders in order to be effective. However, they argue that this should not mean creating “wide open” litigation powers for any entity to bring claims to court that could give rise to mass abusive litigation. The statement also calls for legal clarity and consistency that the organisations argue is paramount for this initiative’s success. “This implies, for example, that definitions are robust and in line with what is used at international level (UN/OECD), and that provisions around climate objectives match with the recent Corporate Sustainability Reporting Directive (CSRD),” they state. “Also, we call for revisiting and shortening the annex to only include those conventions and treaties that create concrete obligations on companies so not to mix up their roles with the roles of states. Timely guidance will be necessary on the new rules to avoid additional complexity both for the companies to secure compliance with a multi-layer set of rules, and for competent authorities to assess compliance with an over-prescriptive framework,” argue the business groups. Finally, they argue that regulating directors’ duties does not belong in a due diligence framework. “It will have negative side-effects, including the disruption of existing, well-established governance models of the member states, without added value to the ability of companies to apply effective due diligence,” states BusinessEurope and the other signatories. The EU is, however, hearing a totally different view from action groups such as environmental group ClientEarth, and faces a complex and a tough decision-making process that will probably leave no-one happy. After the European Parliament’s legal affairs committee (JURI) adopted its position on the CSDD at the end of April, ClientEarth lawyers welcomed the committee’s overall amendments. They noted improvements such as the extension of company scope, inclusion of the financial sector, value chain coverage, variable remuneration of directors and recognition of the rights of indigenous peoples and local communities. However, the group said the JURI committee’s position adopted a weaker outcome on tackling environmental impacts than recently adopted by the Committee on Environment, Public Health and Food Safety (ENVI). The lawyers warned that watering down these provisions risks undermining the achievement of the ambition set out in the EU’s Green Deal. Amandine Van Den Berghe, ClientEarth lawyer, said: “The legal affairs committee’s position papers over some of the cracks in the commission’s original proposal, notably by including the Paris Agreement. But it fails to provide a comprehensive definition of what constitutes an adverse environmental impact, opening loopholes that could allow companies to turn a blind eye to significant environmental issues in their value chains, including their emissions.” “Another backwards step is scrapping the convention on biological diversity from the list of international treaties that companies must refer to, which seems at odds with the EU’s targets to halt and reverse the loss of biodiversity,” she continued. “It’s now down to the European Parliament to preserve improved aspects and address remaining flaws in its full vote in May. Most importantly, it will need to push for a definition that fully captures the corporate world’s environmental footprint in negotiations with the commission and council. Without this clarity, the EU risks rubber stamping a paper tiger,” added the lawyer.

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