Supply chain laws

at an international, European and national level

Supply chain laws

Consumers are increasingly questioning whether products were made using child labour and forced labour (known as modern slavery). Environmental disasters and the threat of pandemics, such as the current COVID-19 pandemic, have shown us that legal regulations and penalties for large corporations and other companies are necessary to protect everyone’s livelihoods.

Millions of men, women and children work under inhumane conditions in global supply chains. They receive wages below subsistence level, are mistreated at work and die after accidents in factories. The cocoa used in chocolate is still harvested by children, clothes are sewn under threat of violence, soil and water are poisoned and air pollution endangers the health of the population. Child labour has even increased in the last ten years, forests are still being illegally cut down and inconceivable quantities of rubbish and toxins are still ending up in our oceans and groundwater every day. 

Companies from the Global North also make these people’s working conditions worse by setting hard-nosed prices and tight delivery deadlines. ‘However, the profits acquired from human and environmental rights violations are also siphoned off in the Global North,’ says Professor Markus Krajewski, holder of the Chair of Public Law and International Law at the Friedrich-Alexander University Erlangen-Nuremberg. 

An additional statement by this expert illustrates that our society and politicians have recognised the transnational importance of corporate responsibility: ‘as our economies profit from them, we have an obligation to regulate these conditions.’ 

This call for companies and corporations to be under a legal obligation to undertake due diligence along their global supply chains has been preceded by a general change in awareness in most countries. Yet, which mandatory due diligence rules for companies already exist? To what extent should companies, regardless of their size, already ensure that comprehensive due diligence is carried out with regard to human rights violations and, by extension, environmental risk, too? Comprehensive disclosure obligations or even due diligence obligations for companies already apply in individual European countries. In the United Kingdom, for example, the Modern Slavery Act 2015 was enacted as far back as 2015, requiring mandatory reporting for companies and measures to prevent forced labour. 

In 2017, the ‘Loi de vigilance’ was passed in France to make corporate due diligence for human rights binding. French companies are obliged to identify and prevent human rights risks at their subsidiaries and along the entire supply chain. Since 2019, the ‘Child Labour Due Diligence Law’ in the Netherlands has obliged companies to comply with due diligence obligations relating to child labour and provides for tangible ways for complaints to be made and sanctions to be levied in the event of non-compliance. 

Now Germany has also followed suit, presenting a draft law for a supply chain act at the beginning of February 2021. The original plan was to make companies also liable under civil law for human rights violations along their supply chain. However, this plan was dropped due to pressure from business associations. Instead, companies that fail to meet their due diligence obligations now face fines and exclusion from public contracts. As a result, these measures do at least go beyond companies’ reporting obligation, which is often perceived as toothless. 

EU-wide reporting obligation 

At EU level, a CSR reporting obligation for large companies has been in effect since January 2017 (Directive 2014/95/EU). Under this, social and environmental issues, as well as related risks, strategies, results achieved and non-financial performance indicators, must be disclosed. However, the reporting obligation only applies to large companies, i.e. companies ‘of public interest’ (in the sense of section 189a (1) UGB), whose balance sheet total exceeds 20 million euros or whose turnover exceeds 40 million euros and which employ more than 500 employees on an annual average. The EU Commission is currently revising this directive on non-financial reporting and intends to present a proposal to this effect before the end of 2021. This will create a uniform EU-wide reporting standard: this has been lacking to date and will now also be applicable to additional companies. 

“A global economy and our prosperity cannot be founded upon the exploitation of people and nature, and child labour”

Dr Gerd Müller, German Federal Minister for Economic Cooperation and Development 

However, there should not just be a general reporting obligation for companies in the EU. EU Justice Commissioner Didier Reynders has already announced concrete proposals for directives on due diligence for companies’ global supply chains for 2021: ‘We want to legislate with new duties, liabilities and oversight. We need at least civil liability, and we are even discussing criminal liability.’ The EU intends to impose due diligence obligations on companies in every sector with relation to climate and environmental risks, as well as human rights violations in their supply chain. As a result, globally active companies from Europe are to be obliged to take responsibility along their supply chains and, by extension, at their production sites outside Europe. The consultation phase on the EU Supply Chain Act ended on 8 February 2021. However, a first draft of the directive is not expected until autumn 2021 due to the expected resistance from business associations and lobbies. 

A rating system for sustainable management 

On a sector-specific level, the EU already has several mechanisms in place to address human rights. For example, the EU Sustainable Finance Action Plan aims to support climate action and sustainable development, while also implementing the Paris Agreement on Climate Change and the UN 2030 Agenda. As a result, the ‘Taxonomy Regulation’ was adopted in June 2020, establishing a common classification system for sustainable economic activities in the EU. Clear criteria were defined according to which economic activities are classified as environmentally sustainable. A distinction is made between ‘green’ and ‘not green’, but that is not all of it: an investment’s environmental sustainability must also be recorded. This is intended to create incentives for sustainable investments for every stakeholder on the financial markets and also for the ‘large companies of public interest’ with more than 500 employees. 

The Taxonomy Regulation is the basis for the Disclosure Regulation adopted in 2019: it obliges financial market participants and financial advisors to provide transparent information on the extent to which they take sustainability aspects into account in their investment decisions or advisory activities. This applies to corporate strategy, investment processes, remuneration policies and much more. The regulation will apply in every EU member state from 10 March 2021. In this context, a mandatory query about sustainability preferences as part of an investment consultation will also be integrated into the EU Directive regulating European securities trading. 

On an international level, there is still no legally binding convention for the effective enforcement of human rights that obliges internationally active companies to adhere to the same human rights standards. However, the United Nations is putting a great deal of work into creating a legally binding convention for internationally active companies and for their entire supply chains and subsidiaries. This ‘Zero Draft’ would see companies face extensive national liability for human rights violations in terms of civil law, criminal law and public law. Based on the UN Guiding Principles on Business and Human Rights, which have been in force since 2011, the first sketch of the ‘Zero Draft’ sets out a concrete obligation for states to regulate corporate responsibility, which provides for a human rights impact assessment and an environmental impact assessment alike. 

In light of the impending new regulation of companies and the corresponding implementation of liabilities and/or penalties at national and international levels, companies in every sector would now be well advised to be as proactive as possible in dealing with potential and actual negative impacts on human rights. Larry Fink, Chairman of the Board and CEO of Blackrock, the world’s largest asset manager, revealed the issue of sustainability to be a top priority for companies for the second time in his traditional, this time ground-breaking letter at the beginning of the year. At the same time, he also called for uniform global standards that enable investors to make informed investment decisions. Smart fund managers will follow Fink’s advice and act accordingly when voting at the various general meetings they attend.


AUTHORS:

DDr. Elisabeth Steiner, Attorney-at-Law and Senior Expert Counsel at LANSKY, GANZGER + partner
Tatiana Urdaneta Wittek, Attorney-at-Law at LANSKY, GANZGER + partner and member of ITKAM

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