Environmental Due Diligence and the EU Corporate Due Diligence Proposal--Lamy, Pons, and Garzon, "GT10 – EU Corporate due diligence proposal: Game changer or paper tiger?"

 

Pix Credit here

Pascal Lamy, Geneviève Pons and Isabelle Garzon produced a policy paper in July that may be worth considering anew. That policy paper, GT10 – EU Corporate due diligence proposal: Game changer or paper tiger? (Europe Jacques Delors, Policy Paper 25 July 2022) suggested that the EU's much talked about draft human rights due diligence proposal may be in need of some rethinking. focuses on the issue of environmental due diligence, which until now has received less public attention than other issues. It is a deep dive into the legal set up proposed by the Commission regarding potential harmful environmental impacts of businesses’ activities along value chains.

The Abstract nicely summarizes the argument (GT10 – EU Corporate due diligence proposal, supra pp. 1-2):

With the European Commission’s proposal on corporate sustainability due diligence, the EU has entered new territory: regulating business internal practices to minimize environmental risks while financial risks until now have been the predominant reason for setting rules on corporate governance. The intense debate that preceded the initiative, pitting growing political and societal support against open resistance from commercial interests, gives a good indication of the magnitude of the novelty. 

Full transparency of business practices can be one of the European Union’s (EU) key levers to make its economic and trade relations with the rest of the world greener by putting in place more sustainable value chains. The intrinsic logic of corporate due diligence is to set companies on a course to caring – and having an interest in caring - for the environmental risks that their activities may entail, wherever they take place. With globalized value chains comes the inherent dimension of extraterritoriality.

This is the intention of the European Commission’s proposal on due diligence, but will it deliver on two fundamental principles? Prevent first, and redress firmly if necessary? A close examination of the proposed directive shows that this is unlikely unless corrective measures are implemented.

First, by taking a narrow and conservative approach to the negative impacts to be prevented and by outlining too general reporting requirements, it does not set sufficiently strong and clear guidelines that will change business processes and reward companies that do everything in their power to prevent environmental harm.

Second, though at first sight this weakness seems to be compensated by the contractual responsibility and civil liability newly imposed on companies along value chains, the effectiveness of the provisions concerned can be questioned and may well result in risk avoiding behaviours: companies stopping business with their regular partners or choosing short-term relationships to avoid liability.

Finally, the proposal does not sufficiently harmonize EU rules. This carries the risk that companies choosing to respect the environment will suffer economic losses due to unfair competition resulting from unsufficient level playing field across the EU.

As the way forward, we propose that better coherence should be ensured with two other major proposals that are being discussed by the EU institutions, the revision of the directive on environmental crime and the proposal on deforestation-free imports of agricultural commodities. In addition, cross-referencing to provisions of the legislation on financial reporting which are still to be defined and have different aims should be avoided and gaps filled. Specifically:

• Environmental adverse impacts should be more broadly defined.
• Companies should receive more specific guidelines to carry out their risk assessments.
• Loopholes regarding contractual relationships with suppliers and reporting obligations need to be closed.
• The public’s interest to report damages through complaints and access to justice should be ensured in a similar way across EU legislation.
• A greater degree of harmonization of checks performed and penalties applied by national market surveillance authorities should be ensured.
• Engagement with trade partners is necessary for bringing about systemic change in a spirit of reciprocity.