The European Commission, the EU’s executive arm, will present on Wednesday a proposal to hold companies accountable for environmental damage and human rights violations in their supply chains globally. It will also crack down on activities in third countries, including Brazil.

Europe has been aligning measures to increase vigilance in the relationship between trade and environmental and social sustainability. And it will be able to impact other countries in terms of ESG if they want to trade with the European market, one of the largest in the world.

Last year, the EU outlined the carbon tax on the border and the proposal to ban the entry of several commodities if produced in deforested areas. Now it will launch a “Directive on Corporate Sustainable Due Diligence,” setting out environmental and human rights obligations for companies. France wants to go further with the introduction of reciprocal standards in EU trade agreements.

In the proposal to be released on Wednesday, the trade impact part is not yet clear, unlike the proposal on deforestation, which establishes a ban on importing products that are not “deforestation-free.” As for the investments of European companies in other markets, the assessment is that the new proposal will tend to have an impact because of the precautions that companies will have to take to avoid breaking the rules in some markets that may be considered risky, for example, due to local environmental policies.

Overall, the due diligence proposal by companies to be released on Wednesday may raise less concern in Brazil than the one on zero deforestation. There was pressure for the mechanism to be modeled on the U.S. legislation, which bases itself on a list of countries that Washington considers as violators. In the European case, responsibility will be placed on European companies or companies operating in Europe.

According to the draft, which was leaked in Brussels, the 27 member states will need to adopt or adapt their own due diligence legislation and, this way, compel companies to identify, prevent and mitigate human rights abuses and violations of environmental standards in their value chains. But the estimate is that this measure will only reach 13,000 companies. Small and medium-sized firms, which represent 99% of all companies in the European common market, will be excluded from due diligence, according to leaked information.

Therefore, only companies with more than 500 employees and global net sales of €150 million or more will be subject to the new rules. It will also include companies with more than 250 employees and net sales of more than €40 million, if at least half of those sales come from sectors considered high-risk, such as agriculture, mining, and textiles.

The proposal will also target companies from third countries if they have net sales of at least €150 million or €40 million in the EU market, depending on the sector in which they operate.

Today, multinationals operate with few obstacles, some experts say. Complex corporate and supplier structures make it difficult to hold the parent company accountable for human rights violations and negative environmental and social impacts in its global operations.

The European proposal would provide for sanctions and civil liability. In other words, it will make companies liable for damage caused by their subsidiaries and their value chains. It means that people whose rights are violated by companies will be able to sue the parent company in the justice system of their home country for compensation or reparation. A community in Brazil’s Northeast region that considers that a multinational has caused environmental damage locally can therefore with less difficulty take legal action against the company in its home country.

The expectation is that climate obligations will lead companies to adopt greenhouse gas emission reduction plans, in accordance with the Paris Agreement, with concrete short, medium and long-term goals.

Much of the European proposal draws inspiration from France’s duty of care legislation, adopted in 2017. The French acted in the wake of the April 24, 2013 disaster at a textile mill in Bangladesh, which collapsed killing more than 1,100 employees. Labels of major European or French brands were found on what remained of the mill. After that, the French law started requiring companies to establish a prevention plan with surveillance measures to identify risks and prevent damage to human rights, health, environment and people’s safety.

Due diligence obligations on human rights and the environment can create a sustainable future, wrote Andre Hoffman, vice-chairman of the Swiss Roche Group, on the website of the World Economic Forum.

The proposal to be presented by the European Commission will then be debated in the European Parliament and by member states in the European Council. And several proposals of amendments will be inevitable. The expectation is that the legislation will be adopted in 2024.

Source: Valor International

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