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Eric Carlson
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The EU is expanding ESG requirements, and due diligence needs to keep up

Human rights protection is gaining momentum, with governments across the EU becoming increasingly serious about addressing human rights violations and broader Environmental, Social, and Governance concerns.

Earlier this year, Germany took an important step in this direction. Following months of negotiations, the German government finally adopted the so-called Supply Chain Act (Lieferkettengesetz). From January 2023 onwards, German companies with more than 3,000 employees across their group structure (reducing to 1,000 employees from 2024) will be required to conduct adequate due diligence concerning human rights and certain environmental risks to protect human rights across their activities and their supply chains.

The move comes at a time when the European Commission is working on an EU-wide directive on Corporate Due Diligence and Corporate Accountability. The regulation will have major implications for companies working in and with the EU. It will set a requirement to identify, address and remedy the ESG risks across companies’ operations and supply chains. The law is expected to follow in the coming months, and it will be interesting to see how the EU member states will transpose it into the local legislation.

While we wait for the final directive to be adopted, last week the EU Commission and the European External Action Service (EEAS) released new Guidance on due diligence for EU companies to address the risk of forced labor in their operations and supply chains. The document builds upon the OECD due diligence framework as a best practice example, offering some good insights into the common red flags of forced labor.

It is also important to note that some international bodies, including the UN Human Rights Council and the UN High Commissioner for Human Rights, have recently advocated a human rights-based approach to corruption, suggesting to view instances of corruption as a violation of human rights. This idea seems promising for at least two reasons: first, because the human rights monitoring bodies will have the mandate to address corruption; second, because this will empower the individuals affected by corruption to come forward with their cases as they will see more clearly how it interferes with the enjoyment of their basic human rights. All of this is likely to bring better implementation of both anti-corruption and human rights protection regulations.

All signs are that human rights protection and other ESG-factor driven issues are in the spotlight for the EU regulators and a broader public. This is likely to trigger important developments for the corporate sector. To the frustration of some compliance officers, an ethics & compliance program is now seen more often than not as a component of a broader ESG program, primarily the “G.” Although this doesn’t mean that compliance officers are now expected to “own” ESG (at least not yet), it definitely means we need to cooperate a lot more with other stakeholders, both internal and external, to foster a coordinated approach. 

Crowd-sourcing ethics and compliance risk assessments has always been a good idea, but with today’s focus on ESG, it is ever more valid. Sharing the data, learnings and due diligence outcomes becomes key as this is likely to have a mutually reinforcing effect and lead to better visibility into risk. As the OECD’s “Connecting the anti-corruption and human rights agendas: A guide for business and employers’ organizations” rightly points out, “the data collected in connection to corruption risk assessments can likely support the analysis of potential red flags in the field of human rights and vice-versa.”

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