Human rights have recently attracted more attention with significant legislation enacted throughout the European Union, and major companies have been increasingly targeted by complex litigation for alleged human rights violations. Here are some of the biggest ESG developments companies operating in the EU should know about.
In France, Duty of Vigilance and human rights litigation.
Duty of Vigilance
Adopted in 2017, the Duty of Vigilance Law requires companies to devise, publish and implement a “vigilance plan” to identify human rights and environmental risks resulting from their activities and introduce measures to prevent them. It applies to corporations employing more than 5,000 employees in France or over 10,000 worldwide. Non-compliance may result in a court injunction to adopt said plan under penalty. Though not yet in effect, sanctions were recently heightened: defaulting companies may be excluded from public procurement.
This one-of-a-kind duty of vigilance is a blatant example of France’s determination to enshrine corporate social responsibility into substantive law and enhance corporations’ accountability globally.
The first case brought under it, which attracted significant media coverage, targets the French oil company Total for its activities in Uganda. According to the French NGO Sherpa, at least 44 French and international companies from all industry sectors are on their radar for non-compliance with the Duty of Vigilance Law.
NGOs have increasingly targeted corporations for alleged involvement in serious criminal offenses.
The most newsworthy case is the criminal investigation against the French cement manufacturer Lafarge regarding its activities in Syria. Allegations concern the payment of €13 million ($15.3 million) to terrorist groups (including ISIS) and other intermediaries through Lafarge Cement Syria (LCS), its Syrian subsidiary. As a result, Lafarge had initially been indicted for complicity in crimes against humanity, terrorism financing, and endangering the lives of its employees.
These proceedings are still ongoing and recently hit the headlines following important procedural turnarounds. The latest is the Supreme Court’s decision of September 7, 2021, whereby the court held that “knowingly paying several billions of dollars to an organization which purpose is solely criminal is sufficient to establish complicity by aiding and abetting.”
The Supreme Court further confirmed the company’s indictment on counts of terrorism financing but canceled Lafarge’s indictment for endangering the lives of its employees. Finally, the Court established that the NGO European Center for Constitutional and Human Rights (ECCHR) had standing to join proceedings as a victim.
This decision sets a strong precedent for assessing corporations’ responsibility, including for the most serious crimes.
In Germany, human rights due diligence and the first ESG probes.
Supply Chain Due Diligence Act
Perhaps the most high-profile action against ESG risks so far is that undertaken by Germany, which adopted the Supply Chain Due Diligence Act on June 11, 2021. The Act will enter into force in 2023 and cover German companies with a workforce of at least 3,000 (1,000 employees as of 2024).
The Act compels companies to identify, assess and prevent supply chain risks of forced labor, child labor, discrimination, violations of freedom of association, poor employment terms and working conditions, and environmental damage. Non-compliance with the Act may result in fines up to 2 percent of turnover. Sanctions also include debarment from public procurement for up to three years.
The Act will definitely increase companies’ exposure to litigation, financial and reputational risks associated with their business activities. However, the Act’s scope means it only applies to major German corporations meeting the high workforce thresholds. Furthermore, obligations only apply to a company and its immediate suppliers, while indirect suppliers are only included in case of “substantial knowledge” of a potential breach. Considering that Germany is known for its solid Mittelstand – with most businesses unlikely to fall into scope – one may wonder if the Act will, in effect, steer any significant change in corporate practice.
First ESG probes
On August 26, 2021, the U.S. Securities and Exchange Commissions and the German financial markets regulator (BaFin) launched an investigation into DWS, the asset management arm of Deutsche Bank. Probes focus on allegations voiced by the firm’s former group sustainability officer, who claims that DWS exaggerated the environmental or social credentials of some of its ESG-labelled investment products.
On September 5, 2021, ECCHR filed a complaint against major German retail brands including Aldi, Lidl, Hugo Boss, and C&A for allegedly benefiting from forced labor of the Uyghur in China. According to ECCHR, the complaint raises whether doing business with suppliers located in the Chinese region where Uyghur are subject to forced labor could be characterized as aiding and abetting those international crimes.
As stated by ECCHR, “this complaint is the first of a series of filing against European companies for alleged complicity in crimes against humanity.” It prolongs the casework started in France when ECCHR supported a similar complaint filed by Sherpa against major retail brands like Uniqlo or Zara.
The EU’s steps towards greater human rights protection.
Directive on corporate due diligence and accountability
The trend witnessed in Germany and France to foster responsible (and accountable) business conduct is enshrined in a broader initiative. Current discussions on the EU Corporate Due Diligence and Accountability Directive substantiate this dynamic.
If introduced, the Directive would compel businesses to conduct due diligence on the adverse impact caused by their operations on human rights, the environment, and good governance.
The anticipated scope of the Directive – covering a company’s supply chain, including suppliers, customers, and end-users – would have a significant impact on companies doing business in the EU.
The EU Global Human Rights Sanctions Regime
The EU’s lead on human rights protection does not solely rely on enhancing its legislative framework.
On December 7, 2020, the European Union adopted a global sanctions regime against human rights violations committed worldwide. This new sanctions regime, directly inspired by the U.S. Global Magnitsky Act, imposes international financial sanctions and travel bans on perpetrators of human rights violations. It further underlines that the protection of human rights is a cornerstone of the EU’s external action and reflects the EU’s determination to enhance its role in addressing human rights violations worldwide.
In conclusion, corporations should be aware that human rights protection and ESG-due diligence are gaining momentum in the EU. This results in a fast-changing regulatory framework that enhances civil society scrutiny and increases litigation risks. This may be the opportunity to review existing policies and procedures, implement an efficient due diligence strategy, and risk-map businesses’ impact on human rights and ESG-related factors, particularly for exposed industries.