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  • Writer's pictureMoyse & Associates

Human rights and businesses in Europe and in Luxembourg

While the European Union is actively working on a draft directive on the duty of care and responsibility of companies with regard to human rights, Luxembourg has just taken the lead by adopting a national plan to eliminate suppliers who do not respect human rights from their supply chain.

Respect of human rights is becoming increasingly important in the activities of companies. For the moment, their protection is still the responsibility of the State, but companies can no longer ignore them and must take them into consideration in their management.

Indeed, if human rights are violated, the consequences can be dramatic: loss of shareholders and the most efficient employees, disgruntled investors, damage to the company's image and reputation with the risk of a consumer boycott, not to mention the risk of costly litigation...

The fear is now to be brought before the court of public opinion, at the heart of scandals, which are extremely costly. This has hurt many companies such as BNP Paribas, Walmart, Volkswagen, and many others.

However, despite the immense stakes involved, many companies still neglect human rights to focus solely on their results and profits, which is what has led supra-state organisations to take matters into their own hands. Indeed, the United Nations has been working since 2014 on a draft legally binding treaty for companies, with due diligence obligations for all companies with business operations.

On the other side of the Atlantic, the European Parliament is also working on this issue. On 10 March 2021, the Parliament adopted a resolution with recommendations to the European Commission. This resolution contains a proposal for a European directive, which would apply to all large companies, not only commercial enterprises but also those providing financial products or services. The directive would be applicable to all listed or high-risk medium-sized companies.

The draft directive contains requirements on human rights, environmental impact assessment, risk management and recommends that companies integrate gender perspectives into their due diligence process.

The main objective of the directive is to ensure that companies operating in the internal market fulfill their duty to respect human rights, the environment and ensure good governance. In concrete terms, they must not cause or contribute to potential or actual negative impacts on human rights and the environment through their own activities or those directly related to their operations, products, or services, whether through their business relationships or value chains. They should prevent any negative impacts and if they do occur, they are encouraged to mitigate them as much as possible.

Companies are required to consult with stakeholders, including trade unions and facility representatives, on their due diligence process. Their due diligence strategy should be made public, which includes communication to employees and business partners.

This is also the direction taken by the Luxembourg national plan, which obliges signatory companies to raise awareness among their staff, develop governance instruments that would make it possible to define the risks and avoid any violation of fundamental rights, and provide for channels of appeal and collaboration with the competent public authorities.

Some other European countries have also been taking measures for several years, notably in England in 2015, with a law on modern slavery, or in 2017 in France with the adoption of a law on due diligence. The Netherlands also legislated on child labour in 2019. Other projects are developing in Switzerland and Germany.

At the European level, the challenge is to harmonise national legislation, giving the different points that absolutely must be respected, to see real compliance, the same rules and sanctions must be provided.

Companies will therefore be invited to comply and to adopt due diligence measures quickly. Integrating these mechanisms into the operation of their business now will save time in the future, and avoid being caught out by new binding legislation at a time when their concerns are elsewhere.

The motivation for companies to opt for due diligence immediately is, let us remember, to preserve their reputation by avoiding any scandal, to meet the requirements of investors and to comply with consumer expectations. In practical terms, the major benefit for companies is that respect for fundamental rights improves risk management. Predictability is absolutely essential for stable and productive business operations.

It is evident that a European-level regulation on due diligence would bring significant benefits to businesses. Indeed, a harmonised and binding standard would provide more legal certainty, with a level playing field for all companies, without reducing competitiveness or innovation.

Human rights, but also respect for the environment, are at the heart of the concerns. The draft directive also aims to force companies to integrate the notion of sustainability into corporate governance, as according to the Commission, companies focus too much on their financial performance, often in the short term, to the detriment of sustainability.

Moreover, taking environmental dimensions into account contributes to economic gains for the company. Better use of raw materials reduces costs and ensures efficiency gains. A company that claims to be environmentally conscious can also gain market share over its competitors.

As sustainability regulations are likely to change and become more restrictive, companies that have integrated sustainability into their management practices today will be spared the loss of profits from new regulations in the future. The financial risks of new regulations or sanctions are in turn reduced. Furthermore, engaging in sustainable development improves a company's image.

The proposed directive requires Member States to put in place a civil liability regime that will hold companies responsible for any negative impacts they have caused or contributed to.

In conclusion, this is the time to prepare for future legislation that will undoubtedly have a major impact in the years to come. Companies still have some time to wait as there are no real constraints yet. However, by 2024 the European directive should be published or transposed and the UN treaty adopted. It is therefore high time for companies to take an interest in human rights and the environment, before binding legislation forces them to do so. It is, therefore, necessary to consult a lawyer without delay in order to be well prepared.


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