EurWORK European Observatory of Working Life

Due diligence

Definition

Due diligence is how a business understands, manages and communicates about risk. This includes the risks it generates for others, and the risks it encounters through its strategic and operational decisions and actions. Due diligence is defined by the 2011 OECD guidelines for multinational enterprises as:

the process through which enterprises can identify, prevent, mitigate, and account for how they address their actual and potential adverse impacts as an integral part of business decision-making and risk management systems.

Specifically, human rights due diligence is the process through which companies should identify, prevent, mitigate and account for their human rights impacts.

Background

There is currently no single EU legislative framework on due diligence; however, there are several initiatives in place that address some of the negative impacts of businesses on human rights and the environment. For instance, the EU has adopted three main directives: the Non-financial Reporting Directive, which is currently under revision; the Timber Regulation, which aims to reduce illegal logging by ensuring that no illegal timber or timber products can be sold in the EU; and the Conflict Minerals Regulation, which ‘lays down the supply chain due diligence obligations of Union importers of minerals or metals containing or consisting of tin, tantalum, tungsten or gold’ (Article 1(2)).

Regulatory aspects

Non-financial information

The most relevant and broadest initiative in the field of fundamental rights is the Non-financial Reporting Directive. This requires large companies to disclose information on the policies they implement in relation to environmental protection, social responsibility and treatment of employees, respect for human rights, measures to counter corruption and bribery, and measures to ensure diversity on company boards. It applies only to large public interest companies with more than 500 employees.

According to the directive, such companies must include in their management report a non-financial statement containing information pertaining to the undertaking’s development, performance, position and impact of its activity, relating to environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters. This would include the following:

  • a brief description of the undertaking's business model.
  • a description of the policies pursued by the undertaking in relation to those matters, including due diligence processes implemented.
  • the outcome of those policies.
  • the principal risks related to those matters linked to the undertaking's operations including, where relevant and proportionate, its business relationships, products or services which are likely to cause adverse impacts in those areas, and how the undertaking manages those risks.
  • non-financial key performance indicators relevant to the particular business.

However, the main loophole in the directive is the absence of any real sanctions for companies that do not provide such reports. According to a report on due diligence prepared for the European Commission in 2020, this explains why efforts to achieve self-regulation by introducing voluntary corporate accountability initiatives have been ineffective.

Revision of the Non-financial Reporting Directive

To address the shortcomings in the Non-financial Reporting Directive, the European Commission announced its intention to revise the directive, while in March 2021 the European Parliament passed a resolution on corporate due diligence and corporate accountability, urging the Commission to act. For the Parliament, a revision of the directive is needed to ensure that companies meet their obligations in terms of respect for human rights, the environment and good governance, wherever they operate in the world. The MEPs’ proposal is aimed at ensuring that undertakings:

do not cause or contribute to potential or actual adverse impacts on human rights, the environment and good governance through their own activities or those directly linked to their operations, products or services by a business relationship or in their value chains, and that they prevent and mitigate those adverse impacts.

This best-efforts obligation extends to large undertakings and high-risk or publicly listed small and medium-sized undertakings, a notion that will have to be defined in more detail by the future directive, taking into account ‘the sector of the undertaking or its type of activities’ but disregarding the size of its workforce or turnover. It is noteworthy that MEPs firmly rejected an amendment seeking to exclude small and medium-sized undertakings from the directive’s scope of application. Undertakings will be required to draw up a ‘due diligence strategy’ for risk assessment purposes, including within their chain of subcontractors and suppliers, and to adopt ‘proportionate and commensurate policies and measures with a view to ceasing, preventing or mitigating potential or actual adverse impacts on human rights, the environment or good governance’. Member States will be required to guarantee:

the right for trade unions at the relevant level, including sectoral, national, European and global levels, and for workers’ representatives to be involved in the establishment and implementation of the due diligence strategy in good faith with their undertaking.

Employee representatives, including European works councils and European company works councils, will have to be kept informed of companies’ due diligence strategies and their implementation. An amendment has also been adopted to prevent undertakings explicitly passing the burden of their obligations on to their subcontractors.

Related dictionary terms

Corporate social responsibility Global Deal global union network International Labour Organization

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