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EU due diligence proposal raises hope for activists, worries foreign companies

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While civil society organisations look at the proposed EU due diligence rules with optimism for local communities abroad, foreign companies voice concerns over the lack of harmonisation of the draft rules and their extraterritorial dimension.

The corporate sustainability due diligence directive (CSDDD), first proposed by the European Commission in February 2022, seeks to hold large EU companies or foreign companies operating in the EU accountable for their impacts on human rights and the environment throughout their value chain.

The upcoming law, currently being negotiated by the European Parliament and the EU national governments to finalise an agreement before next spring, is causing some concerns among businesses in third countries.

Business concerns

“There does not need to be a strong EU nexus for companies to be affected,” Sc?vole de Cazotte, vice-president of international initiatives at the US Chamber Institute for Legal Reform, told EURACTIV, criticising the extraterritorial dimension of the EU draft law.

He believes the proposed legislation should be narrowed down to limit implications for US companies.

“The US and other foreign countries may retaliate or implement rules of their own,” he added, pointing to the possibility of US policymakers taking action against EU firms or reassessing equivalency agreements.

The US government already voiced concerns about the impact of the legislation back in June.

“We’re looking very carefully at the EU’s corporate sustainability directive, and we’re concerned about the impact it could have on US firms,” US Treasury Secretary Janet Yellen said back then, adding that “we’re consulting with the EU and making clear that we’re concerned about the directive’s extraterritorial scope.”

Another aspect criticised by De Cazotte is the proposal’s lack of a maximum harmonisation provision to prevent any member states from introducing more stringent due diligence rules than those provided under the EU directive.

“We agree with the goals, but the diverse way of implementation would make the environment more complex and uncertain for companies,” he said, pointing to the fear of fragmentation across the EU market.

US companies are not the only ones concerned by this.

“It will be an enormous challenge for companies like our members to meet all slightly different legislation across EU member states,” said Yukako Kinoshita, vice-chair of the Japan Business Council in Europe’s (JBCE) CSR Committee, representing Japanese companies operating in the EU.

“The harmonisation with international standards is also essential,” she added, pointing, for instance, to the voluntary UN Guiding Principles on business and human rights and OECD guidelines, which many companies have been following so far.

In its discussions on the directive, the European Parliament also looked at the issue of harmonisation, introducing in the draft legislation a single market clause to ensure member states coordinate their efforts when transposing the directive in their national law. It is unsure whether this element will remain after negotiations with member states.

NGOs’ cautious optimism

While criticised by foreign companies, the draft EU directive raises cautious optimism among civil society organisations working for the rights of people affected by corporate behaviours in third countries.

According to Giuseppe Cioffo, Corporate Regulation Officer at the social justice network CIDSE, the EU legislation could finally address “predatory behaviours carried out by a part of European or local companies within European value chains.”

Cioffo pointed at episodes such as the one involving the Brumadinho dam in Brazil, which collapsed in 2019 shortly after being certified by a German company, causing the death of 270 people.

According to activists, stakeholder engagement envisaged by the draft law is a “promising element” as the local community is key to understanding risks and possible impacts.

However, they also pointed to insufficient accompanying measures that would come with adopting the law, mostly aimed at supporting companies.

“There are limited resources and projects aimed at raising awareness and informing the local community on the law,” Cioffo said.

Moreover, NGOs are concerned that the proposal could eventually be diluted into a box-ticking exercise and limit access to justice for victims of corporate abuses.

“There are still barriers to access to justice, such as the burden of proof on the claimants,” Johannes Blankenbach, researcher at the Business and Human Rights Resource Centre, told EURACTIV, adding that “if this gets watered down [in the ongoing negotiations], the law could become meaningless.”

Liability provisions in the law – which would hold companies liable for damage if they fail to comply with due diligence obligations – worry foreign business representatives who see them as too far-reaching.

“The essence of due diligence is prevention, mitigation and remediation,” Kinoshita said, adding that while liability should be in place if these elements are not respected, it cannot be “unlimited.”

From the US, De Cazotte warned that Europe could “see a lot of litigation.”

“You haven’t seen the wave of litigation that we are experiencing in the US, and this may lead to unnecessary and speculative lawsuits, which are very damaging and costly.”

According to Cioffo, the US and other foreign companies will eventually have to adapt to the upcoming due diligence rules and other national initiatives emerging in many world regions.

In 2022, Japan issued corporate accountability guidance, while Brazil is debating a due diligence bill presented last year.

[Edited by J?nos Allenbach-Ammann/Alice Taylor]

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