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Does EU’s Mandatory Due Diligence Law Cover Just 1% of Businesses?

As a key figure behind the European Parliament’s push for mandatory corporate sustainability due-diligence legislation, Dutch politician Lara Wolters believes the time of “I didn’t know” is over.

A member of the European Parliament since 2019, Wolters drafted the report that served as the basis for the European Commission’s long-awaited—if much delayed—draft directive on corporate due diligence and corporate accountability in February. If adopted, the law would require EU and non-EU companies of a certain size and net turnover to take responsibility for human rights and environmental abuses that may occur in their supply chains, administrative and civil liabilities included.

“I think we’ve always needed a law like this,” Wolters told Sourcing Journal following an event by Cornell ILR School’s The New Conversations Project last week. “I think what’s special about this moment is that there’s political momentum to get this done.” Though reports of Uyghur forced labor in China’s Xinjiang region are certainly part of this, there have also been a number of “flagrant and very tragic examples” of corporate abuse that require attention, she said.

Wolters credits the work of human-rights and environmental campaigners for pushing the conversation to its tipping point. “I think it’s a bit like throwing stones into a river,” she said. “You won’t see the stones at first but at some point, you’ve created a bridge. And I think that we’re at a point now where civil society and NGOs have done a lot of that work for us to be able to walk over the bridge.”

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“I think now the EU is trying to very concretely take steps to get to climate neutrality, to get to laws about sustainability and is trying to get more active on human rights in trade agreements—or at least members of the European Parliament are becoming much more vocal on these,” Wolters added. “And I think that is partly due to the information that we have access to. And I think now we live in a time where, through social media and news reporting, it’s much harder to look away from the discontent [created by] our Western consumption patterns.”

Having one single rule for the entire 27-member bloc, rather than a patchwork of national regimes, is vital to ensuring a level playing field for both companies that want to do the right thing and those that are lagging behind in both desire and ambition, Wolters said.

“Those companies that want to take responsibility can only do that…as long as they’re not undercut from all sides by companies that aren’t taking their responsibility,” she said. “[We need to] make sure that there’s no business model for cutting corners.”

While private regulation, industry initiatives and certification mechanisms have their role to play, voluntary schemes have so far proven unsuccessful, Wolters said. What will prove more effective is a single, harmonized law that provides an unblinkered indication of what corporate expectations are across all member states, so that due diligence can emerge from the realm of “glossy CSR reporting” to become something with bite.

The proposal has faced public and private-sector opposition, though resistance has been less about whether such a law should exist than about how sharp its teeth should be. Wolters worries, however, that lobbying pressure on the European Commission could create a law that fails to generate a “true” impact. An overreliance or overemphasis on contractual clauses or financial carveouts, for instance, risks turning due diligence into a “compliance exercise” rather than the “proactive, ongoing risk-based process that we need,” she said.

“Ultimately what would worry me is that, at the end of the day, this becomes a paper tiger,” Wolters said. “I think it’s very important for us now to make a blueprint that functions, and that has an impact. I think the worst we could do is make a law that essentially takes us a step back.”

“I think what we need to do is take the good that is out there at the moment in terms of best practices, in terms of the application of the [Organisation for Economic Co-operation and Development] guidelines, and turn those into law,” she added. “What we need to not do is make this sort of lowest common denominator that takes us back in time.”

But the draft directive, even in its current form, has attracted criticism, among them a failure to center victims of corporate neglect or malfeasance in discussions about grievance mechanisms and the ability to gain restitution. As it stands, the law’s thresholds would apply to an estimated 13,000 EU and 4,000 non-EU companies, or roughly 1 percent of registered businesses operating in the bloc. Small and medium enterprises are not directly in the scope of this proposal, which critics say is an oversight.

Wolters said she understands the position of the directive’s detractors, and she’s working to incorporate some of these concerns. The 1 percent figure, however, “isn’t quite true.”

“Yes, those might be the companies that directly fall under this duty, but indirectly, there’ll be a cascading effect throughout the supply chain,” Wolters said. “That will mean that many more companies, including via these contractual clauses, will need to be performing due diligence and assuring their partners up and down the supply chains that they are also taking their responsibilities.”

Aside from that, the law will be necessary for “furthering the cultural change” that is percolating, Wolters said. This, she anticipates, will encourage companies to be early adopters even though they’re not liable yet.

Now that the proposal is out in the world, Wolters plans to begin the process of buttoning it up in September and negotiating with member states by the middle of next year. The cutoff for negotiations is May 2024, but she hopes the bloc will be able to come to an accord before then. Following that, there will be a two-year period for member states to implement or translate the directive into law.

The due-diligence directive doesn’t explicitly address forced labor; earlier this month, the European Parliament passed a resolution that paints “in very broad brushstrokes” what a forced labor ban would look like. Any such move would operate in parallel with due diligence, Wolters said, adding that she thinks they are “complementary” in nature.

“Due diligence is very much behavioral rules that are horizontal, so that would encompass all sectors, throughout their entire value chain,” she said. “And I think the forced labor ban is something that is more targeted, that will be a trade instrument, something that very practically happens via checks at the borders and the freezing of goods moving into the EU and so on. Due diligence is much broader than that: it’s about the environment, it’s about human rights, it’s about governance and corruption. And it encompasses all sectors and entire value chains.”

Wolters said the law won’t solve all problems, but it’s a first step and a “piece of the puzzle” that will at least keep companies “on their toes.”

“I hope that we can do a good job and that we can make a blueprint that is fit for purpose, that both works for companies but also has a real impact on the ground,” she said. “And if we can do that, then I hope that this is a model that can be adopted by other powerful continents in the world and, in that way, have the impact globally that we’re looking for.”

“European companies have important value chains and large contracts, the leverage of which they can use,” Wolters added. “But, of course, if the U.S. was to follow suit, then all the more supply chains and contracts would be used in leverage—and that would be a great result.”