Clifford Chance

In its recently published non-paper, the Netherlands has stressed the importance of effective and ambitious due diligence legislation at EU level and sets out its views on necessary building blocks.

Background

In Mandatory due diligence: Building blocks for effective and ambitious European due diligence legislation of 5 November 2021 the Netherlands refers to evaluations showing that business enterprises do not sufficiently comply with the expectations of existing soft law instruments, the OECD Guidelines and the UN Guiding Principles on Business and Human Rights (UNGP), to make global value chains more sustainable. The Netherlands therefore takes the position that human rights and environmental due diligence legislation – preferably at EU level – is needed. The non-paper sets out various building blocks aimed at harmonising due diligence legislation and invites the EU to come up with a proposal for mandatory human rights and environmental due diligence. These building blocks – described below - address the scope of legislation, the requirements it should impose as well as issues relating to enforcement. In this way, the Netherlands explains how the proposal can be made ambitious, effective and feasible at EU level in order to generate maximum positive impact in third countries while safeguarding a level playing field for EU companies.

The Netherlands also uses the non-paper to urge the European Commission to develop a European smart mix of policy measures, preferably by means of an EU Responsible Business Conduct Action Plan, in line with broader EU environmental policy, such as the EU Green Deal. According to the Netherlands, this will be instrumental in creating coherence and consistency in EU policies with regard to global value chain risks. It suggests that the new EU due diligence legislation would preferably be incorporated in such an Action Plan.

The building blocks

Scope

The Netherlands advocates that (i) large companies and listed small and medium-sized enterprises in line with the definitions set out in the EU Accounting Directive (2013/34/EU) and (ii) medium-sized companies in objectively identified high risk sectors should fall within the scope of the new EU due diligence legislation. However, with respect to the latter category of companies the new legislation should be applied proportionally to their size, e.g. imposing less onerous requirements.

In order to promote a level playing field in the EU, the Netherlands suggests that, besides companies domiciled in the EU, also companies domiciled outside the EU that sell goods or services on the EU market should fall under the scope of the new EU due diligence legislation, provided that the European Commission can demonstrate that EU Member States will be able to enforce such an obligation, both practically and legally.

In light of the globally accepted soft law instruments for responsible business conduct where human rights are concerned (the OECD Guidelines and the UNGP) and the aim for companies to positively contribute to economic, environmental and social progress worldwide, the Netherlands favours the introduction of a statutory, general duty of care for all companies as a safety net provision. Such a statutory, general duty of care would stress the duty of every individual company to respect human rights and the environment, even those that do not fall within the scope of the new EU due diligence legislation.

The requirements

As far as the new EU due diligence requirements are concerned, the Netherlands non-paper proposes that these incorporate the six step framework of the due diligence process set out in the UNGP and OECD Guidelines. To promote legal certainty, it is highly recommended that the norms that play a crucial role in these due diligence requirements will become as specific as possible. As noted, in the interests of proportionality, the Netherlands suggests that the requirements for medium-sized companies in high risk sectors should be less detailed. The non-paper emphasises that it is important that the new EU due diligence legislation and other existing and nascent EU legislative instruments are aligned in order to avoid duplication of obligations or legal uncertainty for companies.

Enforcement

The Netherlands is of the opinion that administrative enforcement of the EU due diligence legislation is the most suitable, focusing on a wide range of options for intervention. The Netherlands supports an approach that will primarily encourage companies to continuously improve their due diligence ("positive enforcement"). In the event of violations the regulatory body would, however, be able to impose sanctions. In order to safeguard the level playing field within the EU, the non-paper emphasises that it is crucial that the due diligence requirements are enforced uniformly in all Member States. Although national institutions are better equipped to oversee the context in which individual companies operate, there should be measures to ensure uniformity of enforcement, including detailed guidelines for the national regulatory bodies, and a peer review mechanism. Given these various factors, the Netherlands does not yet take a position on the optimal model but instead invites the European Commission to consider whether the enforcement should take place at EU level or through the designation of national competent authorities.

As for the general duty of care proposed, the Netherlands considers it should be left to civil courts within Member States to determine whether that company has violated this statutory duty in the specific circumstances of a case and, if so whether damages should be awarded. This would mean that under Dutch law any interested party could file a claim against the company for violation of the duty of care.

Looking ahead

With these building blocks, the Netherlands is increasing its pressure on the European Commission to push forward its proposal for mandatory human rights and environmental due diligence. The Commission is expected to publish its draft proposal in the first half of 2022. The Netherlands prefers a European approach, but should the European Commission's proposal not get off the ground or in case of another delay, these building blocks will be helpful in developing national due diligence legislation. One proposal has already been presented to the Dutch legislature in March 2021 in the form of the Responsible and Sustainable International Business Conduct Bill. If adopted, all Dutch companies engaged in foreign trade and large foreign companies conducting activities in the Netherlands or selling products on the Dutch market will have a statutory duty of care. The Bill requires the company to take all measures that can reasonably be requested from it to prevent, mitigate or reverse and, where necessary, remedy such impacts, if it knows or reasonably can suspect that its activities and those throughout the production chain can have negative impacts on human rights, labour rights or environment outside the Netherlands.