The context
Due diligence (know and show) obligations are being added to laws ranging from non-financial reporting to batteries, deforestation and green claims, ushering in a new era of corporate responsibility to respect human rights and environmental standards. While there has been considerable debate about the challenges companies face in tracing their product value chains and the risks embedded in them, there has been comparatively little focus on the transparency requirements, especially as far as obligations to inform, consult and engage with stakeholders. This blog highlights what some recent EU laws expect companies to discuss, disclose and report.
Directive (EU) 2022/2464 as regards corporate sustainability reporting (CSRD)
The CSRD is by far the stakeholder engagement. Companies are expected to describe the process used to identify and assess material impacts, risks and opportunities including any consultation with affected stakeholders and external experts, with respect to a wide range of environmental and human rights issues. If a company has not yet assessed the risks and adopted policies and procedures to manage them, it must explain why it believes the issue is not material or describe a plan to engage with the issue, including:
- Environmental issues such as pollution, water and marine resources, biodiversity, shared biological resources and ecosystems
- Resource use and circular economy
- The impacts of decarbonisation on its own workforce, including job loss/creation, training and up/reskilling, gender, equity, and health and safety
- Labour relations issues such as freedom of association, works councils, the information, consultation and participation rights of workers, collective bargaining (including the percentage of the company’s own workforce covered by collective agreements)
- Value chain workers
- Affected communities
- Obtaining the free, prior and informed consent of indigenous peoples when acquiring land
- Consumers and end-users
The obligation to disclose the processes for engaging with a company’s own workforce and workers’ representatives about impacts includes the following considerations:
- The nature, level, and frequency of the engagement
- How the engagement factors into decision-making and how the workforce is informed of the results
- The financial or human resources allocated to engagement
Companies are expected to disclose details of the processes available to remediate negative impacts and the communication channels for their own workers to raise concerns, including the functioning of grievance mechanisms, hotlines, trade unions, works councils, other dialogue processes and compliance audits.
Directive (EU) on Corporate Sustainability Due Diligence (CS3D)
Companies are expected to consult with stakeholders, including employees and trade unions, throughout the due diligence process, specifically when:
- Identifying, assessing and prioritising human rights and environmental risks
- Developing preventive and corrective action plans
- Taking appropriate measures to remediate adverse impacts
- Deciding whether to suspend or terminate a business relationship
- Developing quantitative and qualitative indicators for monitoring compliance
Companies may work with industry and multistakeholder initiatives to accomplish the necessary stakeholder engagement, and where effective stakeholder engagement is not reasonably possible, they can consult with experts. These options do not however, relieve a company of the obligation to consult with their own employees and employee representatives. Employee rights to consultation under EU and national law and collective agreements, still apply. Note that “employees” includes temporary agency and non-standard forms of employment that meet the criteria of employment set by the Court of Justice.
Companies must provide relevant and comprehensive information to stakeholders and consult effectively and transparently at the appropriate level, including project or site level, at the appropriate intervals. Stakeholders can make reasonable requests for additional information and demand a written justification if the company refuses.
Regulation (EU) 2023/1115 on deforestation and forest degradation (EUDR)
The EUDR requires that operators conduct a risk assessment that includes:
- The presence of indigenous peoples
- The consultation and cooperation in good faith with indigenous peoples
- The existence of duly reasoned claims by indigenous peoples regarding the use or ownership of the area producing the relevant commodity
Operators must also publish an annual report containing the conclusions of the risk assessment and the information and evidence used as well as the process of consultation of indigenous peoples, local communities, other customary tenure rights holders or civil society organisations present in the production area.
Regulation (EU) 2023/1542 concerning batteries and waste batteries
The EU Batteries Regulation requires that operators establish a risk-based battery due diligence policy based on internationally recognised due diligence standards and principles such as the United Nations Guiding Principles on Business and Human Rights, the ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy, the OECD Guidelines for Multinational Enterprises and the OECD Due Diligence Guidance for Responsible Business Conduct. All these standards include obligations to consult affected stakeholders, including workers and their representatives.
The Batteries Regulation goes on to explain that risk-based company due diligence involves measures to identify, prevent, mitigate and otherwise address adverse impacts associated with their activities or sourcing decisions, and includes informed, effective and meaningful consultations with affected communities. Consultation with suppliers, affected stakeholders, government authorities, local and international NGOs, and local communities is also required when an economic operator undertakes risk mitigation efforts.
What does this all mean?
In summary, these due diligence laws enable affected stakeholders, including workers and their representatives, civil society organisations and representatives of indigenous people, to demand:
- Information about how a company identifies material risks, impacts and opportunities
- Explanations for risks, impacts and opportunities that a company omitted or decided not to list as material
- Consultation on the identified risks, impacts and opportunities and their actual or potential adverse impacts
- Consultation on measures to prevent or remediate adverse impacts
- Consultation on decisions to suspend or terminate business relationships for non-compliance with human rights or environmental standards
- Information and consultation regarding notifications or complaints
These due diligence laws generally impose an obligation of means, rather than an obligation of results. In other words, a company must make a reasonable effort to achieve the desired result by following certain procedural steps but is not bound by a contractual requirement to deliver a specific outcome. That nonetheless provides trade unions, NGOs, community organisations and representatives of indigenous people new opportunities to bring civil lawsuits for alleged failure to perform due diligence and to prevent or remediate adverse impacts. We are already seeing examples of this and are likely to see many more if companies don’t adapt to the new era of mandatory human rights and environmental due diligence.
This content has been prepared by Equiception for informational purposes only and does not constitute legal advice. Readers should contact a legal or professional advisor before taking decisions on any of the matters discussed herein. We make every effort to ensure that the content is accurate and up to date, but situations evolve and the content may need to be updated accordingly. Equiception cannot be held liable for any errors or omissions it might contain.