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The impact of multinational corporations on the environment and human rights has been a subject of longstanding and contentious debates. Notorious and highly publicised instances such as sweatshops in Vietnam, a factory collapse in Bangladesh and oil drilling in the Amazon Rainforest, have contributed to the callous reputation of some multinational corporations. The most recent attempt to reign multinationals’ behaviour is the adoption of corporate sustainability due diligence (CSDD) laws. The popularity of CSDD laws has soared in recent years, especially in Europe. CSDD laws have been adopted in countries such as France, Germany, Switzerland and Norway. Other countries such as Canada, Netherlands, Austria, Belgium and the UK are now in the process of adopting similar laws.
The first main legal instruction imposed by CSDD laws is an obligation on large companies to identify their prospective harmful impacts on the environment and human rights. The harms that companies are asked to identify in advance are not only their own, but also those of their global subsidiaries and supply chain partners. In essence, companies are asked to think before they act; identify potential harms and prevent them in advance. The obligation to identify harms is followed by instructions to prevent prospective harms, or to the least mitigate it where prevention is not an option.
The fact that international supply chain partners are covered by these laws is crucial and novel. It implies that companies can no longer invoke ignorance as an excuse for ignoring abuses that take place as part of their wider operation. They are asked to take responsibility, address matters directly, and cut business relations if necessary.
Another novelty is related to global civil liability. Some CSDD rules - not all though - allow victims of human rights and environmental harms to sue companies for neglecting to identify and prevent their, and their global supply chain partners’ harms. In 2023, a first-ever court decision was issued based on CSDD civil liability in France. In this case, TotalEnergies - a French energy company - was (unsuccessfully) sued for failing to identify the environmental impact of its oil drilling operations in Africa.
This new form of legislation is about to receive a significant boost: despite last minute hurdles, a proposed cross-European CSDD law was approved on March 15th by the EU Council (a leaked version was recently made public). Unless the EU Parliament disagrees, this proposal will soon become binding on thousands of large-scale European businesses and their global business partners. This final version can be viewed as progressive in comparison to other CSDD laws. For example, it covers companies that employs 1000 employees and above, whereas the French equivalent law applies only to much bigger companies – 5000 employees and above. Also unlike other CSDD laws (e.g. the German Supply Chain Act), the EU version includes civil liability, providing victims of human rights and environmental harms the power to sue the companies that hurt them.
While the EU’s proposal represents a modest step forward, other developments could be far more profound. In late 2023, a new Bill was placed before the UK House of Lords. This new proposal, in its current form, intends to adopt the most radical and progressive CSDD model. Unlike the EU version, which requires companies to predict only very specific environmental harms, the UK proposed law asks companies to evaluate any adverse impact on the environment, whether resulting from the violation of environmental law, “established environmental principles”, or “any contribution to climate change contrary to the pathways for limiting global warming to the internationally established goal of 1.5°C.” This bill covers also environmental harms resulting from the breach of a novel legal term – one that was not yet recognised by UK environmental law (or international environmental law) – ecocide.
In line with the radical spirit of the UK Bill, it is proposed to impose civil liability not only on companies but also on ‘directors and persons responsible’. According to this proposal, these individuals may face fines and even imprisonment, as well as disqualification as directors, effectively prohibiting them from acting as directors or company managers in the future. This is very different from other CSDD laws, most of which do not mention similar personal sanctions, let along imprisonment.
Another interesting (and some will say unrealistic) feature of the new Bill is the question of who it will cover. While most CSDD law cover only very large companies, arguably those who can afford to comply with these far-reaching obligations, the UK Bill intends to cover companies of all sizes. If the Bill’s instructions will not change, it could well be that even a small workshop from Norfolk will be asked to conduct extensive due diligence exercises and ensure that all its supply chain partners, whether in the UK or elsewhere, are in compliance with environmental and human rights standards. One can only wonder whether this is a realistic requirement and whether very small businesses are in a position to monitor and control the act of supply chain partners from across the globe.
Will CSDD laws work? And what will be their wider impact on businesses, economies, and international relations? These laws are all recent and it is too soon to argue one way or another. Some questions nevertheless arise. To begin with, the impact on supply chain partners, including those operating in the Global South have hardly been addressed. Global South companies will have to adhere to higher environmental and human rights standards, often to a level that is not required by their own governments. We argued in a report published on this topic that without sufficient support, these requirements could add barriers on trade from the Global South. More recently the Chinese Chamber of Commerce expressed similar concerns regarding trade from China.
The impact that additional administrative requirements and the burden involved in overseeing the operation of global partners is another potential challenge. Indeed, the EU member states decided to scale back the proposed Directive for this very reason: it was initially intended to cover medium-sized companies of 500 employees and above, but due to the pressures from industries it ended up covering much larger companies with 1000 employees and above. As reviewed above, the UK Bill has taken an opposite direction and if unchanged may eventually cover also very small firms.
Finally, not many have noticed the impact that CSDD laws such as the EU Directive and the UK Bill could have. The ability for victims to sue parent companies abroad for human rights and environmental harms is less than straightforward. In some countries (e.g. USA) this possibility was largely rejected, while elsewhere (e.g. UK and Canada) courts’ decisions have made it more possible. Where including civil liability provisions, CSDD laws are expected to provide a much easier route to remedy and justice and expose companies to a much wider range of claims.
The impact of CSDD is not yet fully understood. Most of these laws are very new, and therefore the rush to adopt newer and more radical models – as proposed by the UK Bill – seems premature. The next few years will reveal how European companies fair with CSDD laws. Other states can benefit from observing this exercise.