FEDIl – The voice of Luxembourg Industry

Although the entity welcomes the idea of a harmonised legal framework, it criticises the proposal as drafted, and argues it will have the opposite of its intended effect.

The entity states that it welcomes ‘the initiative of the Commission to legislate at EU level for the purpose of establishing a harmonised legal framework. However, the Proposal raises significant concerns, especially under the current conjuncture’. It, however, argues that, in the current context, ‘production as well as supply and logistics, have become fragile and costly and we therefore envisage that the implementation of the Directive, should it be adopted as proposed, would cause (or contribute to cause) the following consequences: difficulties to find raw materials, especially those mostly or exclusively located in 3rd countries,… inconsistent application between and within EU Member States (hereafter “MS”) and absence of sufficient level playing field between EU companies and with regard to non-EU companies, due to unclarity and inconsistency of many key provisions and unjustified discrepancies between rules applicable to EU and non-EU companies; additional administrative, compliance and staff related costs for companies, … real negative impact on companies’ competitiveness, … high compliance costs and negative impact on companies’ competitiveness are expected to have important social costs, such as unemployment in the EU; and …, it cannot be completely excluded that in-scope companies decide to relocate their business outside of the EU and stop providing goods and services in the EU’.

The entity doesn't consider that a legal framework on supply chains is needed and advocates for asking companies to follow existing guidelines and standards instead.

The entity states that in the current (2021) context: 'introducing a new layer of legislation in the near future could make it harder for companies to effectively secure, redesign or be able to rebuild essential supply chains in the recovery phase.' Then it makes a number of recommendations: 'for a workable and balanced EU framework'.

The entity welcomes exclusion of SMEs, and further argues for limiting burdens on them even as indirect suppliers. It also advocates for targeted due diligence based on relevant adverse impacts depending on products

The entity states that ‘a more targeted due diligence regime should be introduced, based on the most relevant adverse impacts, in respect of certain products and not any activity of the in-scope companies without any further distinction whatsoever as regards the actual risks for human rights and the environment involved. … The exclusion of small and medium-sized enterprises … is welcome. However, they will be indirectly affected as suppliers in the supply chain and will face challenges and contractual constraints. This will imply costs of implementation and unnecessary bureaucracy and burdens for SMEs, which should be avoided or, at least, mitigated with appropriate accompanying measures’.

The Company considers that both micro and SMEs should be excluded, with some exceptions, and these be subject to lighter requirements, including reporting and receive support.

The entity points out that ‘On the exclusion of SMEs or micro enterprises: we wonder if it be wise to exclude a company on the sole basis of its size. Very small companies can potentially have bigger impacts on e.g. the environment than bigger ones. It could be their interest not to be excluded as, eventually, they would have to be in line with the requirements that lie on bigger companies, to be considered as a “sustainable” business partner. However, a common dynamic is efficient only if we have a risk-based approach, based on the activity and on the size of a company. We strongly call for support to smaller companies that want to follow the due diligence process, more awareness raising and accompaniment.’ It does not indicate whether companies of all sectors should be covered.

The entity opposes the current design of enforcement mechanisms, viewing them as intrusive and disproportionate.

The entity states that ‘Sanctions and enforcement are not proportionate and lack guarantees. (A) The proposed provisions on public enforcement are too intrusive, disproportionate and not appropriately counter-balanced with due process and appeal rights. … (B) The concept of “public support” is vague, it could therefore lead to legal uncertainty and to fragmentation of rules within the single market. Moreover, this provision could violate fundamental principles of law insofar as it might lead to double punishment for the same facts, it does not contain any time limitation, it does not refer to the severity or nature of the breach. This provision should thus be redefined considering the above considerations or deleted. (C) Public enforcement powers should be harmonised across MS to avoid fragmentation of rules and to ensure a level playing field within the EU. … (D) Furthermore, it is necessary that the Directive ensure coordination among the different MS supervisory authorities, … To this end, the Directive could provide for the establishment of a central authority overseeing its implementation across MS. (E) Lastly, the competence granted to national supervisory authorities concerning substantiated concerns appear unlimited as they refer to any breach of the Directive’s obligations. In addition, any stakeholder could bring a case before a supervisory authority’.

The entity does not take position in relation to the different options presented by the consultation.

In response to question 19, it does not take a position in relation to the options proposed by the consultation and instead states that: '‘The nature and scope of enforcement mechanisms and sanctions will depend on the exact content and scope of the regulation/obligation. The underlying philosophy of future action on due diligence should be to push companies towards sustainability in their operations within supply chains, not to act as punishment.’ Then it presents a number of considerations that it considers to be essential when drafting the enforcement mechanism.

The entity opposes inclusion of directors' duties in the Directive

It indicates that ‘these provisions 25 and 26 are not clear and impose overarching general policy objectives upon directors, without however providing them with the necessary tools and guidance to this effect. We are concerned that they will have an arbitrary and unjustified interference over the management of companies and overly complexify the already difficult exercise of decision-making of directors. In addition, the management bodies of EU companies integrate already into their decision-making processes all relevant stakeholders’ interests, such that article 25 does not have any added value in this respect. The Proposal simply exposes directors to liability vis-à-vis third parties for their management decisions, without taking into consideration that balancing conflicting interests is an extremely difficult task, the proposed rules contribute to creating risk aversion, slowing down decision-taking processes, increasing legal, administrative and insurance costs and impairing recruitment of skilled individuals. We therefore recommend deletion of article 25 and revision of article 26'.

The entity strongly disagrees with a legal requirement for directors to establish procedures to ensure risks and impacts on stakeholders are identified, prevented and addressed, and to manage risks for the Company in relation to stakeholders and their interests.

In response to question 7, with which it strongly disagrees, it states that 'Legally imposed requirements raise several questions: Which methodology, procedures and targets would be appropriate for companies of different sizes and sectors, or of different board structures and activities? A one-size-fits-all approach would considerably hamper and slow down decision-making processes in companies'. In response to question 6 on legally requiring directors to manage risks in relation to stakeholders, the entity, among other considerations, makes the following: 'Legal requirements would be too precise and strict. This would not allow boards to take the necessary decisions to adapt to their specific situation, activity, and as regards specific stakeholders. Directors’ duties should not be reduced to a ticking box formula, but rather should they be based on universal principles. This would allow for the necessary flexibility.'

The entity does not refer explicitly to remedying human rights harms it has caused or contributed to. Instead, it proposes a narrow liability framework, where civil liability would only apply if the company directly caused the harm and failed to carry out due diligence. It rejects vicarious liability for harms caused by business partners and supports a safe harbour approach. No reference is made to compensation or other forms of remedy, including in cases of contribution to harm.

In response to question 19a, the entity refers to civil liability, indicating that: ‘Civil liability should only apply if (i) due diligence has not been carried out and (ii) usual rules of civil liability are satisfied (damages occurred and a causal link between the two is established). There should be no vicarious liability whereby companies become responsible for actions of other autonomous entities. Liability should depend on different levels of involvement of the company in human rights adverse impacts (caused, contributed to and directly linked)'. In response to question 15, the company provides some considerations on 'accountability and remedy': ‘It is inappropriate to hold European companies accountable for damages when it is impossible to control all the components of the value chain and many other actors involved. … Need for a safe harbour: Companies should not be held liable for harm in their supply chain when they have not directly caused it, could not reasonably be aware of it or when they took the appropriate due diligence measures to prevent it.’

Although the entity does not reject the mechanism, it raises concerns about costs and potential abuse

The entity states that ‘Only directly affected parties or entities with legitimate interest should have the right to file substantiated complaints, which should only refer to breaches of companies’ due diligence obligations’. It points out that MS States will have to ensure that companies establish a process for submission of complaints by affected persons, trade unions or workers’ representatives and civil society organisations in relation to companies concerns regarding those potential or actual adverse impacts, including in the company’s value chain (Article 9). Cost of implementation of the process is expected to be high, given the rights granted to complainants. Additionally, the risk of abuse of the complaint’s mechanism should be duly considered as well as procedural safeguards (confidentiality of information and documents made available to parties, modalities, etc)’.

Although the entity does not directly address grievance mechanisms, it disagrees with a legal requirement to establish consultation channels for engaging with stakeholders as part of the due diligence duty.

The entity does not respond in relation to whether grievance mechanisms as part of due diligence should be promoted at the EU level (question 20c). However, it disagrees with a legal requirement to establish consultation channels as part of due diligence: ‘The company knows best which impact its activities have on stakeholders and inversely. The company should have the right to determine relevant stakeholders depending on its specificities. The company should be allowed to determine the best type of measures and information and consultation mechanisms.’

The entity opposes the civili liability regime as currently proposed

The entity states that ‘As the Proposal currently stands, it is particularly concerning that the possibility that companies face liability lawsuits in those cases where they could only have identified the potential for an adverse impact but could not have prevented the adverse impact or the damages resulting from it. Furthermore, it is equally worrying that companies can be liable for unlawful conducts of non -controlled subsidiaries or entities on which they have no influence and therefore upon which it is extremely difficult (if not impossible) to impose their internal codes of conduct (or in general, the measures that they are required to enforce according to the Directive). The legal liability regime relating to due diligence as introduced by the Proposal should take stock of such reality. This provision is unclear, and potentially breaches the proportionality principle, exposing companies to unjustified excessive litigation. We therefore call upon the co-legislators to clarify the civil liability provision and to redraft it as to correct the above shortcomings’.

The entity doesn't consider this a suitable option as an enforcement mechanism, and limits the cases where this enforcement mechanism can be applied.

The entity states that: 'civil liability should only apply if (i) due diligence has not been carried out and (ii) usual rules of civil liability are satisfied. There should be no vicarious liability whereby companies become responsible for actions of other autonomous entities. Liability should depend on different levels of involvement of the company in human rights adverse impacts (caused, contributed to, and directly linked).'

The entity opposes full value chain coverage and advotes restriction to first-tier suppliers

The entity states that ‘In practice, it is very challenging, if not impossible, for companies to control their whole value chain … The proposed obligations are therefore not reasonable nor workable and companies should not be held responsible for events that are out of their control. Considering the far-reaching obligations (and associated liability) imposed upon companies, it should be expected that their operations will be impacted, leading to serious impairment of their competitiveness. For example, EU companies will have to withdraw from third-country “problematic” jurisdictions where it is already proven impossible - for various political and social reasons - to impose EU protection standards. Due diligence obligations should thus be feasible and workable and should only cover the first-tier direct supplier(s) of in-scope companies’.

The entity does not consider that a legal framework on due diligence is needed. Although it does not clarify to what extent it agrees with the due diligence duty definition proposed, it has some concerns and asks for clarifications. It advocates for reducing scope to parties with which companies have direct contracts upstream.

The entity does not consider that a legal framework on due diligence is needed (question 2) and does not declare to what extent it agrees with the due diligence duty definition (question 14). It points out that: ‘due diligence should be risk-based, proportionate and context specific. It should set priorities to prevent and mitigate most severe human rights impacts. There is need for clear explanation of “adequate processes” and “reasonable effort” as these can be subject to multiple interpretations. … Concerning the definition of “supply chain”, we believe it is too broad since it potentially considers every business relationship, both upstream and/or downstream and at all tiers of suppliers. In practice, it is impossible to manage all the risks related to a company’s “business relationships” along the whole supply chain. Therefore, it is urgent that the scope of “business relationships” within the supply chain will be clearly defined. We strongly recommend covering only parties that the company is directly connected to through contractual relationships.’ It does not refer to remedy.

The entity supports contractual clauses to facilitate compliance with Directive obligations

The entity states that 'Article 12 states that to provide support to companies to facilitate their compliance with certain obligations of the Directive, the Commission will have to adopt guidance about voluntary model contract clauses. We welcome this provision. However, we consider that model contractual clauses should be developed in collaboration with businesses, including with SMEs, which will be the parties affected in the implementation of the Directive. We also recommend that such clauses become available as soon as possible'.

The entity strongly disagrees with a legal requirement of stakeholder identification.

The entity strongly disagrees with question 6 about a requirement (for directors) to identify stakeholders and their interests. It states that ‘Where stakeholder interests are material, companies automatically consider them. … Legal requirements would be too precise and strict. This would not allow boards to take the necessary decisions to adapt to their specific situation, activity, and as regards specific stakeholders. … Companies and their boards need flexibility to balance individual stakeholders’ interests which can sometimes be incompatible depending on each other (e.g. restructuring, recovery, insolvency, merger or division). Only the company’s board can correctly identify trade-offs and balance the different interests. It is technically impossible for companies to have an exhaustive and still correct knowledge of all stakeholders’ interests. The materiality of each impact for the long-term success and resilience of the company may vary accordingly’.

The Company disagrees to some extent with this requirement, which is explicitly and directly asked in the consultation.

This is directly asked in the consultation questionnaire (question 20a). The Company disagrees to some extent and argues that: ‘‘The company knows best which impact its activities have on stakeholders and inversely. The company should have the right to determine relevant stakeholders depending on its specificities. The company should be allowed to determine the best type of measures and information and consultation mechanisms."

Although it does not oppose to stakeholder dialogue, the entity seeks to narrow the definition of stakeholder, narrowing down the obligation of dialogue

The entity states that the definition of stakeholder is 'too broad, considering that obligations on companies concerning “stakeholders” are many and significant. For example, stakeholders need to be consulted by the companies when assessing actual and potential adverse impact (Article 6), they can submit complaints to the companies (Article 9) and provide input regarding the companies’ due diligence policies (Article 26), ....It is therefore recommended that alternative definitions of stakeholder be considered. For example, a stakeholder could be defined as a person who has specific attributes which pertain to them or by reason of circumstances that differentiate them from all other persons and who has a specific and actual (or soon to occur) injury that is causally connected to the conduct complained'.

The entity opposes requiring directors to manage long-term human rights risks

The entity states that 'We are concerned that they on directors' duties will have an arbitrary and unjustified interference over the management of companies and overly complexify the already difficult exercise of decision-making of directors. In addition, the management bodies of EU companies integrate already into their decision-making processes all relevant stakeholders’ interests, such that article 25 does not have any added value in this respect. The Proposal simply exposes directors to liability vis-à-vis third parties for their management decisions, without taking into consideration that balancing conflicting interests is an extremely difficult task, the proposed rules contribute to creating risk aversion, slowing down decision-taking processes, increasing legal, administrative and insurance costs and impairing recruitment of skilled individuals. We therefore recommend deletion of article 25 ...'.

The entity strongly disagrees with a legal requirement for directors to manage the risks of the company in relation to stakeholders and their interests.

The entity strongly disagrees with question 6 about a requirement (for directors) of management on the risks for the company in relation to stakeholders and their interests. It states that: "Where stakeholder interests are material, companies automatically consider them. … Legal requirements would be too precise and strict. This would not allow boards to take the necessary decisions to adapt to their specific situation, activity, and as regards specific stakeholders. Directors’ duties should not be reduced to a ticking box formula, but rather should they be based on universal principles. This would allow for the necessary flexibility. Companies and their boards need flexibility to balance individual stakeholders’ interests which can sometimes be incompatible depending on each other (e.g. restructuring, recovery, insolvency, merger or division). Only the company’s board can correctly identify trade-offs and balance the different interests. It is technically impossible for companies to have an exhaustive and still correct knowledge of all stakeholders’ interests. The materiality of each impact for the long-term success and resilience of the company may vary accordingly."