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ClientEarth Communications

10th May 2021

Trade
Rule of law

How will the EU’s new due diligence laws help tackle its global environmental footprint?

The EU has a stark global environmental footprint.

It’s responsible for over 10% of deforestation linked to global consumption through import of commodities like palm oil, coffee and cocoa. Emissions from the land use sector – most of which are caused by deforestation – are second only to fossil fuels as a major cause of climate change.

This problem isn’t just limited to deforestation. Unsustainable business activities by EU companies in sectors from seafood to plastic manufacturing pose risks to the environment at home and abroad.

For the EU to live up to its ambitions for environmental leadership, as set out in the European Green Deal and through its global climate commitments, it must address the sustainability of EU business practices.

New measures to reduce the EU’s environmental footprint are underway, which reflects the urgent need for stronger laws to ensure more sustainable global supply chains.

Over the past six months the European Parliament adopted two different reports calling on the European Commission to develop new laws to address this. In June, the Commission will publish two legislative proposals on the topics of these reports.

In this piece, we explain the recommendations of these two reports, and why it is crucial that these recommendations become enshrined in law.

What do the two reports encompass?

The first gives advice to the Commission for a new legal framework to stop and reverse EU-driven global deforestation, ecosystem conversion and associated human rights impacts.

The second gives recommendations for corporate governance – laying out obligations for companies, regardless of the sector, to identify, assess and mitigate adverse environmental, human rights, and governance impacts through their business activities.

These two reports are complementary. Together, they offer comprehensive recommendations for what needs to be fixed to ensure the EU is not contributing to environmental destruction or human rights violations.

In a nutshell, what does the deforestation report entail?

The deforestation report recommends that companies can only put forest and ecosystem-risk commodities, and products made from them, on the EU market if there is no more than a negligible risk that they:

  • originate from land obtained via the conversion of natural forests or other natural ecosystems;
  • originate from natural forests and natural ecosystems undergoing degradation; or
  • are produced in, or are linked to, violation of human rights.

Companies trading in products most associated with forest and ecosystem risks – including palm oil, soy, meat, leather, cocoa and coffee products, would have to complete a due diligence process to ensure that their products are not linked to these impacts.

With this process, they would need to identify, assess and mitigate any risk that their products do not meet specific sustainability criteria, before placing them on the market.

“EU demand is currently fuelling huge amounts of environmental destruction and human rights impacts linked to the high-risk commodities that end up in our supermarkets,” said ClientEarth lawyer Michael Rice.

“The fact that there is no EU law to address these impacts needs to be urgently remedied.”

The report recommends establishing enforcement bodies in EU member states to monitor and enforce compliance.  This way, victims of damage to forests and other natural ecosystems or human rights abuses that are linked to EU operators would have rights to take legal action.

In a nutshell, what does the corporate governance report say?

The corporate governance report recommends that companies must take steps to prevent adverse impacts on human rights, the environment and good governance through all their business activities. They must also address any adverse impacts when they occur.

This proposed legal framework would apply to large companies across all sectors, to all publicly listed small and medium sized companies, and high-risk small and medium-sized companies. It would also apply to companies outside of the EU selling goods within the EU.

In addition, the report recommends that member states build-in a legal system to hold companies accountable in case of human rights violations or environmental damage.

ClientEarth Lawyer Clotilde Henriot said: “Companies should be ensuring that their business activities are not linked to adverse environmental impacts at home or abroad, but they are not currently being compelled to do so.

“Introducing binding requirements for corporate governance across the entire length of a company’s value chain is the key way to bring about appropriate action.”

What are the similarities between these reports?

Both reports seek to make EU supply chains more sustainable, and recommend implementing due diligence processes as a tool to make sure companies identify and react to issues as they arise.

They also equally highlight the need for more transparency and reporting from companies. And, both reports stress the need for ambitious enforcement.

What are the major differences?

While the two reports recommend the adoption of a due diligence tool, the way each process will work differs significantly.

The deforestation report recommends a product-specific approach to due diligence. This would not apply to all operations of a company, but is instead aimed at a limited scope of high-risk goods.

And, it requires companies to avoid placing those goods on the market when they are linked to deforestation and associated human rights violations.

The corporate governance report, on the other hand, is targeting all sectors to prevent adverse environmental and human rights impacts at every step in a company’s business activities, and to mitigate adverse impacts when they are identified.

Why are they both important?

The corporate governance report proposes a horizontal approach that applies to all sectors. It provides a wide range of adverse impacts and sets a common approach for the private sector at large.

On the other hand, the deforestation report sets out specific rules and requirements to make sure risks and impacts in high-risk commodities are properly addressed. One complements the other.

What comes next?

In June, the European Commission is expected to table proposals for both a horizontal due diligence law and a law aimed at minimising the risk of deforestation and forest degradation for products placed on the EU market.

There have been questions about whether a product-based approach as proposed in the deforestation report is necessary, or whether the corporate governance framework will do the job on its own.

We believe it is essential that the EU establish both the horizontal sustainable corporate governance framework and specific due diligence requirements for deforestation risks associated with products placed on the EU market.

The legislative proposals currently under development should incorporate the distinct recommendations made by the European Parliament on each matter.

This is also in line with the European Green Deal, which promised regulation to ‘promote’ deforestation-free supply chains, and highlighted that sustainability should be further embedded into the corporate governance framework.

Clotilde said:

“Together, these processes can ensure future sustainability risks are mitigated, while damaging products aren’t able to make it onto our shelves.”

For a more comprehensive explanation of these two European Parliament reports, their differences, and how they are complementary, see our detailed briefing here.

Image credit: Diego Catto / Unsplash

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