New regulations on human rights, the environment, and forced labor

It's been another week filled with high emotions in the international human rights and business spheres. After numerous delays and setbacks, with several weeks making my LinkedIn feed resemble a true soap opera, the European Parliament finally approved the Corporate Sustainability Due Diligence Directive yesterday, addressing human rights and environmental sustainability. Additionally, this Tuesday, April 23, saw the approval of regulations prohibiting the import, export, or marketing to the European Union of any product produced, wholly or partially, with forced labor. What implications does this hold for exporting companies (or chains of exporters) in the region? Let's break it down step by step.

First and foremost, it's important to clarify that had the Due Diligence Directive not been approved, exporting companies would NOT have been exempt from the market obligation to demonstrate their management of respect for human rights. On the contrary, they would have been subject to 27 different legislations on the matter, as each country has been approving legislation related to human rights and supply chains. Germany, France, Switzerland, Holland, and Norway, among others, have already done so. The approval of this regulation, once finalized, will provide legal certainty and create a level playing field for product exports across the Union.

Although today's vote in the European Parliament marked a crucial step, there are still upcoming votes in the Committee of Permanent Representatives of the Member States' Governments on May 15, and finally, the Competitiveness Council or COMPET on May 23. However, it is hoped that there won't be major stumbling blocks in these final stages. From there, the regulation will come into force in two years.

What are the implications for companies in the region? The Directive will directly impact European companies with over 1,000 employees or annual global turnovers exceeding €450 million, in a phased manner. Similarly, it will apply to foreign companies that generated over €450 million in the EU last year, with rules also extending to economic groups, parent companies, subsidiaries, and franchises.

However, companies falling under the Directive's scope should conduct human rights and environmental impact assessments of their operations, as well as those of their business partners or value chains, particularly in areas where impacts are most likely to occur. Likewise, the operations of subsidiaries of companies falling under the Directive's scope, along with those of their business partners, should undergo assessment. Companies should take measures such as engaging with their suppliers and business partners regarding prevention and mitigation of adverse impacts, including the inclusion of contractual clauses on respect for human rights with prevention plans by the supplier, and clauses in the supplier's contracts with its own suppliers. Finally, provisions are made for companies to take action when they identify impacts on their business partners, which may even lead to suspension, termination, or non-renewal of contracts.

As evident, companies selling goods and services to Europe, purchased by companies falling within the Directive's applicability or second-linked to it, will be required by their buyers to demonstrate adequate risk management of adverse impacts. This requirement may apply even if European companies themselves do not fall within the Directive's scope, as many other companies are already demanding this, and will likely do so more rigorously now, as a standard market practice.

Moreover, the Regulation on the Prohibition of Forced Labor, also approved by the European Parliament, and set to come into force in 2 years, aims to prevent the import, marketing, or export of any good, component of a good, or service to the Union produced with forced labor. It even grants the European Commission investigative functions outside the Union's territories and countries. It's crucial to remember that forced labor encompasses more than just slave labor, as we traditionally imagine it. It involves analyzing indicators set by the ILO, which include issues such as coercion for compulsory labor, such as debt bondage, wage deductions, retention of documents or wages, physical restriction from leaving the company's premises, mandatory excessive overtime under threat of dismissal, among others commonly observed cases. If forced labor is identified, both operating companies and their responsible business partners may face heavy sanctions, in addition to product seizure and prohibition from entering European territory.

Upon material entry, EU authorities may require an operator to submit, within 30 working days, information including evidence of due diligence conducted across the entire product chain in their originating territories. Therefore, companies in the region should start preparing now by conducting forced labor gap analyses in their operations and value chains. The 30-working day period is too short to carry out a due diligence process in line with the Due Diligence Directive and international UN and OECD standards, as mandated by the regulation.

Those of us working in the field of human rights have been implementing due diligence processes for companies for 13 years, based on international guidelines such as the United Nations Guiding Principles on Business and Human Rights and the OECD Due Diligence Guidelines, on which these new regulations are based. Therefore, we possess knowledge of best practices and have already established a solid methodology that enables our clients to comply with these new standards, enhancing their export competitiveness and providing them with contractual, reputational, and legal security.