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The EU’s proposed new Directive would mandate large companies in the EU or doing business there to implement strict new due diligence obligations. The regulation is now close to being finalized, which would start the clock ticking for individual countries to change their laws. We analyze what companies should expect from the Directive, as well as the wider trend towards global human rights due diligence regulations. We then look at the best way to adapt your due diligence approach to thrive in this new era–with help from Nexis® Solutions.
The Corporate Sustainability Due Diligence Directive is entering the final stages of negotiations between the EU’s institutions, and experts believe it will be concluded within months. Although member states will then receive more time to implement the Directive into their legislative framework, it no longer seems to be an option for companies to wait and see. Instead, they should already be working hard to ensure their due diligence process includes screening third parties against human rights and environmental factors.
The Directive will mandate regulated companies operating in EU member states to ensure activities by the business and its suppliers comply with strict human rights and environmental sustainability criteria.
Crucially, it will introduce obligations on large companies in the EU–or large non-EU firms doing business on the continent–which may require a significant change in how they currently approach compliance and due diligence. This includes:
EU member states will be responsible for implementing the Directive’s requirements into their laws and regulations by a certain date, as well as setting the fines or enforcement actions to be taken if a firm is found to be in breach.
MORE: The due diligence checklist
The new Directive does not just have implications for European-based companies, but it applies extra-territorially to any global firm above a certain size that is doing business within the EU. The US Treasury Secretary Janet Yellen warned earlier this year that the US is concerned about potential “negative, unintended consequences” of the Directive for US firms.
Another concern raised is that the Directive in its current form will not prevent any EU member state from going further in requiring more stringent due diligence than the Directive prescribes. Yukako Kinoshita, vice-chair of the Japanese Business Council’s committee to represent Japanese companies operating in the EU, said this is particularly worrying for Japanese firms. “It will be an enormous challenge for companies like our members to meet all slightly different legislation across EU member states,” he said.
MORE: Recent regulatory enforcement show the need for due diligence
The EU’s Directive is likely to prompt other countries to follow in imposing their own due diligence requirements on companies. Some of these could target EU companies in particular, as an official at the US Chamber Institute for Legal Reform predicted that “the US and other foreign countries may retaliate or implement rules of their own”.
Even setting retaliatory motivations aside, it has already become clear that the move towards human rights due diligence requirements is a growing global trend. Other recent or upcoming examples include:
MORE: Due diligence for third party environmental impacts
Companies need to realize that we have entered a new era of due diligence. The traditional model of considering only financial and legal risks of third parties is no longer sufficient. Regulators increasingly expect companies to screen third parties for human rights and environmental risks. While more and more consumers, investors and employees want to buy from, invest in or work for companies that can demonstrate they are ethical.
The best way for companies to thrive in this new era is to acquire reliable data on suppliers and third parties, including:
With ever-growing volumes of information available in the modern world, it is not easy to surface that data which is most relevant for assessing a supplier’s human rights and environmental impact. The best compliance operations leverage technologies which instantly screen multiple entities against high volumes of trustworthy data in all the areas outlined above. Given regulators’ expectations that companies carry out ongoing monitoring, these systems should also be able to flag any changes to a risk assessment of an entity when new information arises.
Nexis® Solutions is a leading example of such a system. It helps firms to implement a more efficient and effective due diligence process to identify and mitigate third party risk by providing companies with authoritative data from the most relevant sources.
Read more about the new era of due diligence, and how your company should respond, in our White Paper: "The New Era of Due Diligence".