51 (146) 2021

Green for Glasgow, Green for Good

EU poised to issue sweeping new due diligence Directive

By Randy Mott JD, director for EAME, CHWMEG Inc.
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Earlier this year, the European Parliament approved a sweeping new Directive requiring due diligence on supply chains for every company operating in the EU with more than 250 employees1. The proposal is expected to be finalised this month and may be modified somewhat due to strong business opposition.

We can predict that it will at least meet the standards now imposed on large French and German companies by their respective national laws. The signal is unmistakable that international companies must have in place a due diligence system that is more than ‘checking the box’, in the words of the European Parliament report.

Some of the more controversial provisions require that the due diligence strategy (required for every major employer in the EU) be made public along with any reports the company receives after mandatory investigations that involve adverse impacts to the environment or human rights violations. The EU proposal also empowers the public that is affected to bring legal actions to challenge any impacts, and to require a remedial programme by the company.

The proposal includes violation of environmental and human rights treaties as such an impact, but also covers any actions by the company or its suppliers that “have caused environmental harm.” The proposal has transnational effect, so any covered company must conduct due diligence on its global supply chain. The proposal provides that “ ‘potential or actual adverse impact on the environment’ means any violation of internationally recognised and EU environmental standards.” This seems to mean that EU environmental requirements would be imposed on non-EU operations, even in emerging nations.

The scope of the proposal is almost too broad to credibly believe, but its basic intent has been made clear. Some requirements that go well beyond the German or French laws may be changed in the final proposal (both national laws are already transnational and global in scope). In the end, there is certainly going to be an EU requirement to conduct international due diligence.

By far the most risk in a supply chain is the downstream management of wastes. Over 70% of companies surveyed by the European Commission identified this issue as the greatest risk in the supply chain (number one). Improper waste management by one’s own plant employees or third-party contractors has created major economic and reputational damage to many companies. The EU already requires that a waste producer exercise reasonable care in tis selection of waste solution providers. [See Commune de Mesquer v. Total France SA and Total International Ltd (ECJ Case C-188/07, 2008).] Waste producers under European law typically retain their liability until the final safe disposition of their wastes. Companies that do not have an international waste-management due diligence programme will be required to create one and publish it. [See Article 4 of the draft Directive.]

Companies that have years of experience in such an effort can provide abundant guidance. CHWMEG, a non-profit association, is the largest waste-stewardship organisation in the world. CHWMEG includes nearly 300 member companies that has performed nearly 5,700 reviews at over 2,000 unique waste and recycling facilities throughout the world (as of Oct 2021). Many of our members also maintain their own additional review efforts by corporate staff or third parties. This is certainly the largest amount of accumulated experience in this area.

Having worked through CHWMEG and as a consultant to these companies, the author can describe some basic steps that will be necessary. Some of this may be clarified in Commission Guidelines to be issued. [See Article 14 of draft].

Companies will firstly need to determine how many and what waste vendors they use. Many firms starting such a programme have found this can include as many as 1,000 different facilities. Reducing that number is one early and common step to make a programme manageable. Second, the company must establish a protocol for prioritising the scope of due diligence based on risk. Certain risks – described above – will come from the Directive, but there are other risks, such as the criticality of the waste stream to production and the financial viability of the vendor. Hazardous and non-hazardous waste streams both present risks if improperly managed. A programme must create a realistic criterion for the type and frequency of reviews (a desk audit, questionnaire, a site inspection or a full site audit). There are various ways these requirements can be implemented including using specialised corporate staff, outside contractors or an association such as CHWMEG. Association members share the cost of the audits and members can also obtain existing reports from an extensive database.

Finally, there is the difficult task of deciding when to use a vendor, knowing the risks. There is no simple or universal solution to the key question. Some companies have created a risk-scoring system. Others use a group of corporate staff experts. But a third party, like CHWMEG, cannot make that decision due to antitrust laws and that fact that each company may have unique considerations.

Typical problems include cases where the local government requires use of a particular facility. This will, however, never relieve the company of its legal responsibility under most all existing laws or under the Directive. Other situations can involve a vendor that is the only physical option in the area (a fact often found in emerging countries). Other times, there will be areas that can be improved upon, and the company may already have a financial interest in assisting the facility or advising it. The Directive will make this type of action compulsory.

If nothing can be done and there are no alternatives, the draft Directive appears to allow for reasonable efforts and due care to comply. But all of these decisions under the new provisions can be made public and, in some cases, will have to be published.  [See Article 6.]

There will be an extended period to comply with these final provisions, but for companies without an existing waste due diligence programme, the time will be necessary for its establishment. Smaller firms without the corporate staff will have to rely on third-party assistance. It is not clear that the Parliament or the Commission fully appreciate the enormity of the task that they are imposing.

For more information: europe@chwmeg.org

1.    European Parliament resolution of 10 March 2021 with recommendations to the Commission on corporate due diligence and corporate accountability (2020/2129(INL)


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