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While the French duty of vigilance law has been in effect since 2017, it was in December 2022 that the Tribunal judiciaire de Paris was called to examine the issue for the first time. In fact, for several years, NGOs and associations have sued certain French companies for failing to take effective measures to prevent violations of human rights and environmental damage throughout their supply chains. It is noteworthy that while a company like TotalEnergies was the first to be sued for its oil project in Uganda and Tanzania, BNP Paribas was recently issued a formal notice due to its financial link to illegal deforestation in Brazil.
Launched a few months ago with the draft directive, the regulatory process for establishing a European duty of vigilance is now accelerating. The European Parliament clarified its position by adopting the draft directive (see box below). A trilogue between the European Parliament, the European Council, and the European Commission is set to begin in June 2023 to adopt a compromise on the modalities of the European duty of vigilance law.
Issues and Objectives of the Duty of Vigilance Law
Emerging in response to the 2013 Rana Plaza tragedy, the duty of vigilance law was born out of the desire to hold multinational companies accountable for their impact throughout their production chain, particularly regarding working conditions.
As a reminder, the law requires companies with more than 5,000 employees in France or 10,000 worldwide, over two consecutive fiscal years, to implement a vigilance plan, which includes:
- A risk mapping
- Actions to mitigate risks or prevent severe violations
- Regular assessment of subsidiaries, subcontractors, or suppliers
- An alert and reporting mechanism
- A system for monitoring the measures implemented and evaluating their effectiveness
The goal of this law is to encourage companies to behave in a sustainable and responsible manner throughout their value chain and subsidiaries. The risks covered include human rights, the environment, fundamental freedoms, as well as health and safety.
The impact for companies is significant: it requires them to manage their entire value chain through audits, surveys, training, and monitoring of implemented actions, among other measures.
Towards a European Duty of Vigilance
Continuing the European legislative process, the Council of the European Union adopted its long-awaited position (general orientation) on the Duty of Vigilance Directive on December 1, 2022.
While the initial proposal for the directive aimed to cover a relatively broad range of companies, the Council of the European Union ultimately set the threshold at 1,000 employees and an annual turnover of more than €300 million. For comparison, the original proposal targeted all companies based or operating within the European Union that employ more than 500 people (versus the current minimum of 5,000 in France) and have an annual turnover of €150 million.
Another significant point in the position of the Council of the European Union is that the provision of financial services by regulated financial companies may be excluded from the activities covered by the directive, depending on the choice made by the states during the transposition of the directive.
The reduction in the scope of companies affected compared to the initial proposal leads us to conclude that the European duty of vigilance project is likely to be less ambitious than originally expected. Indeed, we note that member states have the choice to include or exclude companies from the financial sector. Similarly, the choice to adopt the concept of an "activity chain" rather than a "value chain" — which is more restrictive as it mainly covers companies' supply chains and a very limited portion of the downstream part of the value chain — indicates a narrower scope than initially intended.
The End of the Legislative Process
Update June 15, 2023: On Thursday, June 1, 2023, the European Parliament adopted the draft directive on the duty of vigilance for multinationals. The companies affected by the text are those with more than 250 employees, more than €40 million in turnover in Europe, and €150 million globally. The text clarifies the conditions for civil liability, ensuring full compensation for damages caused to victims. Penalties can reach up to 5% of global turnover and may include restrictions on access to public markets.
Update April 26, 2024 : After several months of legislative processes, the directive on "due diligence" was approved by the European Parliament on Wednesday, April 25, 2024. The result is a more restricted duty of vigilance compared to the original proposal, but it will require large companies to prevent, stop, or mitigate their negative impact on human rights and the environment across their entire chain of activity.
Companies are thus expected to conduct due diligence in human rights and environmental rights based on risks. To do this, the company must:
- Integrate due diligence into its policies and risk management systems (see Article 5)
- Identify and assess actual or potential negative impacts and prioritize them (see Articles 6 and 6a)
- Prevent and mitigate potential negative impacts, end actual negative impacts, and minimize their extent (see Articles 7 and 8)
- Implement remediation measures for actual negative impacts (see Article 8c)
- Engage meaningfully with stakeholders (see Article 8d)
- Establish and maintain a notification mechanism and a complaints procedure (see Article 9)
- Monitor the effectiveness of policies and due diligence measures (see Article 10)
- Communicate publicly through an annual report on due diligence (see Article 11)
Moreover, companies will also need to adopt a transition plan (i.e., actions derived from this plan are an obligation of means, not results) to make their business model compatible with the 1.5°C global warming limit set by the Paris Agreement.
The directive must still be officially approved by the Council before being published in the Official Journal of the European Union (OJEU). It will enter into force 20 days after publication. Its transposition into national legislation of member states must occur within two years.
Which Companies Will Be Affected by the European Duty of Vigilance Law?
The text of the duty of vigilance directive for businesses regarding sustainability, voted on by the European Parliament on April 25, 2024, outlines a specific scope. The companies affected by the duty of vigilance will be:
- European companies (or groups) with more than 1,000 employees and a global turnover exceeding €450 million.
- European companies that have entered into franchise/license agreements with royalties above €22.5 million and a global turnover exceeding €80 million.
- Non-European companies generating a turnover exceeding €450 million.
- Non-European companies that have entered into franchise/license agreements with royalties above €22.5 million in the European Union and a turnover generated within the EU exceeding €80 million
And Now?
It is clear that the pressure is mounting on companies, as their legal responsibility is strengthening: in the case of damage directly linked to the non-execution or failure to comply with a vigilance plan implemented by the group, the parent company will be required to remedy the damage incurred. Moreover, although their outcome is uncertain, ongoing legal cases could have a significant reputational and image impact for the companies involved.
These new vigilance obligations imply both social and now legal responsibility. Companies must justify their efficient efforts regarding human rights to their stakeholders as well as to civil society, and, where applicable, authorities. Since this is a field still under construction, with no existing case law and the European draft not yet finalized, this requires an increased capacity for adaptation on the part of companies.
RSM can assist you in implementing your vigilance plan, thus ensuring the management of risks within your value chain.
