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24 November 2020

The Duty of Due Diligence under the Responsible Business Initiative – a Change-Maker?

On 29 November 2020 Swiss citizens will vote on the Responsible Business Initiative (Initiative pour des multinationales responsables / Konzernverantwortungsinitiative).

The Responsible Business Initiative (the Initiative) proposes a new due diligence obligation for Swiss-based large companies as well as a liability provision to hold them accountable for human rights and environmental violations made abroad by controlled companies. 

Responsible-Business-Initative-Due-Diligence-Froriep

The present blog is part of FRORIEP's series on the Responsible Business Initiative. It will review the question of the due diligence, i.e. the process through which a company can identify, prevent, mitigate and account for how it addresses its actual and potential adverse impacts, and provides an overview of the Initiative's proposal regarding the new proposed duty of due diligence for Swiss-based large companies with respect to human rights and international environmental standards. In addition, you will also learn more about the duty of due diligence adopted by the Swiss Parliament in a counter-proposal, which will come into force in the event the Initiative is not accepted. 

As for the Initiative's goal to introduce a liability provision to hold Swiss-based large companies liable for human rights abuses and environmental violations caused abroad by companies under their control, read our dedicated Blog on this topic.

The Duty of Due Diligence under the Responsible Business Initiative

The Initiative's objective to introduce a duty of due diligence for Swiss-based large companies implies that said companies will have to take the following measures to ensure the respect for human rights and the environment in all their business activities, including those abroad:

  1. Identify and assess the potential and actual risks of the company's activity on human rights and the environment;
  2. Implement measures to reduce the risks identified and to remedy violations;
  3. Monitor the effectiveness of the measures undertaken.

According to the text of the Initiative, the due diligence duties apply also to controlled companies as well as to all business relationships with third parties.

Finally, the implementation and execution of such measures will have to be publicly reported on an annual basis.

In that sense, the Initiative's due diligence duty aims to ensure that companies mitigate the risks related to human rights and the environment, react efficiently to any violations with appropriate measures and are accountable for it.

Who is targeted by this duty of due diligence?

According to the Initiative's text, the duty of due diligence will be applicable to “companies that have their registered office, central administration or principal place of business in Switzerland”. The text also states that such duty of due diligence is also applicable to "the controlled companies and to the entirety of the business relationship."

Moreover, it is relevant to note that the text adds that it "will take into consideration the needs of the small and medium sized companies with little human rights and environmental risks." In that line, the Initiative Committee has stated that small and medium sized companies with little risk shall not be subject to such requirements. As such, the Initiative principally targets multinationals. In the event the Initiative is accepted, the notion of “controlled company” shall be further specified.

To read more on the notion of "under their control", read our Blog regarding the liability provision.

The Duty of Due Diligence under the Counter-Proposal

In the event the Initiative is rejected, the Counter-proposal adopted by the Swiss Parliament, would enter into force. This final Counter-proposal was the result of a consensus between the two chambers of the Swiss Parliament (the National Council and the Council of States) after months of discussions and proposals.

The Counter-proposal's duty of due diligence is limited to companies that:

  1. Place or process in Switzerland ores or metals containing tantalum, tin, tungsten or gold, originating from conflict zones or areas of high risks; or
  2. Offer goods or services for which there is a well-founded suspicion of the use of child labour.

It will be up to the Swiss Federal Council to define the thresholds for the due diligence duty to apply.

Similarly to the Initiative, the Counter-proposal mentions that small and medium sized companies with little risks on the matter of child labour will not be subject to the due diligence duty.

The new due diligence duty will require the targeted companies to implement a management system that makes it possible to establish traceability in their supply chain.

The duty to publish an annual report

More generally, the Counter-proposal also introduces the obligation for large companies (société d'intérêt public) and large financial institutions (such as banks and insurance companies) to publish annually a report on environmental and social issues, issues related to the employees, the respect of human rights and measures to fight corruption. Such a report would have to remain publicly accessible for at least 10 years. In the event such targeted companies do not comply with the obligation to report they may face a fine of CHF 100,000.

The Duty of Due Diligence: the International Scene

On the international scene, the UN Guiding Principles on Business and Human Rights (the UNGP) as well as the OECD Guidelines for Multinational Enterprises (the OECD Guidelines) are the two key texts that have shaped the debate and the basic framework for responsible business conduct and in particular the duty of due diligence. Both texts specify the due diligence process that is expected from companies.

At the EU level, there is already an EU Regulation 2017/821 of 2017 which lays down supply chain due diligence obligations for EU importers of minerals or metals containing tin, tantalum and tungsten and their ores, as well as gold originating from conflict-affected and high-risk areas.

Moreover, and most recently, upon the initiative of the EU Commission, the European Parliament submitted a report in September 2020 which includes the text of a proposed EU Directive on "Corporate Due Diligence and Corporate Accountability". The report urges the adoption of a due diligence obligation, stating that the EU "should urgently adopt minimum requirements for undertakings to identify, prevent, cease, mitigate, monitor, disclose, account, address and remediate human rights, environmental and governance risks in their entire value chain".

In fact, the EU Commission has mentioned that it intends to introduce such mandatory human rights due diligence legislation in the first quarter of 2021.

At the UN level, the Human Rights Council launched in 2014 an intergovernmental working group to establish an international legally binding instrument on Transnational Corporations and Other Business Enterprises with respect to human rights whose second revised draft has been discussed as recently as October 2020 and which includes a provision calling on State Parties to require business enterprises to undertake human rights due diligence.

At the national level, several countries have already introduced or are planning to introduce legally binding obligations for businesses to exercise human rights due diligence, in particular:

  • The French law – "loi de vigilance" – introduced in 2017, obliges "big companies" to adopt a due diligence plan to identify and address human rights and environmental impacts in their operations, supply chains and business relationships. Under the French law, the due diligence duties extend beyond a company's own operation and apply to operations of companies it controls, as well as those of the subcontractors or suppliers with whom the company maintains an established commercial relationship.
  • The Netherlands adopted a law in 2019 requiring companies to identify whether child labour occurs within their supply chains and report on their due diligence efforts. In the event said companies do not comply with their due diligence obligation, they can incur administrative fines and criminal liability.
  • Canada is in the process of enacting a Transparency in Supply Chains Act which would provide for a duty of care for certain companies.
  • In Germany, a Supply Chain Law (“Lieferkettengesetz” or “Sorgfaltspflichtengesetz”) enacting mandatory human rights due diligence is currently under discussion. Under such law, large German companies would have to take appropriate measures to prevent human rights violations in their business activities and supply chains.
  • While not strictly embedding due diligence obligations, the California Transparency in Supply Chains Act 2010 and the Modern Slavery Act 2015 in the United Kingdom impose companies to disclose information regarding human rights, namely slavery and human trafficking, and thus can be considered as first steps before the enactment of a general due diligence legislation.

Conclusion

As explained, the Initiative's objective to introduce a duty of due diligence for Swiss-based large companies follows what can certainly be considered a trend within the international community. The fact that the Counter-proposal also provides for such a duty, albeit for companies in specific sectors, demonstrates that the Swiss authorities understand the need to provide a legal basis for a mandatory due diligence duty.

With the upcoming EU Directive on due diligence and corporate accountability, it is expected that human rights due diligence will become mandatory for many businesses and across a broad range of issues.

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Photocredit: Pexels/Manuela Adler

Topics: Corporate & M&A  Dispute Resolution  Real Estate  Environment 

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