ERU, Alm.del - 2020-21 - Endeligt svar på spørgsmål 370: MFU spm. om den danske regering vil bekæmpe forslaget og i givet fald bedes oplyst, hvordan regeringen vil forsøge at standse dette forslag, til erhvervsministeren

Erhvervsudvalget 2020-21
ERU Alm.del
Offentligt

NOTE

1. februar 2021

Annex on the initiative on mandatory corporate due diligence

The Danish Government welcomes the European Commission’s

initiative

in-

troduce a legislative proposal on mandatory due diligence that encourages

sustainable and responsible business conduct globally by contributing to

an efficient smart mix of mandatory and voluntary measures.

COVID 19 has shown that in order to manage crises effectively and fle-

xibly, companies are well advised to have a close understanding of their

value chains, know their suppliers and cooperate with them to address any

adverse impacts and vulnerabilities.

Definition of due diligence

The term due diligence should be used in accordance with the risk-based

due diligence concept developed by the United Nations (UN) Guiding

Principles on Business and Human Rights (UNGPs) and OECD’s Guide-

lines for Multinational Enterprises as revised in 2011.

Risk-based due diligence is a process to identify, prevent, mitigate and ac-

count for harmful impacts caused by the company, or to which the com-

pany contributed, or impacts that are directly linked to its operations, pro-

ducts or services by its business relationship with another entity. Risk-ba-

sed due diligence is characterized as a management approach. It should be

an ongoing and contextual process that involves stakeholders, in particular

those affected by the risk.

The Danish Government will draw attention to the importance of due dili-

gence not becoming a tick-box exercise. The Commission can carefully

consider how to obtain the intended objectives of due diligence without

causing a shift from identifying and preventing harm on the ground through

a management process on to compliance with a statutory requirement; and

involve socio-legal expertise with knowledge of regulatory strategies on

organisational change to help provide input for this purpose.

Related regulation

Some EU regulation regarding risk-based due diligence is already in place

such as the EU Conflict Minerals Regulation, the NFRD Directive, the

Disclosure Regulation, and the standard setting Taxonomy Regulation. It

is therefore important to ensure that new regulation does not conflict or

overlap with existing legislations.

ERU, Alm.del - 2020-21 - Endeligt svar på spørgsmål 370: MFU spm. om den danske regering vil bekæmpe forslaget og i givet fald bedes oplyst, hvordan regeringen vil forsøge at standse dette forslag, til erhvervsministeren

In Denmark, mandatory reporting on corporate social responsibility (CSR)

was introduced with effect from the financial year 2009 through an amend-

ment to the Act on Financial Accounts.

In 2012, the Danish legislature adopted an Act that provided the Danish

OECD NCP with a statutory basis. According to the NCP Act, NCP Den-

mark is an independent body within the public administration. It comprises

five members, including three appointed based on nominations from indu-

stry, labour unions and civil society. A secretariat is provided by the Da-

nish Business Authority.

An EU legal framework

The Danish government acknowledges that mandatory EU due diligence

can contribute effectively to a more sustainable development, including in

non-EU countries. A harmonization in this area will reduce regulatory frag-

mentation between Member States and additional administrative burdens

for the companies, as emerging national laws in this field are quite diffe-

rent.

On the other hand, an EU legal framework can lead to possible risks. An

EU legislation on due diligence must be aware not to cause:

Disproportionate administrative costs and procedural burdens

Penalization of smaller companies with fewer resources

Competitive disadvantage vis-à-vis third country companies not

subject to a similar duty

Responsibility for damages that the EU company cannot control

Disengagement from risky markets, which might be detrimental for

local economies

The UNGPs and OECD’s Guidelines

set out the aim for companies to iden-

tify and manage risks, ultimately and ideally to avoid harm. This presumes

an ongoing and contextual process suited to the dynamic character of the

risk in question. We recommend the Commission to be mindful that due

diligence as a legal standard of conduct may involve that due diligence

processes must be standardised risking to reduce the flexible, dynamic and

risk-based

characteristics of the UNGP and OECD Guidelines’ due dili-

gence concept.

Yet, without a legal

standard of conduct for companies’ due diligence

pro-

cesses it will be difficult to deliver legal certainty for companies regarding

societal expectations or potential sanctions, or to ensure a level playing

field between companies. However, defining due diligence as a standard

of conduct might shift companies’ focus towards compliance with that

standard. This might detract from their efforts to effectively identify and

manage risks through an ongoing and contextual process. Evidence of

company actions and responses to increasingly detailed requirements on

non-financial reporting suggests that detailed requirements and penalties

may enhance compliance orientation at the cost of effective contextual due

diligence. The Commission should be mindful of the risk that EU legisla-

tion results in a mere tick-the-box exercise for companies with no real im-

pact. This means considering whether a standard of conduct will deliver

better protection for the violated part than a requirement about a manage-

ment process.

With the aim to introduce harmonized EU regulation the Danish Govern-

ment initially considers positively a horizontal due diligence regulation

that is cross-sectorial and cross thematic, covering human rights, social and

environmental matters and are in line with both UN Guiding Principles on

Business and Human Rights, the ILO Tripartite Declaration of Principles

concerning Multinational Enterprises and Social Policy and the OECD

Guidelines for Multinational Enterprises.

The horizontal regulation is preferable because many problems are not li-

mited to one sector or theme and it is often not possible to deal with them

in isolation. Where necessary the horizontal regulation could be comple-

mented by EU-level general or sector specific guidance or rules like the

Timber Regulation.

The Danish Government highlights that the initiative will have to find a

balance between flexibility and precision.

Scope of the due diligence legislation

Many European companies are part of global supply chains and engage in

business operations outside of the EU. It is therefore key that any legisla-

tive framework in the EU takes an international perspective in order not to

compromise the competitiveness of European companies and avoid losing

global market shares to companies that are not met by the same require-

ments and are not upholding the same standards.

Regulating only the largest companies, requirements will still trickle down

the value chains and affect many smaller companies as well. It is therefore

recommended to use a step-by-step approach and start with the largest

companies, while we collect knowledge and experience for mandatory re-

quirements for the largest companies before potentially expanding to smal-

ler companies.

Mandatory requirements to a simplified standard for SMEs would be an

ambitious goal in the long term, but in the short term a voluntary solution

accompanied by SME specific guidance is considered the optimal solution

in order to collect experiences and best practice. Regulation should be de-

veloped with respect to the resources available for small and medium size

companies. SMEs should have detailed non-binding guidelines catering for

their needs.

SME´s are not familiar with due diligence procedures to the same extent

as larger companies among other reasons because they are not covered by

NFRD requirements. It is important that proportionality principles take this

fact into account and that considerations are made regarding a special sy-

stem for the SME´s. The level of risk assessment should play a crucial role

in these considerations.

Consideration needs to be given to the practical challenge companies could

face to comply with legislation, including overview of large and complex

supply chains and how to handle subcontractors with which the company

does not have a direct relation. This is also in line with the OECD Guide-

lines, where leverage and responsibility go hand in hand.

Enforcement mechanism and sanctions

It is crucial that there is a realistic possibility of carrying out the control

necessary to ensure real impact of the rules. In addition, the role of sanc-

tions must be considered in more detail, because financially burdensome

sanctions in the form of compensation must be proportionate to the breach

of the obligations.

It is essential that affected stakeholders (victims) have the required resour-

ces to carry out a claim. Moreover, to obtain a compensation a legal stan-

dard of conduct would also be required

so that the company’s due diligence

can be assessed and found adequate or deficient. However, it is still impor-

tant to keep in mind, that risked-based due diligence is an on-going dyna-

mic process and must therefore not be a thick-the-box exercise.

In general, the general aim of regulation and enforcement is not to oblige

companies to compensate victims in individual cases. This means that pri-

vate enforcement still has an important role to play, holding companies

liable under tort law for the harmful effects of human rights violations.

Access to Remedy

Access to remedy for risks that occur in host countries as a result of the

activities of multinational enterprises is often restricted due to the jurisdic-

tional limits of national courts. As home state courts typically cannot deal

with issues occurring in host states or along the supply chain in third coun-

tries, affected stakeholders need to apply for remedy with institutions in

their own country. Weak institutions, law and/or enforcement in host states

can make access to courts difficult or ineffective for affected stakeholders

in those countries.

The present system on due diligence is voluntary and is based primarily on

the UN Guiding Principles for Responsible Business Conduct and OECD’s

Guidelines for multinational enterprises. Part of the OECD Guidelines is

the establishment of the NCP system, where the national contact points

(NCP´s) are intended to raise awareness of the OECD Guidelines and to

establish a complaint-handling system where everyone has the opportunity

to file a complaint concerning a company that does not carry out due dili-

gence as mentioned in the guidelines. An essential element of the system

is a mediation function. In addition, the NCP’s can make statements,

including criticisms, in connection with the company’s compliance with

OECD guidelines, as well as make recommendations in this regard. There

is no possibility of the NCP awarding financial compensation to the com-

plainant.

The Danish NCP is renowned for being law-based, for including both pri-

vate companies and public institutions and for providing opportunities to

take up cases on the NCP´s own initiative. Central parts of the Danish sy-

stem are the task of creating awareness of the OECD Guidelines, the broad

and simple right of complaint with no fee and a simple complaint proce-

dure, the use of alternative solutions based on dialogue and mediation and

the opportunity to give criticism and recommendations which are publis-

hed on the NCP´s website. Based on experience the Danish NCPs involve-

ment in specific cases and its recommendations often help the companies

to develop their due diligence processes. Therefore, the promotional tasks,

complaint procedures, mediation possibilities and publishing of criticism

and recommendations should be preserved in a new system on due dili-

gence.

The Danish Government recommends the Commission to consider learnings

from the OECD NCP system regarding access to non-judicial remedy and we

would be pleased to exchange experience from the Danish law-based NCP.

The NCP system has a unique possibility of granting affected stakeholders

access to remedy due to the extraterritorial competence and the conflict-sol-

ving approach. It secures access to justice and is less costly than a judicial

system.

Stakeholder engagement

In the due diligence processes, it is important to engage relevant stakehol-

ders. The UNGP and the OECD guidelines use the expression “affected

stakeholders”. That is to be understood as persons that are or can be directly

affected by adverse impacts in which case, they will become victims or

violated. This is relevant both in the process of identifying the risks and in

process of investigating whether the risk has been handled in a responsible

manner.

The Danish Government recommends the Commission to clearly define

the roles of stakeholders in order to improve legal certainty for companies.

Summing up it appears important to combine the aims of legal certainty,

level

playing field, enforcement and victims’ access to (substantive)

remedy with civil claims and equality of arms that appear to presume a

legal standard of conduct, with due diligence as a risk management process

and the aim of companies not causing harm. Due diligence must not be-

come a tick-box exercise. This is in accordance with the idea of due dili-

gence as a management process that is ongoing, contextual and fit to iden-

tify risks that may be subject to dynamic change.