Subject : Newsletter on the European Union Directive on Mandatory Human Rights, Environmental and Good Governance Due Diligence

Date  : 10.03.2022

  1. What is the European Union Supply Chain Directive?

The European Union Supply Chain Directive(EU Directive on Mandatory Human Rights, Environmental and Good Governance Due Diligence) (the Directive”) has been on the agenda of the European Union (the “EU”) for a long time. The proposal of the Directive has been submitted by the EU Parliament on March 10, 2021 and the proposal discussions have been postponed three times during this process. However, although it has been expected for the proposal to be opened for discussion in March 2022, the change of the proposal package name to “Sustainable Corporate Governance” is also on the agenda. In actual fact, the Directive underscores the requirement of auditing the harms caused by relatively smaller-sized enterprises, which are part of the supply chains of international companies, against both human rights and the environment. It has been emphasized by the EU within the scope of the Directive that as a result of globalization, only regulating the obligations of increasing the affirmative impacts of companies that achieved great power and effect globally is not adequate and the relatively smaller-sized enterprises under the supply chains in the name of provision of international services must also be subject to the obligation of reducing the damages that they gave to the host country. In this context, it is possible to mention that the Directive focuses on auditing the violations, particularly against human dignity, human rights, environment, and governance. In that regard, the Directive proposed by the EU, it is aimed to determine the legal status of the supply chains of the globalized companies regarding human rights, environment, and governance issues and to hold them liable for taking measures for destructing, reducing, and even preventing the violations and negativities detected upon the understanding that foreseeing the cooperate responsibility as a voluntary regime is inadequate in addressing the potential adverse impacts of globalized commercial activities.

  1. What are the Companies that Fall under the Scope of the Directive?

Within the context of the Directive proposed by the EU, it is stipulated that the harmonization mechanisms of the supply chain shall be implemented gradually. Under this context, it is stipulated that in the first stage, the Directive with the obligations qualified as comprehensive undertakings shall cover the companies that are among the companies conducting activities within the EU; (i) with more than 250 personnel or (ii) whose annual turnover exceeds 50 Million Euro or (iii) whose current balance exceeds 43 Million Euro. In addition to these companies, it is stipulated that such comprehensive obligations shall also be subject to companies outside the EU that are; (i) publicly held companies, (ii) small and medium-sized enterprises conducting activities in sectors determined as high risk such as mining, timber, and textile, and (iii) companies which provide financial products and services, including the United States of America that provide products and services to the EU domestic markets.


  1. Which Obligations Do the Law Stipulate?

It is required that companies that are liable within the scope of the Directive should take due diligence related to the adverse impacts of the commercial activities of suppliers and subcontractors in the fields of human rights, environment, and governance. The thing meant by Due diligence is the liability which the companies shall take all proportional and appropriate precautions in order to prevent the occurrence of adverse impacts on human rights, the environment, or good governance in their supply chains and to make effort to prevent the adverse impacts on human rights, the environment and governance to the fullest extent possible and to address such kind of adverse impacts on these when they occur. In practice, due diligence consists of processes implemented by a company for the determination, evaluation, prevention, reducing, ceasing, monitoring, taking into account, addressing, and correcting the potential and/or current adverse impacts in the fields of human rights, environment, and governance. In this context, it is seen that the companies obligated within the scope of the Directive shall be subject to three main obligations. First of all, the obligated companies shall take the required precautions and endeavor to prevent potential adverse impacts on human rights, the environment, and governance issues, which are the three fields of corporate liability. The second basic obligation is to implement the necessary processes regarding the detection, auditing, mitigation, and prevention of adverse impacts in the mentioned fields. As the last point, it is expected from the companies within the scope of the Directive to publicly disclose their approaches to be pursued while fulfilling their value chain due diligence obligations with the “Due Diligence Strategy Document”. Within the scope of the Directive, it is expected to conduct due diligence on the violations specific to forced labor, syndicate rights, and labor rights, particularly in the commercial activities on human rights. In addition to this, the auditing of environmental obligations related to combating the climate crisis such as the efficient usage of resources, waste management, pollution, reduction of population and greenhouse gas emissions specific to the violations in the environmental issues, and prevention of the violations of such obligations are stipulated. Lastly, in line with due diligence obligations in the governance field, it is required to evaluate the issues related to fields such as companies’ combating bribery, corruption and illegal campaign contribution, tax evasion, and transparent management.

  1. Conclusion

The EU regulated under the Directive that the requirement of the determination of the adverse impacts and violations of the suppliers and sub-contractors of the companies under the scope of the Directive in the fields of human rights, the environment, and the governance due to their commercial activities, in case of determination, the prevention of the same and taking the appropriate and required precautions in this direction. The EU specifically underlines that the determination of the corporate liability of the value chains of the large-sized companies achieved to the usage of power and resource in the international field by the means of globalization shall be subject to a voluntary basis and that no significant development can be experienced in the adversities in this field and that imposing obligations basing on necessity is required. In this context, the enterprises under the value chain of the companies that fall under the Directive, regardless of whether they conduct activities within the EU, shall be audited and thus, it is aimed to prevent such violation by this means. Due to the sanctions stipulated in case of the violations of the obligations stipulated under the scope of the Directive particularly such as being banned from attending to tenders and high amounts of administrative monetary fines, it is stipulated that the companies under the scope of the Directive will follow up on their supply chains closely and will cease the business relationship with their suppliers that do not take precautions to reduce and prevent the adverse impacts in the three fields where the corporate liability is specified. Under this context, although the obligations of non-EU enterprises are not regulated directly, the concerns such as commercial earnings and market loss also lead non-EU actors to realize their commercial activities in accordance with the corporate liability within the scope of the Directive.