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The European Commission’s proposal for a Directive on Corporate Sustainability Due Diligence on February 23, 2022, is expected to have a significant impact on the global industry. Since the directive requires not only EU companies of certain size and power, but also non-EU companies of certain groups that are active in the EU to adopt corporate sustainability due diligence measures to address negative human rights and environmental impacts, Korean companies that operate businesses within supply chains used by the European Union (EU) will likely be affected by the spillovers in its implementation. This is a far-reaching directive since these due diligence measures are not limited to activities purely within a company’s operations, but it also extends to subsidiaries and value chains with established business relationships. The directive needs approval from the European Parliament and the European Council to be implemented in 2024 and EU Member States will be provided at least a two-year time frame to implement this directive within each of their national systems. Therefore, it is forecast that Korean companies will not be affected immediately, but they need to be fully prepared for the possible obligations to manage potential human rights and environmental risks in their supply chains.
The proposal of the directive was adopted in light of recent legislations enacted by certain EU Member States on supply chain due diligence. In 2015, the Parliament of the United Kingdom (UK) for the first time enacted the Modern Slavery Act to combat modern slavery and human trafficking by requiring businesses to audit and report on modern slavery in their supply chains. While it was a significant step towards combating modern slavery and human trafficking, it did have certain limitations since no criminal or financial penalties were imposed for non-compliance. It was only in 2017 that due diligence measures became mandatory in France through the enactment of the ‘French Duty of Vigilance Law.’ Under this law, legal sanctions could be imposed on companies if there are no adequate due diligence measures in place within their global supply chains. More specifically, it is reported that judges can levy fines of up to 10 million Euros if companies do not publish their plans, and up to 30 million Euros if their failure results in damages. Soon after, other European countries began to enact similar laws requiring supply chain due diligence. The Netherlands adopted the ‘Dutch Child Labour Due Diligence Law’ in 2019, Switzerland adopted the ‘Swiss Code of Obligations’ in 2021, Germany adopted the ‘Supply Chain Act’ in 2021 and Norway also adopted the ‘Transparency Act’ in 2021. The EU had similar policies in place, including the ‘Conflict Minerals Regulation’ in 2017 and the ‘Guidance on Due Diligence for EU Companies to Address the Risk of Forced Labour in Their Operations and Supply Chains.’
It appears that similar trends are sweeping the United States. Washington has incubated and deployed various measures to strengthen due diligence measures of American companies. In fact, the U.S. for the first time included a provision under the Dodd-Frank Act in Section 1502 requiring U.S. listed companies to disclose whether they are using ‘conflict minerals’ and whether these minerals originate in the Democratic Republic of Congo (DRC) to prevent the continuous funding of the conflict in the DRC. Subsequently, the State of California adopted the ‘California Transparency in Supply Chains Act,’ which took effect in 2012, requiring companies in California of a certain size to disclose information on coordinated efforts to eradicate human trafficking and slavery within their supply chains. During the Obama administration, the U.S. Department of State also adopted the ‘National Action Plan on Responsible Business Conduct’ as part of its efforts to implement the ‘UN Guiding Principles on Business and Human Rights (2011)’ as well as the ‘OECD Guidelines on Multinational Enterprises (2011).’ And more recently in July 2021, the U.S. Department of State with other governmental bodies updated the ‘Xinjiang Supply Chain Business Advisory’ as part of its bid to highlight the heightened risks for businesses with supply chain and investment links to Xinjiang given the possible involvement of some companies in the alleged widespread human rights abuses in the region. As such, the U.S. has been taking concrete steps to prevent human rights and environmental risks associated with U.S. business activities by requiring domestic companies to report on their efforts, but the U.S. does not actually impose mandatory due diligence requirements on companies as is the case in the EU.
Despite the different approaches taken by the U.S. and Europe towards corporate sustainability due diligence, these latest trends suggest that they share the ultimate goal of promoting responsible business conduct not only in their countries but also abroad in line with the OECD Guidelines on Multinational Enterprises and the UN Guiding Principles on Business and Human Rights. These international instruments are not legally binding on states. But with increasing reports of the negative impact on human rights and the environment induced by business activities, along with the ESG movement, the U.S. and European countries are working to ensure that their companies are taking proactive steps to identify, mitigate, and address the human rights and environmental risks. These trends will continue to unfold, and the existing regulations will be strengthened as there is greater demand for responsible business conduct from not only consumers but also from companies wishing to level the playing field.
The Korean government has also been playing an active role in introducing new regulations for stronger human rights management primarily targeting public institutions in Korea. Since the government included human rights management as one of the criteria for evaluating a public institution’s management performance in 2016, more public institutions have been promoting efforts for ethical management. Other Business and Human Rights guidelines have also been released to the public to ensure that public institutions and private entities alike are subject to these practices. Alongside these efforts, the Ministry of Foreign Affairs needs to provide greater assistance to Korean companies operating overseas to ensure that Korean companies are adequately informed of these foreign legislations and their impact on the business operations of Korean companies to help them gain a competitive advantage over foreign competitors.
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