European Union flags in front of the European Commission in Brussels, Belgium.

On 29 April 2020, the European Commissioner for Justice, Didier Reynders, announced that the European Commission will develop legislation that would require companies to carry out due diligence to identify, account and mitigate for adverse human rights and environmental impacts in their supply chains.

The Commissioner confirmed that a legislative initiative would be introduced by 2021. Details of the exact legal mechanism will follow, but according to the Commissioner, any legislation would be "inter-sectorial, mandatory and of course with a lot of possible sanctions".

Existing non-legal incentives suggest that companies should already be reviewing and reinforcing their management of human rights and environmental risks – with a particular focus on supply chain responsibilities. The Commission's legislative commitment, and the COVID-19 pandemic, will only serve to accelerate this prerogative.

The Commission's legislative commitment follows the publication of a study in February 2020, commissioned by the Commission, which assessed options to regulate human rights and environmental due diligence in supply chains. The study indicated a need for policy change and revealed widespread support among business respondents for introducing mandatory measures.

The study acknowledged that national due diligence legislation is increasing: France and the Netherlands have their own human rights due diligence laws, and there are national movements for similar legislation in a number of other countries including Germany, Finland, Austria, Denmark, and Switzerland. Legislative requirements for mandatory disclosure of a specific human rights risk – modern slavery in a company's supply chain – have also increased in the recent years, with domestic laws in the UK , Australia and California , and similar laws proposed in Hong Kong and Canada.

Some multinationals have argued that an EU-level mandatory human rights diligence law would "level the playing field" and increase legal certainty in the face of a "patchwork" of different domestic obligations. There is growing evidence that investors also support such measures: in April 2020, a group of 101 international investors representing over US$4.2 trillion in assets issued a joint call for greater regulatory measures requiring companies to carry out human rights due diligence. Civil society and NGOs have also been campaigning for an EU-level law.

Furthermore, the health, social, and economic crisis caused by COVID-19 is "fast becoming a human rights crisis". The study pre-dates the pandemic, but it was launched by the Commission as part of its sustainability strategy; the Commission considers that the pandemic shows the "critical need" to strengthen sustainable practices. COVID-19 will serve to focus attention on the results of the Study and arguably increase the imperative for this legislative initiative.

What does this mean for businesses?

The Commissioner has suggested that the law will contain an enforcement mechanism and sanctions that could be coordinated by domestic authorities with oversight at the EU-level. He further indicated that the legislation will be based on the United Nations Guiding Principles on Business and Human Rights ("UNGPs"), OECD and ILO frameworks, and will be cross-sectorial. The impact of the law is likely to extend beyond companies incorporated in the EU, and, as a leader in sustainable policy, the EU's law could trigger further regulatory developments around the world.

The study identified a number of existing business incentives to undertake due diligence in this context, including: reputational risks; investor requirements; and consumer expectations. These non-legal incentives have now become more relevant in circumstances where human rights are "at the frontline in the fight against COVID-19″ .

Some businesses are reacting to the crisis by guaranteeing workers' pay and supporting suppliers. However, there is increased attention on other businesses which are taking measures that are resulting in human rights and environmental violations – which the OECD has said "may in turn have longer-term legal and reputational effects on companies". The OECD is therefore calling on businesses to take a responsible business conduct approach in tackling the pandemic. A proper responsible business approach includes effective human rights and environmental due diligence, with a particular focus on supply chain issues

The study illustrated that there is a significant variance in current due diligences practices. More than two-thirds of business respondents reported their due diligence practices to include training on human rights or environmental impacts, supplier codes of conduct and audits. Internal and external investigations and engagement with human rights and environment experts were other steps adopted by a minority of business respondents.

Businesses should take note of these emerging best practices and ensure their existing policies and procedures are in line with the standards under the UNGPs. This will allow businesses to position themselves for the impending EU law, and manage the increased scrutiny on supply chains as a result of the pandemic.

Sam Eastwood is a partner and James Ford and Libby Reynolds are associates in Mayer Brown's Litigation team.