10 March 2021

CRE: D&O exposure under further threat as MEPs vote on corporate accountability Directive

Members of the European Parliament (MEPs) will today vote on whether to request the European Commission (EC) adopts a new Directive on corporate accountability and governance that would oblige EU companies to address infringements of human rights and environmental damage within their supply chains.

This follows the recent adoption by the German government of a draft Human Rights Due Diligence Regulation (Supply Chain Act) that would oblige German companies to ensure their suppliers respect human rights.

The draft German legislation, planned to be passed by parliament before the country’s general election in September, is not as strict as some had hoped. But it would allow for fines of up to 10% of turnover to be applied to those companies deemed to have broken the rules.

Henning Schaloske, partner at insurance law firm Clyde & Co, said in a recent note that this law has obvious implications for D&O exposure and coverage. “This includes a further increased risk exposure for directors and officers alongside the sanctions against companies. Important questions include, for example, the insurability of fines or whether and to what extent companies might seek recourse from their D&Os and, if so, how D&O insurance policies respond to such claims,” he stated.

The European proposal that will be voted on by MEPs today is likely to go significantly further than the German law, and extend the liability of EU- and non-EU-based companies for activities at their suppliers. If adopted, the Directive will mean that European risk and insurance managers will surely face a further hardening in the D&O market and reduced capacity, while also having to tackle the underlying risk.

The binding rules proposed by the MEPs would stretch beyond the EU’s borders. Under the proposal, all companies that want to access the EU’s internal market, including those established outside the EU, would have to prove that they comply with due diligence obligations related to human rights and the environment.

MEPs are also calling for the rights of stakeholders or victims in non-EU countries, who are particularly vulnerable, to be better protected. They additionally want a ban on importing products linked to severe human rights violations, such as forced or child labour.

The proposal could significantly increase the legal liability of EU companies and their directors and officers for failing to adequately identify and remedy human rights and environmental failings within their supply chains.

A report by the European Parliament’s legal affairs committee on corporate accountability that details the proposed Directive, and which was debated in the parliament on Monday, states: “In order to enable victims to obtain remedy, undertakings should be held liable for the damage the undertakings under their control have caused or contributed to where the latter have, in the course of their business relationships with the former, committed violations of internationally recognised human rights or have caused environmental harm.”

It adds: “Conducting due diligence should not absolve undertakings from liability for the harm they have caused or have contributed to; [the committee] further considers, however, that having a robust due diligence process in place may help undertakings to avoid causing harm… In line with the UN ‘Protect, Respect and Remedy’ framework considerations on the rights of victims to a remedy, the jurisdiction of EU courts should be extended to business-related civil claims brought against EU undertakings on account of harm.”

The legal affairs committee report states that the ongoing process of globalisation and Covid-19 have exacerbated an already inexcusable situation within supply chains that current conventions are failing to address.

“According to ILO statistics around the globe, there are around 25 million victims of forced labour, 152 million victims of child labour, 2.78 million deaths due to work-related diseases per year and 374 million non-fatal work-related injuries per year… The ILO has developed several conventions to protect workers but their enforcement is still lacking, especially with reference to the labour markets of developing countries,” states the report.

“This alarming situation has prompted a debate as to how to make businesses more responsive to the adverse impacts they cause or contribute to… that debate has led, among other things, to the adoption of due diligence frameworks and standards within the UN, the OECD and the ILO… these standards are however voluntary and, consequently, their uptake has been limited,” it continues.

 

CRE

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