Environmental Due Diligence Obligations in Home State Law with Regard to Transnational Value Chains

Abstract

The following chapter takes a closer look at transboundary environmental harm caused by business operations in the context of transnational value chains. Here, the transboundary character does not necessarily result from the environmental harm’s course but rather from transboundary economic causal links via transnational value chains. Consequently, the situations considered in this chapter are generally those categorised as one of the ‘type-two cases’ detailed in the previous chapter.

The author would like to thank the participants of the online workshop “Environmental protection through value chain due diligence legislation” on 22 April 2021: Daniel Augenstein, Jelena Bäumler, Mirina Grosz, Elisabeth Henn, Jannika Jahn, Enrico Partiti, Paul Mougeolle, Lise Smit, and Lena Walker for their valuable contributions and thoughts; likewise, he would like to thank Roda Verheyen and Kirsten Schmalenbach for their valuable and very helpful comments on a draft version of this chapter.

1 Introductory Remarks

The following chapter takes a closer look at transboundary environmental harm caused by business operations in the context of transnational value chains. Here, the transboundary character does not necessarily result from the environmental harm’s course but rather from transboundary economic causal links via transnational value chains. Consequently, the situations considered in this chapter are generally those categorised as one of the ‘type-two cases’ detailed in the previous chapter.¹

This chapter explores how, de lege ferenda, an environmental due diligence obligation for companies in their home State law can be designed in order to contribute to environmental protection throughout transnational business operations and value chains.² This approach would create new obligations that potentially cover the entire value chain and where civil liability would be a conceivable element in an effective mix of enforcement measures.

After briefly sketching governance gaps in transnational value chains and home State regulation as a strategy to tackle those gaps (Sect. 7.2), this chapter provides some examples of emerging due diligence regimes in transnational value chains and roughly systematises them (Sect. 7.3). The subsequent sections examine three key issues regarding the legislative design of a potential environmental due diligence (hereafter ‘EDD’) obligation in home State law: due diligence’s ‘horizontal’ and ‘vertical scope’ in value chains (Sect. 7.4), EDD’s material scope (Sect. 7.5) and civil liability as an enforcement mechanism (Sect. 7.6). The final section examines potential legal objections to this type of due diligence laws that stem from their potential ‘extraterritorial’ impact (Sect. 7.7).

2 Background: Home State Regulation as a Strategy to Tackle Governance Gaps in Transnational Value Chains

In a global economy, cause and effect are in play given the existence of certain business models, demand and consumption patterns in one State that result in environmental harm or human rights abuses in another State through the operation of transnational value chains.

Value Chain, Supply Chain, Life Cycle

The terms ‘value chain’ and ‘supply chain’ are more economic than legal. In the realm of economics, an accepted definition of the term supply chain was provided by Martin Christopher who stated: “The supply chain is the network of organizations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate consumer.”³ The different stages of the value chain are typically referred to as ‘tiers’, ‘tier 1’ being direct suppliers, ‘tier 2’ the suppliers of ‘tier 1’ and so on.

In the relatively recent political and legal debate on the regulation of transnational business activities, both supply and value chains have become key concepts. However, a universally accepted legal definition has not yet been established.

In 2021, Germany adopted the ‘Act on Corporate Due Diligence Obligations for the Prevention of Human Rights Violations in Supply Chains’ (‘Lieferkettensorgfaltspflichtengesetz’—LkSG),⁴ a law that operates exclusively with the term supply chain. The definition in Section 3(5) of the Act⁵ is particularly narrow, inter alia, because it seems to entail exclusively the upstream chain.

Article 3 point (5) in the Draft ‘Directive on Corporate Due Diligence and Corporate Accountability’, as requested and recommended by the European Parliament (EP) in its March 2021 resolution,⁶ defines value chains significantly broader as “all activities, operations, business relationships and investment chains of an undertaking and includes entities with which the undertaking has a direct or indirect business relationship, upstream and downstream, and which either: (a) supply products, parts of products or services that contribute to the undertaking’s own products or services, or (b) receive products or services from the undertaking”.

The specifications ‘upstream’ and ‘downstream’ refer to the perspective of a given entity in the value chain. Hence, the upstream value chain includes all business operations that take place prior to the given entity’s operations while the downstream value chain includes those business operations that occur subsequent to the given entity’s value-added operations. For example, from a textile manufacturer’s perspective who undertakes so called ‘cut, make, and trim’ (‘CMT’)-operations, the upstream value chain would include cotton production, weaving, dying of fabric, design etc., while the downstream value chain would encompass packaging, labelling, distribution, and retail.⁷

A more holistic regulatory approach could go beyond the traditional consideration of the value or supply chain as going from raw material to end-user and include, in particular, the post-use phase. For such an approach the product life-cycle concept can be used as a conceptual point of departure. Indeed, the unofficial outline drafted by the Federal Ministry for Economic Cooperation and Development suggested defining the term value chain with reference to the life-cycle concept. The definition in Section 3 no. 2 incorporates literal parts of the life-cycle concept as defined in Article 2(20) of the public procurement Directive 2014/24/EU. Similarly, in the failed Draft for the US Climate Change Disclosure Act of 2019⁸ Section 2(15) defined the term value chain as “the total lifecycle of a product or service, both before and after production of the product or service, as applicable” and that “may include the sourcing of materials, production, and disposal with respect to the product or service”.

Governance gaps along and within such value chains foster various kinds of environmental harm.⁹ Although there are many intertwined and overlapping issues involving transnational business operations’ impacts on human rights and the environment, the early policy and legal debate was dominated by a focus on human rights protection. Paradigmatic for this focus was the development, adoption and subsequent dissemination of the UN Guiding Principles on Business and Human Rights (UNGPs).¹⁰ These have been incrementally accepted as the “global authoritative policy standard”.¹¹ In contrast, the policy debate on environmental protection in transnational value chains lacks an equally accepted, comprehensive, and influential policy standard. Given this lacuna, the concepts and approaches developed for human rights protection are a fruitful source of inspiration when discussing regulatory strategies for environmental protection in transnational value chains.

The Special Representative of the Secretary-General and transnational corporations and other business enterprises, John Ruggie, described the phenomenon of governance gaps regarding human rights abuses:

The root cause of the business and human rights predicament today lies in the governance gaps created by globalization - between the scope and impact of economic forces and actors, and the capacity of societies to manage their adverse consequences. These governance gaps provide the permissive environment for wrongful acts by companies of all kinds without adequate sanctioning or reparation. How to narrow and ultimately bridge the gaps in relation to human rights is our fundamental challenge.¹²

Ruggie’s evaluation of the “business and human rights predicament” can be equally applied to the analogue ‘business and environment predicament’ in transnational value chains.

Conventionally, the State on whose territory an infringement of rights occurs is the competent and responsible entity to address the issue, the actor that can most readily put in place a suitable legislative framework, establish adequate administrative measures and judicial procedures to both prevent and redress such infringements. However, competitive pressure to attract and facilitate foreign direct inward investment may impede host States’ efforts, particularly in the Global South, to tighten regulatory standards and their enforcement.¹³ Therefore, the governance gaps mentioned above may be rooted, inter alia, in particular in local regulatory deficits as well as local enforcement deficits. Furthermore, the rationale for the traditional, strictly territorial approach to human rights and environmental protection is being challenged with reference to asymmetrical balance-of-power structures in transnational value chains: Economically potent actors, such as the parent companies of multinational corporate groups or powerful ‘lead firms’ in transnational supply chains, are often domiciled outside the territory where an infringement has occurred and, therefore, beyond the jurisdiction and regulatory reach of the affected host State.¹⁴

Against this backdrop, and in the absence of a sufficiently effective regime of environmental protection through international law, the question arises as to how problems related to issues such as negative environmental or human rights impacts in transnational value chains may be tackled by means of home State regulation.¹⁵

Home State Regulation

The concept of home State regulation covers regulatory concepts that assert jurisdiction based on companies’ incorporation, headquarters or principal place of business within the jurisdiction of the regulating State.¹⁶ In this sense, the companies that are being regulated are domiciled or ‘at home’ in the regulating State. Home State regulation, in a broader sense, may also assert jurisdiction based on a company’s business operations on the home State’s territory, even if the company is incorporated elsewhere and does not have any headquarters or principal place of business within its territory. Typically, home State regulation seeks to influence locally-domiciled companies’ conduct abroad. Therefore, home State regulation is designed to have extraterritorial impacts, even if its scope of application is strictly limited to the home State’s territory.¹⁷

Home State regulation is neither a magic potion¹⁸ nor a silver bullet¹⁹ to easily close governance gaps and solve all the problems that occur along transnational value chains. Even though a healthy scepticism towards regulatory instruments relying on home State control may be justified,²⁰ home State regulation can arguably work when used as a complement to the regulatory efforts of host States²¹ and related undertakings at the international level.²² There is a controversial debate whether home States may be obliged to follow such approaches of regulation with extraterritorial effects, in particular with regard to the positive human rights obligation ‘to protect’.²³ Recent case law of the German Federal Constitutional Court (FCC) suggests such an obligation for Germany could be based on constitutional rights in the German Constitution.²⁴ However, even if such a human rights obligation for some kind of regulatory intervention by home States can be established, it would still be more challenging to make a case for such an obligation with regard to environmental protection beyond its overlap with human rights.²⁵ Regardless of the debate whether home States must adopt this kind of legislation, it is less controversial that they may do so under specific circumstances.²⁶ Whereas the idea to harness home State law with some extraterritorial effects to achieve certain regulatory goals is not new in the realm of environmental regulation,²⁷ in recent years the approach has gained new traction with the ‘Duty of Vigilance Act’ in France (2017),²⁸ the law against child labour in the Netherlands (2019), the German ‘Corporate Supply Chain Due Diligence Act’ (2021), the Norwegian ‘Act relating to enterprises’ transparency, work on fundamental human rights and decent working conditions’ (‘Transparency Act’) (2021),²⁹ and some pieces of legislation at the EU level (Timber Regulation, Conflict Minerals Regulation, Non-Financial Reporting Directive).

This chapter explores how EDD obligations could be established in national law as means of home State regulation to improve conditions of business operations in transnational value chains. Given the topic of this study, the focus of such obligations would be to prevent harm to the environment, including through precautionary obligations. Furthermore, how a law could be designed to give rise to liability in cases where a violation of the due diligence obligation occurred will also be examined.

3 Emerging Due Diligence Regimes for Transnational Value Chains

This section outlines some of the emerging due diligence regimes regarding human rights and environmental concerns in transnational value chains—concepts that can already be identified in national, EU and international soft law.³⁰ In the relatively recent history of human rights and environmental due diligence (hereafter ‘HREDD’) by means of home state regulation, a number of national statutes have entered into force and various draft bills have emerged. Most approaches are based on the concept of due diligence as originally spelled out in the UNGPs³¹ (¶ 14 et seq.). The pursued approaches can be broadly grouped into two categories: Comprehensive approaches on the one hand (¶ 20 et seq.) and narrowly-focused ones which tackle a limited range of issues on the other (¶ 68 et seq.). Both categories may be applied at the national, EU or international level (¶ 71 et seq.).

3.1 Due Diligence in Transnational Value Chains: History and Terminology

Due diligence has been established as a legal concept for decades in quite disparate legal fields, ranging from business law, where it is traditionally used to describe a risk management tool in the context of corporate or real-estate transactions, through to public international law³².³³ However, the UNGPs’ ‘second pillar’ has adopted the term but established its own constitutive construct.³⁴ Although non-binding, the ‘second pillar’ suggests that every business enterprise—regardless of its size, sector, operational context, ownership and structure (UNGP no. 14)—should respect human rights and, to this end, carry out human rights due diligence (UNGP no. 15(b)). The underlying human rights due diligence (HRDD) concept is distinguished by a particularly broad scope, covering in principle all adverse impacts of an enterprise’s business activity, not only when such impacts are directly caused or contributed to by the enterprise (UNGP no. 13(a), even when such impacts are caused by third parties, as long as the impacts are “directly linked” to an enterprise’s operations, products or services through its business relationships (UNGP no. 13(b). Hence, HRDD’s scope could potentially cover any given enterprise’s entire value chain.

Since the UNGPs’ adoption in 2011, the concept has been tremendously influential regarding both other soft law approaches³⁵ as well as hard law legislation.³⁶

Human Rights Due Diligence

The concept of human rights due diligence was originally developed within the UNGPs’ ‘second pillar’, i.e. the corporate responsibility to respect human rights.

Human rights due diligence’s core elements consist of a series of subsequent steps of

• identifying,

• preventing,

• mitigating, and

• accounting for

relevant risks that actually or potentially have adverse human rights impacts with which the company conducting due diligence may be involved. Sometimes, the adoption of a relevant corporate policy statement and a complaints mechanism are also considered as elements of due diligence³⁷ as these steps are a part of the UNGPs’ ‘second pillar’ even though not technically part of human rights due diligence. In particular, if a company voluntarily creates a self-obligation to exercise HRDD, this can be a mechanism that creates legally binding obligations. In contrast, if exercising due diligence is mandatory under law, rather than the result of a voluntary decision, the imperative to make such a policy commitment may be reduced to it simply serving as means of a company communicating its compliance policy and expectation to its staff and business partners.

The UNGPs have obviously been strongly influenced by drawing on the transactional concept of due diligence taken from the business law. However, in doing so, John Ruggie insisted that the Guiding Principles “establish their own scheme for corporate human rights due diligence” and “stipulate their own constitutive construct of human rights due diligence”.³⁸

Due diligence in this sense generally defines a behavioural standard of conduct, rather than one of result, and provides a procedurally structured mode for dealing with certain risks. However, it is not a mere tick-boxing process as it can result in substantive obligations. If certain risks are detected or could be detected, certain obligations come into play that require those risks to be pre-emptively mitigated as far as possible.

Due diligence in this sense is neither a civil law nor a public or administrative law concept but a much broader, cross-cutting approach that can be relevant in all legal fields where risks to human rights are linked to business operations in transnational value chains. In the context of civil liability, due diligence obligations may be considered as the determinants of the relevant standard of care required.

The UN Guiding Principles on Business and Human Rights have become the global authoritative policy standard for business and human rights,³⁹ with the ‘second-pillar’ clearly setting the current benchmark in HRDD. It has served as a blueprint for, or at least largely inspired, a number of soft law instruments⁴⁰ as well as hard laws⁴¹ and legislative drafts around the world.

Ten years after the original endorsement of the UNGPs by the UN Human Rights Council in 2011, a strong global and quite consolidated consensus on which elements should be included in corporate HRDD-concepts can be observed.⁴² Although the concept was originally designed with the exclusive focus on human rights protection, it has been increasingly transferred to other issues of sustainability in the wider sense in transnational value chains.

Although such due diligence obligations that are currently ‘under construction’ in legislative attempts around the world feature strong procedural elements, they typically also amount to substantive obligations.⁴³ Given its procedural character, the due diligence concept, as it has been developed with a view to human rights protection, can be transferred to the protection of virtually any type of legal interest or object of protection, including the environment in transnational value chains.⁴⁴ This is true of course for organisational requirements that have been proposed to supplement a binding HRDD-regulation, namely documentation requirements, organisational compliance obligations, whistle-blower protection and a non-judicial grievance mechanism. However, it is also true for the substantive core elements of risk analysis, prevention (including effectiveness control) and remedy.⁴⁵

The line between exclusively procedural obligations, such as nominating a compliance officer, and substantive due diligence obligations, such as specific prevention measures, is blurry. Arguably, undertaking a risk analysis could be seen as falling between meeting either a simple procedural or clear-cut substantive obligation. Nevertheless, both types of obligations can be sharply distinguished from a third category that may be referred to as ‘direct commands or prohibitions’ and bind the obliged party to specifically do or not do something, e.g. not to import seal products or illegally logged timber.⁴⁶ Although such commands or prohibitions can be regulated with regard to value chains, they do not necessarily constitute due diligence obligations. While both types of obligations may be combined, a clear distinction can be crucial to the legal evaluation of several issues related to the design of EDD. Generally speaking, legal requirements regarding such direct commands and prohibitions can be more demanding in terms of their material scope,⁴⁷ requirements with regard to legal certainty,⁴⁸ the exercise of extraterritorial jurisdiction⁴⁹ and potential incompatibility with WTO law⁵⁰ than due diligence obligations.

If a due diligence obligation potentially covering an entire value chain was established, it would have legal consequences not only for the so called ‘arm’s-length’ value chains, linked by chains of contracts, but would extend even more so to the value chains between parent companies and their subsidiaries within corporate groups (argumentum a forteriori⁵¹). Therefore, the issue of corporate group liability is not specifically addressed here.⁵²

3.2 Comprehensive HREDD Approaches in Home State Law

Comprehensive due diligence concepts try to tackle all or most of the human rights issues, sometimes complemented by environmental matters, through a single, comprehensive set of due diligence rules, without limiting its scope in particular to specific industries or objects of protection. A number of examples for this type of due diligence legislation in national home State law will be outlined below, namely the French ‘Duty of Vigilance Act’ of 2017, a Swiss popular initiative (narrowly failed 2020), and the German ‘Supply Chain Due Diligence Act’ of 2021. At European level, the European Parliament’s proposal for a ‘Directive on Corporate Due Diligence and Corporate Accountability’ and the EU-Non-Financial Reporting Directive will be briefly presented. Other more recent examples from 2021, such as the Norwegian ‘Transparency Act’⁵³ and the Dutch Draft Bill for a ‘Responsible and Sustainable International Business Conduct Act’⁵⁴ could not be discussed here for reasons of practicality.

France: ‘Duty of Vigilance Act’ (2017)

After a lengthy and highly controversial legislative procedure which culminated in a constitutional review by the Constitutional Council,⁵⁵ the ‘Duty of Vigilance Act’⁵⁶ finally came into force in France on 29 March 2017.^57,58

French Constitutional Council, Decision No. 2017-750 DC of 23 March 2017

Immediately after the ‘Duty of Vigilance Act’ had been adopted by the French National Assembly and the Senate but before its promulgation in the Official Journal, 60 Senators and 60 Deputies referred the Act to the Constitutional Council (Conseil Consitutionnel) requesting the law be declared incompatible with the Constitution and therefore void.⁵⁹

On 23 March 2017, the Council ruled that the Act was constitutional for the most part.⁶⁰ Only the sanction with punitive character was considered unconstitutional and therefore declared void. In the Council’s view, the last paragraph of Article 1 of the adopted Act violated the principle of the “legality of crimes and punishments” (principe de légalité des délits et des peines). The Article stated: “The judge may order the company to pay a civil fine of up to 10 million euros. The judge shall set the amount of this fine in proportion to the seriousness of the breach and take into account the circumstances of the breach and the personality of the perpetrator.”⁶¹

The Constitutional Council based its verdict on a wide array of arguments, including the ‘generality’ of the terms human rights and fundamental freedoms without mentioning the other cited terms (health, safety of persons and the environment),⁶² the wide scope with regard to certain sub-contractors and suppliers,⁶³ and that effective measures of ‘reasonable’ oversight must be capable of “mitigating risks or of preventing serious breaches”.⁶⁴ A fourth argument was the fact that the adopted draft did not specify whether the civil fine could be imposed for each breach or only once, irrespective of the number of breaches.⁶⁵

However, even in the light of these findings, the Council deemed that neither the substantive obligations as such nor the remaining enforcement mechanisms through reporting, civil liability and the court-ordered penalty payment (astreinte) were unconstitutional.

The ‘Duty of Vigilance Act’ amends the French Commercial Code’s chapter regarding public limited companies (société anonyme) by introducing a “duty of vigilance” for certain corporations in Article L. 225-102-4 and -5.

Duty of Vigilance vs. Due Diligence

The French law is clearly inspired by the UNGPs’ due diligence concept.⁶⁶ Given that there is a literal equivalent to the English word diligence in French (diligence), the choice of the term “vigilance” must be seen as a deliberate deviation from the terminology of the UNGPs’ ‘second pillar’. However, it is not easy to identify any clear reason for this choice, as the conceptual commonalities with the UNGPs’ due diligence approach certainly outweigh the differences. However, legal practice and academic writing on the French law conventionally stick to the French term rather than adopting the internationally established term “due diligence”.⁶⁷

The personal scope of application covers any corporation that has at least 5000 employees on French territory or at least 10,000 employees around the world (Article L. 225-102-4 para. I subpara. 1 Commercial Code). Several questions regarding the personal scope of the law are unclear and await clarification by the French courts, particularly regarding the required corporate form and the location of a corporation’s registration.⁶⁸

According to the plain wording, the provision could be applied to any corporation with at least 10,000 employees anywhere throughout the world, regardless of whether or not its registered seat is in French territory. However, according to the interpretation by the Constitutional Council and most commentators, the parent company having a registered office in French territory is required.⁶⁹ As such, current estimates suggest that a fairly small number of only 150–300 companies falls within the personal scope of this law.⁷⁰ Indeed, a study conducted by a civil society project, identified, as of June 2020, a total number of 265 companies that were within the scope.⁷¹

The amended Commercial Code now obliges the corporations within its scope to establish and effectively implement a vigilance plan.⁷² Such a plan must include reasonable vigilance measures able to identify risks and prevent “severe violations” of human rights, “fundamental freedoms”, the health and safety of persons as well as environmental damage resulting directly or indirectly from the operations of the corporation and its subsidiaries.⁷³

Moreover, even violations and damage resulting from the operations of subcontractors or suppliers with whom the duty holder maintains an “established commercial relationship” must be included, provided that such operations are connected to this relationship. The legal concept of an “established commercial relationship” (“relation commerciale établie”) has been entrenched in French commercial law (cf. Article L. 442-1 II Commercial Code⁷⁴) for more than 20 years.⁷⁵ Traditionally, the concept is meant to protect smaller businesses in particular from an abuse of power where they are economically dependent on larger business partners which can threaten to suddenly terminate the relationship.⁷⁶ The use of this recognised legal concept may be motivated by the legislature’s intention to avoid the creation of new, and perhaps not sufficiently precise, legal terms.⁷⁷ However, it appears to be a rather unfortunate legislative choice to ‘transplant’ the term to a concept that is meant to protect third parties, in particular employees and local communities, so it is now applicable in the context of environmental issues within transnational value chains. Arguably, a broader and better fitting interpretation of “established commercial relationship” seems possible in the light of the UN Guiding Principles’ concept of a direct link formed by business relationships, relevant adverse impacts on the ground and the addressee of the norm’s business operations or products.⁷⁸ However, the Constitutional Council’s ruling seems to indicate that it favours a rather narrow interpretation in the light of its original meaning in Article L. 442-6 I Nr. 5 Commercial Code (now Article L. 442-1 II Commercial Code).⁷⁹ As a result, this interpretation seems to lead to a relatively limited scope regarding supply chains. Against the backdrop of these doubts arising from the terminological history in French law, the EU Commission’s proposal to ‚transplant’ the term once again into a future EU Corporate Sustainability Due Diligence Directive (Art. 3 lit. f and g of the Commission’s Proposal, cf. below ¶ 63)—thereby creating a kind of ‘second-degree legal transplant’—may cause even more confusion.

Regarding its purpose and object of protection, the French ‘Duty of Vigilance Act’ goes beyond human rights⁸⁰ and specifically includes the protection of the environment against “severe impacts”. However, the statute does not specify its notion of ‘human rights’ nor what is included in its use of the word ‘environment’. A more explicit listing of norms of reference had been considered, however, this was ultimately not adopted.⁸¹

Under the Act, the required vigilance plan needs to be developed in cooperation with relevant stakeholders, preferably within the framework of a multi-stakeholder initiative. It must include at least the following five elements (Article L. 225-102-4.-I- para. 4 no. 1–5 Commercial Code):

• 1. a ‘risk map’ (‘cartographie des risques’) that identifies, analyses and prioritises the risks for the mentioned objects of protection,⁸²

• 2. evaluations of subsidiaries, subcontractors and suppliers with which the corporation maintains an “established commercial relationship”,

• 3. appropriate action to mitigate risks and prevent serious harm,

• 4. a whistle-blowing mechanism established in cooperation with relevant trade unions, and

• 5. a system to monitor the effectiveness of the implemented measures.

A decree providing more specifications for the required elements of the vigilance plan (Article L. 225-102-4-I para. 5⁸³) may be issued by the government after consultation of the Council of State (Conseil d’État).

The French law contains a threefold enforcement mechanism: First, the corporation is obliged to publish the vigilance plan and a report on its effective implementation as part of its non-financial reporting obligations under Article 225-102 Commercial Code.⁸⁴ Second, anyone who can justify a legitimate interest in the corporation’s compliance has standing to file a motion for non-compliance/injunction to comply. Three months after an unsuccessful formal notice (‘mise en demeure’) the competent court may, according to Article L. 225-102-4.-II, compel the corporation in question to comply if necessary, by imposing a periodic penalty payment (‘astreinte’). This procedure is an interesting enforcement mechanism as a complementary approach to civil liability for damages which, unlike the latter, does not require that any damage has already occurred. Rather, this periodic penalty payment approach may be viewed as more of a preventive measure applied as soon as the duty of vigilance as such has been violated.

Finally, Article L. 225-102-5 Commercial Code provides for liability for any damage caused by non-compliance with the obligation imposed by its Article L. 225-102-4. However, the pressing issue of the conflict of laws is not addressed. This may lead to practical problems when suing based on the French ‘Duty of Vigilance Act’ because, in the paradigmatic case of damage occurring in a third country, it will be the third country’s tort law, rather than France’s, that would be applicable pursuant to Article 4(1) Rome II Regulation as a basic rule (lex loci damni).⁸⁵ The French liability provision can and should be interpreted as an overriding mandatory provision within the sense of Article 16 Rome II Regulation resulting in the application of French law, however, in absence of an explicit clarification, such an interpretation does not appear to be compelling. Although the issue was considered during the deliberation in the French National Assembly,⁸⁶ a motion to clarify this point was dismissed.⁸⁷ This could be interpreted as the legislator’s intention not to make the liability rule an overriding mandatory provision.⁸⁸ Nevertheless, the National Assembly’s intention to hold French companies liable pursuant to the French duty of vigilance standard, especially in cases such as Rana Plaza, was very clear. The most appropriate way to achieve this is the interpretation that the liability aspect of the law should be viewed as an overriding mandatory provision.

Article L. 225-102-5 para. 1 Commercial Code refers to the general tort rule stipulated in Article 1240 (formerly Article 1382) et seq. Civil Code.⁸⁹ Thus, traditional tort law, both substantive and procedural, would apply to claims under Article L.255-102-5 Commercial Code. Generally speaking, tortious liability simply requires three elements: some form of damage (‘dommage’), intention/negligence/breach of a duty (‘faute’) and a causal link (‘lien de causalité’) between the two aforementioned elements.⁹⁰ The burden of proof for all of these elements rests with the claimant.

It has been pointed out that the duty of vigilance in the new Act is conceptualised as a duty of conduct and not one of result.⁹¹ Hence, any breach of the duty of vigilance cannot simply be inferred by establishing the occurrence of damage.⁹² Therefore, the plaintiff needs to prove all three elements cited above to establish tortious liability. While proving that there has been a breach of the duty of vigilance may not be easy, given that all the relevant information is in the possession of the obliged corporation, proving the necessary causal link is likely to be even more difficult. This becomes apparent when one considers that the plaintiff must prove that the damage would not have occurred if the defendant had duly complied with his duty of vigilance. Shifting the burden of proof onto the corporation,⁹³ which had been considered in the initial stages of the first legislative procedure on the matter,⁹⁴ was discarded at later stages of the procedure. Interestingly, just as in the case of injunctive relief, any person showing an interest in acting for this purpose has standing to bring the lawsuit for damages (Article L. 225-102-5 para. 2 Commercial Code).

Pursuant to Article L. 225-102-5, para. 3 Commercial Code, the adjudicating court may order its ruling on civil liability to be published, disseminated or displayed at the cost of the losing party.

To date, very few cases have been brought alleging a violation of the duty of vigilance and, as of December 2020, there were only a total of seven procedures ongoing (against TOTAL (two cases), EDF,⁹⁵ TELEPERFORMANCE,⁹⁶ XPO Logistics Europe,⁹⁷ SUEZ,⁹⁸ and Casino Guichard-Perrachon⁹⁹). All seven of these are based on the procedure pursuant to Article L. 225-102-4.-II (formal notice and subsequent injunction with penalty payment). No civil liability claim for compensating damages has yet been filed. Only four cases have passed the preliminary procedure of a formal notice (mise en demeure) and progressed to the point of having been filed in court: The two lawsuits against TOTAL, the one against EDF and the one against Casino Guichard-Perrachon: The first case was brought by Friends of the Earth France (‘Les Amis de la Terre’) and other NGOs against TOTAL. In this case, the claimants allege that TOTAL failed to comply with its duty of vigilance obligations, in particular, that the vigilance plan is insufficient with regard to its business activities in Uganda.¹⁰⁰ The case was brought at the Nanterre High Court, however, the Court declared itself incompetent to hear the case and referred it to the Nanterre Commercial Court,¹⁰¹ a decision that was upheld by the Court of Appeals of Versailles,¹⁰² but finally overturned by the Court of Cassation.¹⁰³ Another case against TOTAL was brought by Notre Affaire à Tous and other NGOs as well as fourteen municipalities (‘communes’) regarding issues concerning climate change.¹⁰⁴ A third case, that involving EDF, concerns an alleged violation of indigenous peoples’ rights in the context of the construction of a major wind farm in Mexico. The claim was filed in October 2020 by individual members of the affected communities with the support of a local NGO (ProDESC), the European Center for Constitutional and Human Rights (ECCHR) and a number of other French and international NGOs.¹⁰⁵ It was dismissed by a civil court in Paris in December 2021.¹⁰⁶ A fourth case was brought against the Casino group,¹⁰⁷ a global retailer with a special focus on the Latin American market, claiming that Casino’s business activities contribute to deforestation and land-grabbing in Latin America.¹⁰⁸

As is obvious from the foregoing, the ‘flood’ of lawsuits for damages or injunctions and penalty payments, often invoked by the corporate lobby opposing a liability mechanism , is not in sight.

Germany: Corporate Supply Chain Due Diligence Act: ‘LkSG’ (2021)

Four years after the pioneering French law was enacted, Germany adopted a similar piece of legislation: The ‘Act on Corporate Due Diligence Obligations for the Prevention of Human Rights Violations in Supply Chains’¹⁰⁹ (hereafter: ‘Supply Chain Due Diligence Act’) was passed by the German Bundestag on 11 June 2021, at the very last moment of its 19th legislative term and in the penultimate week of the parliamentary session.¹¹⁰

The passage of this bill signalled something of an preliminary end to the policy debate that had been triggered at the national level in 2015 by the Federal Government’s consultation procedure for a National Action Plan for Business and Human Rights. Civil society had been calling for binding HRDD-legislation in Germany and four NGOs (Amnesty, Bread for the World, Germanwatch and Oxfam) commissioned a proposal on how a statutory HRDD-obligation could be set out and enforced in German law. The proposal for a draft ‘Bill on the Obligation of Companies to Exercise Due Diligence in the Protection of Human Rights’ (in the following ‘HRDD Bill-proposal’ or simply ‘NGO-proposal’) was published in 2016.¹¹¹ It was largely based on the UNGPs’ ‘second pillar’ and also draws on early draft versions of the French ‘Duty of Vigilance Act’ and the Swiss Coalition for Corporate Justice’s proposal.¹¹² The NGO proposal focused strictly on human rights due diligence and did not include any specific obligations with respect to the protection of the environment as such. Nevertheless, in February 2019, a classified draft outline (‘internal memo’¹¹³) by the Federal Ministry for Economic Cooperation and Development (BMZ) became publicly known after it was leaked to the press¹¹⁴ (hereafter: the BMZ draft¹¹⁵). Some parts of it were obviously inspired by or literally taken from the 2016 NGO proposal. However, unlike the NGO proposal, the BMZ draft also contains a comprehensive set of rules regarding EDD in its Section 4(3) and Section 3 no. 8 and 9. A third and more recent proposal was commissioned in November 2020 by the German Green Party and published in June 2021.¹¹⁶ Given the highly contentious political battles that ensued regarding the proposed legislation, it is no surprise that the ‘Supply Chain Due Diligence Act’ eventually fell short of these early drafts in several respects, as will be outlined below.

The ‘Supply Chain Due Diligence Act’ generally applies to enterprises regardless of their legal form that have their central administration, principal place of business, administrative headquarters or statutory seat in Germany and that have at least 3000 employees (from 1 January 2024 this will be reduced to 1000 employees) in Germany (Section 1(1) of the Act). The threshold criterion is less restrictive than in the French law,¹¹⁷ however, it still appears somewhat arbitrary. It would have had more been more consequent, especially with regard to the principle of the protection of legitimate expectations (‘Vertrauensschutz’),¹¹⁸ if the threshold criterion had not exceeded the recommendation from the German National Action Plan for Business and Human Rights of 2016¹¹⁹ (500 employees).

Enterprises that fall within the scope of the Act are obliged to exercise due regard for the human rights and environment-related due diligence obligations pursuant to ‘Division 2’ (“Due diligence obligations”) of the Act (Section 3(1) s. 1). The core elements of these due diligence obligations include establishing a risk management system (Section 4(1) of the Act), performing risk analyses (Section 5), taking preventive measures, which includes making a policy statement (Section 6) and taking remedial action (Section 7). Those core elements are flanked by supplementary, organisational obligations, such as designating a compliance officer (Section 4(3)) as well as documenting (Section 10(1)) and reporting (Section 10(2)) requirements. These basic elements of due diligence can all be traced back to the UNGPs’ ‘second pillar’ and, therefore, were barely contested in the legislative procedure.

A major area of criticism¹²⁰ in the ‘Supply Chain Due Diligence Act’ relates to its general limitation of scope regarding the affected companies “own business area” and “direct suppliers”, i.e. ‘tier 1’ (cf. Section 5(1) s. 1, Section 6(3) and (4), Section 7(1) and (2) ‘Supply Chain Due Diligence Act’). Hence, the entire downstream value chain is categorically excluded from the due diligence obligation’s scope. The upstream value chain beyond direct suppliers (‘tier 1’) is subject to the due diligence only exceptionally if an enterprise obtains “substantiated knowledge” (“subsantiierte Kenntnis”) of potential human rights-related or environment-related issues in the supply chain. ‘Substantiated knowledge’ is defined as having “actual indications” that “suggest” a violation of a human rights-related or an environment-related obligation by an indirect supplier may be possible (Section 9(3) ‘Supply Chain Due Diligence Act’). This approach is problematic, firstly, because it is inconsistent with the UNGPs which are, as previously notes, accepted as the global authoritative standard, secondly, it creates an undesirable and unpalatable reward for ignorance; indeed, those companies which responsibly and voluntarily ‘did their homework’ on their supply chain to examine and monitor their specific problems; in contrast, their competitors that simply ignored these issues could be better off.¹²¹ It remains to be seen, whether avoiding such contradictory results can be achieved by means of an extensive interpretation of the term “substantiated knowledge”.

In contrast, the earlier alternative drafts by the NGOs and by the BMZ made attempts to include the entire value chain and avoid a fixed limitation to a certain tier in the value chain. The practical challenges associated with imposing such a far-reaching obligation on value chains were addressed by an ‘adequacy test’ (“Angemessenheit”) that looked at all the substantive obligations related to the entire value chain and any human rights abuse to which a company potentially contributes (cf. Section 6(4) HRDD Bill-proposal). However, all obligations in this context are limited by an adequacy criterion. The company is obliged to carry out a risk analysis and to adopt preventive and remedial measures only to the extent that make the given measures adequate (“angemessen”) (cf. Section 6(2), Section 7 sentence 3, and Section 8 sentence 2 HRDD Bill-proposal). Section 6(2) sentence 2 HRDD Bill-proposal further defines the ‘adequacy test’ by explicitly mentioning certain criteria, namely the country- and sector-specific risks, the severity and likelihood of possible human rights abuses, how directly the company is contributing to such abuses as well as the size of the company and the actual economic leverage the company can exert on the actor directly causing the abuse. This catalogue of criteria is inspired by UNGP no. 17(b) and a version of this proposal for an adequacy-criterion list was eventually adopted in Section 3(2) ‘Supply Chain Due Diligence Act’.¹²²

Unlike the French ‘Duty of Vigilance Act’ and the BMZ draft, the ‘Supply Chain Due Diligence Act’ touches upon environmental issues merely in passing and rather puts a clear focus on human rights. The Act’s official title—‘The Act on Corporate Due Diligence Obligations for the Prevention of Human Rights Violations in Supply Chains’—does not even mention environmental protection.¹²³ Nevertheless, the Act does contain some elements on environmental aspects.

Firstly, its catalogue of “human rights risks” contains a clause relating to certain environmental impacts. Section 2(2) no. 9 ‘Supply Chain Due Diligence Act’ reads as follows:

A human rights risk within the meaning of this Act is a condition in which, on the basis of factual circumstances, there is a sufficient probability that a violation of one of the following prohibitions is imminent: (…) no. 9. the prohibition of causing any harmful soil change, water pollution, air pollution, harmful noise emission or excessive water consumption that a) significantly impairs the natural bases for the preservation and production of food, b) denies a person access to safe and clean drinking water, c) makes it difficult for a person to access sanitary facilities or destroys them or d) harms the health of a person;

Hence, a human rights risk pursuant to Section 2(2) no. 9 of the Act always requires an impairment of one of the human rights goods listed in items a) through d). Purely environmental damage, such as a loss of biodiversity, is not covered. Climate change issues are not addressed explicitly; if and to what extent Section 2(2) no. 9 of the Act could nevertheless fuel climate change litigation remains to be seen.¹²⁴ Environmental issues are addressed in Section 2(3) of the Act, irrespective of any human rights implications, by referencing the quite narrow prohibitions in the Minamata, the POPs and the Basel Conventions.

The BMZ draft went further as it explicitly set the protection of the environment in global value chains as a core purpose (cf. Section 1 sentence 1 BMZ draft). Section 4(3) BMZ draft recommended a stipulation that the object of EDD is compliance with fundamental environmental protection requirements on the one hand and the prevention of environmental damage on the other. Both terms were defined in BMZ draft Section 3 no. 8 and 9. The draft also went on to create an overarching concept of violations, which were defined as “human rights abuses” or “not insignificant” violations of fundamental environmental protection requirements or not insignificant environmental damage (Section 3 no. 10 BMZ draft). Consequently, the three due diligence core elements (risk analysis, preventive and remedial measures) relate to this broad concept of ‘violation’ (cf. Sections 5 and 6 BMZ draft).

The core enforcement mechanism of the ‘Supply Chain Due Diligence Act’ consists of monitoring and enforcement by the Federal Office for Economic Affairs and Export Control (Bundesamt für Wirtschaft und Ausfuhrkontrolle—BAFA) (Division 4 of the Act). Means for administrative enforcement include financial penalties (‘Zwangsgeld’) and administrative fines (‘Bußgeld’, Section 24 of the Act).

A legal basis for any civil liability claims for damages caused by a violation of the due diligence obligations is not included. On the contrary, Section 3(3) s. 1 ‘Supply Chain Due Diligence Act’ specifically states that: “A violation of the obligations under this Act does not give rise to any liability under civil law.” However, civil liability claims pursuant to the lex lata remain unaffected (Section 3(3) s. 2 of the Act). The Act does, however, presuppose the existence of legal grounds for civil liability claims, as is highlighted by the civil procedural rule in Section 11 of the Act pursuant to which victims of certain human rights abuses may authorise a domestic trade union or NGO to bring proceedings to enforce his or her rights in its own capacity. The inclusion of this rule was a compromise intended to account for the lack of an explicit enforcement measure for civil liability and make the Act acceptable to the needed majority within the Federal Government. However, this rule is rather unlikely to have much impact on litigation practice.

In contrast, both the NGO proposal from 2016 and the BMZ draft from 2019 advocated for the inclusion of an explicit liability clause. However, Section 15 of the NGO proposal did not recommend creating a new legal basis for civil liability, rather, it simply elucidated the behavioural standard as set out by the due diligence obligations in its part 2 to be the applicable standard of care. By stipulating its applicability irrespective of any extraneous laws otherwise applicable to the non-contractual liability under private international law, the NGO proposal declared the due diligence obligation explicitly as an ‘overriding mandatory provision’ pursuant to Article 16 Rome II Regulation.¹²⁵ As a result, claims for damages relating to human rights abuses would still have been adjudicated based on the lex loci damni. Only when determining the relevant duty of care standard would the potentially stricter due diligence obligations pursuant to the NGO proposal need to be consulted.

The public administrative enforcement aspect of the Act is flanked by the rules on public procurement (Section 22), stipulating that any enterprise that has been fined pursuant to Section 24 for a violation of its due diligence obligations shall be, under certain circumstances, excluded from the award of public contracts.

Overall, the enforcement mix in the ‘Supply Chain Due Diligence Act’ does contain some rather innovative approaches with a strong focus on public administrative oversight instruments. However, a more comprehensive mix, such as one that included the elements of civil liability and criminal liability as suggested in the BMZ draft, would have provided the Act with ‘more teeth’.

Switzerland: A Narrowly Failed Popular Initiative (2015–2020)

After a legislative proposal was narrowly defeated in the Swiss National Council in March 2015 following a turbulent and somewhat dubious voting procedure,¹²⁶ the so-called ‘Swiss Coalition for Corporate Justice’ (‘Konzernverantwortungsinitiative’, hereafter: ‘Initiative’) launched an initiative text¹²⁷ containing a draft for a new Article 101a (“Responsibility of Business”) of the Swiss Federal Constitution (hereafter: BV-E). The initiative text proposed to impose a legal obligation on companies with a registered office, central administration or principal place of business in Switzerland to respect “internationally recognised human rights” and “international environmental standards” even in their overseas operations. On 29 November 2020, the Initiative secured the necessary majority (‘Volksmehr’, ‘majorité du peuple’); however, according to Article 142(3) of the Swiss Constitution it would have also required the majority of cantons (‘Ständemehr’, ‘majorité des cantons’). The Initiative failed to clear this hurdle (8.5 canton-votes in favour and 12.5 votes against).¹²⁸ Nevertheless, the Initiative triggered a piece of HRDD legislation, albeit a rather weak one, focusing on conflict minerals and child labour that relied solely on reporting obligations as an enforcement mechanism but which did not create any new legal liabilities.¹²⁹

Although the Initiative’s draft was ultimately not adopted, it may serve as reference material for the examination and development of HREDD legislation. The proposal contains two core elements: a substantive due diligence obligation with regard to human rights and environmental standards throughout the value chain and a corporate liability mechanism for harm caused by the company itself or undertakings it controls.

The first core element of the proposal is a HREDD obligation that shall be regulated by law (Article 101a(2)(b) BV-E). This element is largely based on the concept of HRDD according to UNGPs and OECD Guidelines. Beyond the duty bearer’s own operations, the due diligence obligation’s scope includes undertakings that the entity legally or economically and factually controls and all business relationships (Article 101a(2)(b) s. 3 BV-E). The due diligence obligation includes (1) the duty to investigate actual and potential impacts on the environment and internationally recognised human rights issues, (2) the duty to take appropriate measures to prevent violations of internationally recognised human rights and international environmental standards as well as putting an end to existing violations, and (3) to account for the measures taken (Article 101a(2)(b) half-sentence 2 BV-E).

The phrase “international environmental standards” is not explained in detail in the Initiative’s draft, however, the explanatory remarks in the official communication of the Swiss Federal Council indicated that they include both standards under international law (such as the United Nations Framework Convention on Climate Change, the Vienna Convention for the Protection of the Ozone Layer and the ambient air quality standards of the World Health Organization) as well as private standards of NGOs (e.g. technical norms or standards of the International Organization for Standardization [ISO]).¹³⁰

By mentioning “international environmental standards”, the Initiative’s proposal references international environmental treaty law on the one hand and to non- specified soft law standards on the other. This referral to two fundamentally different categories of legal sources may raise questions, especially given that the text is supposed to define a binding legal standard. However, it should be borne in mind that the wording is designed as a proposal for a, typically broadly formulated, constitutional norm. A constitutional norm requires further implementation and concretisation by laws below the constitutional level. The underlying reason is that according to Articles 138 and 139 of the Swiss Federal Constitution, only an amendment to the Constitution may be the subject matter of a ‘popular initiative’ (‘Volksinitiative’). Consequently, the Swiss legislature will have to specify more precisely what is to be considered an “international environmental standard” within the meaning of the Constitution.¹³¹

The second core element of the Initiative’s proposal is a civil liability regime for damage resulting from “violations of internationally recognised human rights or international environmental standards in the course of their business activities”. This regime includes instances where the damage in question is directly caused by third-party companies to the extent that these are “controlled” by the obliged company. The liability regime is modelled on the concept of the principal’s liability (“Geschäftsherrenhaftung”¹³²) pursuant to Article 55 of the Swiss Code of Obligations (‘Obligationenrecht’, hereafter ‘OR’). The plaintiffs in such cases must prove the occurrence of a damage, wrongfulness, and an adequate causal link. However, the company may exculpate itself by observing due diligence as required by law or by the fact that the breach of due diligence was not causal for the damage (Article 101a(2)(c) s. 2 half-sentence 1 BV-E). Werro considered the proposal based on Article OR to be a reserved and rather business-friendly regulation by international comparison.¹³³

In contrast to the due diligence obligation, which can essentially cover the entire value chain (‘all business relationships’), the liability regime is limited to causation by the company itself and causation contributions stemming from controlled companies.¹³⁴ The notion of control is explicitly intended to include the simple and factual economic exercise of power and, as such, is not limited to corporate group structures under company law (Article 101a(2)(a) half-sentences 3 and 4 BV-E). According to Gregor Geisser, the leading counsel behind the Initiative, this is to be interpreted as a broad concept of a corporate group, which goes beyond the concept of a group under accounting law and its formal concept of control according to Article 963 sentence 2 OR.¹³⁵ However, in his understanding, this broad concept encompasses the outer limit of liability where liability for damage in pure supply and value-added chains without at least de facto economic control over the direct causer is ruled out.¹³⁶

Thus, it must be noted that while the Initiative advocates a broad conceptualisation of what constitutes a corporate group, it limits liability strictly to the outer edges of the group. The substantive due diligence obligation explicitly encompasses “all business relations” i.e. even those beyond the company’s own control.¹³⁷ However, the company can only be held liable for those portions of the business relations that it controls, i.e. basically only for events within its own corporate group in the wider sense as described above.

At first glance, liability pursuant to the German proposals by NGOs in 2016 and the BMZ in 2019 seems to go further than the Swiss Initiative’s draft. While the latter strictly requires full control over the entity that directly caused damage, the mentioned German proposals do not explicitly do so. As the due diligence obligation pursuant to these proposals potentially covers the entire value chain, even those parts of the chain beyond the obliged company’s sphere of control, it thereby creates (via Section 15 HRDD Bill-proposal) a tortious duty of care that provides for liability without necessarily requiring the obligated company to control the entity that directly caused the damage. Nevertheless, it is likely that the outcomes of cases based on either the Swiss draft or the German proposals would not differ fundamentally. This is because pursuant to the German proposals, a company may be held liable only to the extent that the damage can be causally attributed to a breach of due diligence obligations, i.e. if it could have been prevented by careful conduct on the part of the obligor. In the absence of any possibility of control over the direct perpetrator, it is difficult to imagine a situation where a breach of due diligence obligations may cause specific damage: If an obliged company does not have any control whatsoever or at least potential influence on a third-party tortfeasor in the value chain, the obliged company cannot prevent damage caused by the third-party even with the highest could not have been prevented and therefore liability is equally ruled out in such cases under the 2016 NGO-concept.

Article 101a(2)(d) BV-E solves the problem of the conflict of laws, an issue that also arises under Swiss international private law. Just as under the Rome II Regulation (Article 4), generally foreign tort law is applicable (Article 133 IPRG) in relevant cases where the damage occurs somewhere abroad.¹³⁸ Therefore, the duty of care pursuant to Initiative’s proposal shall apply “irrespective of the law applicable under private international law” (Article 101a(2)(d) BV-E).

European Union: EP Resolution on a Corporate Due Diligence and Corporate Accountability-Directive (2021)

In March 2021, the EP adopted a resolution calling for a Corporate Due Diligence and Corporate Accountability Directive (hereafter: “Draft Directive”).¹³⁹ A Commission-draft for such a directive that that had been announced by the Commissioner for Justice in 2020 was, after a public consultation for the Commission’s ‘Sustainable Corporate Governance Initiative’ in early 2021,¹⁴⁰ finally published on 23 February 2022¹⁴¹ (after the editorial deadline for this book). It may differ significantly from what Parliament requested, and it will shape the further legislative procedure decisively. As such, the EP’s proposal will be mentioned only very briefly¹⁴² here:

As is the case with other national HRDD acts, such as those in France and Germany, the Draft Directive adopts a concept of due diligence which is inspired by the UNGPs’ ‘second pillar’. Indeed, in many ways, the EP-Draft is significantly more in line with the UNGPs’ concept than legislation such as the German ‘Supply Chain Due Diligence Act’.¹⁴³ This particularly is true with respect to the due diligence obligation’s scope which potentially covers the entire value chain—explicitly including even its downstream part (cf. Article 1(1) and (2), Article 3(5) Draft Directive). The Draft Directive also provides for a quite robust and comprehensive enforcement regime, including public administrative oversight (Article 12 Draft Directive) by an independent authority endowed with sufficient investigative powers to be an effective tool (Article 13 Draft Directive). It furthermore includes Member States’ obligation to provide for “effective, proportionate and dissuasive” sanctions, in particular fines and temporary or permanent exclusion from public procurement, state aid etc. (Article 18 Draft Directive). Unlike the German ‘Supply Chain Due Diligence Act’, the Draft Directive explicitly requires Member States to also provide for a civil liability regime under which undertakings may “be held liable and provide remediation for any harm arising out of potential or actual adverse impacts on human rights, the environment or good governance that they, or undertakings under their control, have caused or contributed to by acts or omissions” (Article 19 Draft Directive).¹⁴⁴

European Union: Non-financial Reporting-Directive (2014)

Directive 2014/95/EU regarding the disclosure of non-financial and diversity information (dubbed: the “Non-financial reporting Directive” or NFRD),¹⁴⁵ which is currently being revised,¹⁴⁶ may be added to the category of ‘comprehensive approaches’. Nevertheless, it does potentially cover, inter alia, all human rights and environmental matters in transnational value chains of EU companies. Therefore, its material scope can be considered as rather comprehensive, notwithstanding certain weaknesses and limitations. These weaknesses result particularly from the lack of any kind of defined normative behavioural standard as the Directive barely mentions the issues that should be dealt with in the reporting process. Having said that, even a more ambitious Reporting Directive, one that establishes such substantive behavioural standards, can still have only limited impacts as all the transparency mechanisms are based on the assumption that the information published by a company will be relevant for the transaction decisions other market participants.¹⁴⁷

The NFRD’s personal scope is rather limited and covers only undertakings that have more than 500 employees and are so-called ‘public-interest entities’¹⁴⁸ (Article 19a(1) sentence 1 Directive 2013/34/EU).¹⁴⁹ The covered undertakings are obliged, in addition to their mandatory financial management report, to include a “non-financial statement containing information to the extent necessary for an understanding of the undertaking’s development, performance, position and impact of its activity, relating to”, inter alia, environmental matters and respect for human rights. This shall include, in particular,

• “a description of the policies pursued by the undertaking in relation to those matters, including due diligence processes implemented” (item b),

• “the outcome of those policies” (item c), and

• the “principal risks related to those matters linked to the undertaking’s operations including, where relevant and proportionate, its business relationships, products or services which are likely to cause adverse impacts in those areas, and how the undertaking manages those risks” (Article 19a Directive 2013/34/EU).

The reference to “business relationships” includes, notwithstanding the limitation through the criteria of relevance and proportionality, the potential to cover the entire value chain.¹⁵⁰

If an undertaking does not pursue policies in relation to the enumerated matters, it must provide an explanation for not doing so (a so-called ‘comply-or-explain’-approach, Article 19a(1) subpara. 2 Directive 2013/34/EU). Hence, the Directive does not define any substantive standard of conduct and it barely mentions a number of matters which must be covered in the non-financial statement. Therefore, the transparency approach of the Directive appears to a certain extent as a rather soft enforcement mechanism that lacks any kind of substantive behavioural obligations whatsoever. The underlying rationale, however, presumes that investors and other market participants do have a significant preference for investing in or doing business with undertakings that comply voluntarily with high human rights and environmental standards. While this may be true for some market participants, concerns arise that substantial steering effects can be expected beyond the niche for ‘sustainable products’ in the overall market. Not surprisingly, it remains contested whether a transparency mechanism that attempts to operate without any substantive benchmark or behavioural standards will have any significant or even measurable real-world effect.¹⁵¹

3.3 Isolated Approaches Regarding Specific Industries and Objects of Protection

In contrast to comprehensive approaches, isolated or stand-alone approaches seek to tackle some environmental and human rights issues only in a specific industry, stage of a value chain or with respect to a limited set of objects of protection.

One example of an isolated approach is the European Timber Regulation (EUTR)¹⁵² which prohibits to place illegally harvested timber and derived timber products on the internal market (Article 4(1) EUTR). Its personal scope includes operators who place timber and timber products on the internal market for the first time and, with a restricted set of obligations, traders who sell or buy timber or timber products already placed on the internal market (Article 1 and Article 2(c) and (d) EUTR). Hence, with regard to the obliged entity’s size or place of incorporation, the Regulation does not contain any restrictions of the personal scope. In this regard, the EUTR is not actually an example of a home State regulation sensu stricto. The EUTR obliges operators to exercise due diligence when placing timber or timber products on the internal market (Article 4(2) and Article 6 EUTR) and traders are obliged to ensure the traceability of traded timber and timber products (Article 5 EUTR). The classification of products as legal or illegal is based on the applicable local legislation in the country of harvest (Article 2(f) to (h) EUTR).¹⁵³ This exclusive reference to compliance with local laws and regulations can lead to unsatisfactory results, for example, when governments and local authorities undermine or even blatantly disregard internationally accepted protection standards.¹⁵⁴ The due diligence requirements are detailed in Article 6 EUTR. They include providing certain information, risk assessment and risk mitigation procedures.¹⁵⁵

Another prominent example in the category of isolated industry-specific value chain legislation can be found in the EU Conflict Minerals Regulation;¹⁵⁶ other regulatory approaches focus on specific issues or objects of protection, for example the Dutch Child Labour Due Diligence Act of 2019¹⁵⁷ and the steadily growing body of legislation tackling ‘modern slavery’.¹⁵⁸

3.4 Level of Legislation: National, EU or International Law?

An EDD obligation that binds private companies regarding their transnational value chains is conceivable at the level of national, European and international law. Of course, given the ‘global’ character of the issues at stake (the protection of human rights and the environment in transnational value chains), a multilateral standard in international law would be the first choice from a conceptual-legal point of view. However, it seems rather unlikely that a treaty on environmental protection in transnational value chains will enter into force in the foreseeable future. The ongoing negotiations for a ‘legally binding instrument to regulate, in international human rights law, the activities of transnational corporations and other business enterprises’,¹⁵⁹ do not suggest that such a treaty can be expected any time soon as many issues remain controversial.¹⁶⁰ The initiative for the ‘Draft Global Pact for the Environment’¹⁶¹ the seems to have failed, at least for the time being.¹⁶²

In its resolution of March 2021, the EP agreed on an ambitious Draft Directive on Corporate Due Diligence and Corporate Accountability¹⁶³ and it is still expected that the Commission, after several postponements, will launch a corresponding legislative process with its own proposal. It remains to be seen how the German ‘Supply Chain Due Diligence Act’ will impact the Commission’s draft and the negotiations in the Council. On the one hand, the fact that now Germany and France, the EU’s two biggest Member States, have comprehensive national value chain due diligence legislation in place creates momentum for an agreement on a similar piece of legislation at the EU level, although the weaknesses in the German law could lower the bar for any resultant EU law.¹⁶⁴

An international treaty may be the first choice to tackle environmental and human rights problems in transnational value chains. However, the adoption of the French ‘Duty of Vigilance Act’, the German ‘Supply Chain Due Diligence Act’ and other national due diligence acts, as well as possibly a future EU directive in this area, would certainly bolster the prospects for international consensus on a legally binding instrument.

3.5 Assessment

The examples above illustrate that two quite different design models, namely isolated approaches and relatively comprehensive solutions, can be employed to introduce a due diligence obligation across value chains. While these approaches differ in particular regarding their material scope and objects of protection, they both ultimately strive to achieve the same overall goal.

Isolated approaches have a fairly limited scope regarding certain topics or objects of protection, such as illegal logging, deforestation, conflict minerals, child labour, forced labour and so forth. These limitations in scope provide certain advantages as they can afford to be less abstract and more specific, thereby providing the norm addressee with clearer guidance regarding what to do to comply with the obligation.¹⁶⁵ Furthermore, relatively specific and detailed rules can also facilitate the norm’s practical application.¹⁶⁶ However, one disadvantage of using isolated approaches is that the process will ultimately result in the proliferation of countless individual regulations with more or less diverging due diligence concepts, an issue that is avoided by comprehensive approaches. Moreover, the advantages that isolated approaches have by employing specific and detailed rules and having an easier application can be, at least to some degree, achieved by comprehensive approaches through the use of concretising supplements. This allows the rather abstract requirements of a general due diligence obligation to be spelled out in more detail regarding specific industries, objects of protection and so forth, in effect getting ‘the best of both worlds’.¹⁶⁷

Overall, taking a comprehensive approach seems the preferable option, although it would need to be based on a largely uniform regulatory approach for all relevant environmental damage and human rights abuses along the entirety of value chains. This has the advantage of ensuring a high degree of coherence across various sectors, value creation stages and objects of protection. This in turn enables norm addressees, standard setters, enforcement authorities and courts to benefit from synergies and thus reduce both transaction and enforcement costs.¹⁶⁸

The following three sections will address selected issues when designing environmental value chain due diligence obligations in national home State law: due diligence’s scope in a value chain (Sect. 7.4), environmental due diligence’s material scope (Sect. 7.5) and its enforcement by means of civil liability (Sect. 7.6).

4 Designing Due Diligence’s Scope in the Value Chain

The present section¹⁶⁹ sets out how due diligence’s scope in transnational value chains can be designed and limited. In this regard, two aspects need to be distinguished: First, the question of which parts of a value chain should be covered (hereafter: ‘horizontal scope’); second, the question of what degree of efforts for different parts of a value chain is required to discharge the obligation (hereafter: ‘vertical scope’).

Human rights abuses and environmental impacts can occur at any point along the entirety of a value chain. The discussed type of EDD legislation aims at tackling environmental harm in the entire value chain or life cycle, regardless of how production is organised and divided between legally independent companies. Consequently, the ‘horizontal scope’ should cover potentially an entire value chain, including its downstream part.¹⁷⁰ A largely unlimited ‘horizontal scope’ settles the question of attribution by grace of the fact that generally any harm or detriment occurring anywhere in the value chain can potentially be traced and attributed to almost any company anywhere in the value chain.¹⁷¹ Every company subject to the due diligence obligation could potentially be solely or jointly responsible for harm occurring anywhere in its value chain. An unlimited ‘horizontal’ and ‘vertical scope’ of the due diligence obligation, regardless of a company’s connection to the harm, in particular its ability to prevent it, would result in joint and several no-fault responsibilities for the entire value creation process.¹⁷² Such results, however, could give rise to constitutional concerns regarding the principle of proportionality and,¹⁷³ moreover, such outcomes may be questionable from a development policy perspective.¹⁷⁴ Hence, a due diligence obligation limited in neither its ‘horizontal’ nor ‘vertical scope’ is not a viable option.¹⁷⁵

A rather simple solution could consist of rigidly limiting the ‘horizontal scope’ to individual stages (‘tiers’) of a value chain, for example direct suppliers (‘tier 1’) or the corporate group. Indeed, a variation of this approach was chosen by German lawmakers in the ‘Supply Chain Due Diligence Act’: As a general rule, due diligence obligations are limited to an enterprise’s own operations and “tier 1” of the upstream supply chain and only exceptionally, in the case of “substantiated knowledge” of certain issues in the upstream supply chain will due diligence obligations extend beyond “tier 1”.¹⁷⁶ However, one weakness of this approach is that it inadequately addresses certain high-risk operations in areas such as extractive industries.¹⁷⁷

To reconcile the conflicting objectives of proportionality of the regulation, coverage of particularly problematic stages of a value chain while simultaneously avoiding unintended and undesirable side effects, a more flexible and customised approach to limiting the scope of due diligence appears the most viable potion. Customised limitations to both the ‘horizontal’ and ‘vertical scope’ can be designed in different ways. The various conceivable models can be broadly categorised as either ‘graduated models’ with a limited number of fixed levels of involvement or flexible ‘sliding models’ that employ a fluid continuum of involvement intensity.

‘Graduated Model’: Fixed Levels of Involvement

The UNGPs, as the most influential reference norms, fall into the category of a ‘graduated model’. They draw a quite rigid distinction between three levels of corporate involvement in human rights abuses: causation of, contribution to and a direct link to an abuse.¹⁷⁸

Indeed different levels of involvement can be distinguished in a graduated manner. However, to be of practical relevance, different levels of involvement should be coupled with different legal consequences.¹⁷⁹ This seems clear in theory but may prove problematic in practice as the dividing lines between the different categories are not clear cut. While distinguishing direct causation from a mere contribution to causation by third parties may generally be feasible, however, distinguishing contributions from direct links is less straightforward.¹⁸⁰ Regarding environmental harm, even making the distinction between causation and contribution may be challenging as environmental harm is often caused by multiple actors and factors. The question then arises, is such cumulative causation to be regarded as causation or is it merely contribution? According to the prevalent but-for test/condition sine qua non-causation theory, any contribution necessary for a result to occur represents a cause of the result. This seems to support the view of not distinguishing sharply between the different levels of involvement but rather pursuing the necessary differentiation, particularly with regard to the ‘vertical scope’ of the obligation in a more flexible manner.

‘Sliding Model’: A Flexible Adequacy Criterion

Instead of the somewhat rigid set of levels of involvement (cause/contribution/link) of the ‘graduated model’, a more flexible design could be based on a rather broad concept of involvement or causal contribution what results a rather broad ‘horizontal scope’ of due diligence in the value chain. In particular with regard to the principle of proportionality,¹⁸¹ the ‘vertical scope’ of the required due diligence efforts would need to be limited more along a value chain depending, e.g. on the degree of proximity of the duty bearer’s business activity to the point where actual harm occurred in the value chain.

Such an approach was suggested by the afore-mentioned¹⁸² German NGOs’ 2016 proposal (‘HRDD Bill-proposal’). According to Section 6(4) sentence 1 number 1 HRDD Bill-proposal, a company may be considered to be contributing to a human rights abuse if third parties are contributing to a human rights abuse ‘as a consequence of the company’s business activities’. In order to nevertheless achieve an appropriate limitation of the obligations’ ‘vertical scope’, the required due diligence measures must take into account the specifics of the individual situation. To this end, the HRDD Bill-proposal stipulates an ‘adequacy test’. The elements relevant for determining adequacy include:

• The proximity of the duty bearer to the incident in the value chain

• The size and leverage of the duty bearer vis-à-vis the actor directly causing the abuse or violation

• The country-specific risks

• The industry-specific risks

• The severity of violations and

• The likelihood of violations occurring.¹⁸³

Similar catalogues of criteria have been proposed by Andreas Zimmermann and Norman Weiß in an article based on their legal opinion written for the German Federal Ministry of Labour and Social Affairs¹⁸⁴ and by Sophie Nordhues in her PhD-thesis.¹⁸⁵ The ‘appropriateness’ criterion defined in Section 3(2) of the German ‘Supply Chain Due Diligence Act’¹⁸⁶ also features a number of similarities. Such an approach allows for a high degree of flexibility to best ensure that justice is done in each case despite the diversity of circumstances possible in a broad spectrum of situations that would fall within the scope of a cross-industry regulation that seeks to encompass entire value chains. However, the above-outlined approaches do not exclude each other. For example, the flexible ‘adequacy test’ may be combined with a more rigid differentiation between the direct causation of harm by the duty bearer’s actions and those of its subsidiaries’ on the one hand and only indirect contributions in the value chain via third parties on the other.¹⁸⁷ In cases involving direct contributions, the legal consequences could, or indeed should, be more severe. For example, a reversal of the burden of proof could be limited to such case constellations.¹⁸⁸

5 Designing Environmental Due Diligence’s Material Scope

The most challenging part in designing a statutory ‘environmental’ due diligence obligation consists of determining its ‘material scope’. This requires a linkage of the due diligence procedure with a relevant substantive environmental target standard or level of protection.¹⁸⁹ A clear answer to this question is particularly important with regard to the effectiveness of the obligation and, moreover, it could have repercussions regarding the constitutional principle of legal certainty.¹⁹⁰

Two major avenues of approach are conceivable when pursuing this goal of determining the material scope of an EDD obligation. Firstly, the obligation may refer to substantive environmental provisions (¶ 89 et seq.). Secondly, as an alternative or as a supplement to the first avenue, the material scope could be more broadly expanded by means of a general or catch-all clause (¶ 115 et seq.). However, these approaches are not clear-cut, distinguishable and well-established categories, rather they are frameworks that only basically delimit what could conceivably be done. Indeed, the category a particular regime falls into may depend on its specific wording. As a final point note at this introductory stage, both of these major avenues and their sub-elements may be combined (¶ 126 et seq.).

5.1 Reference to Substantive Environmental Provisions

Reference to pre-existing substantive environmental provisions to define due diligence’s material scope (hereafter ‘referencing approach’) has the advantage of providing a relatively high level of clarity and legal certainty while requiring relatively little new legislative work. At least four variations of such a ‘referencing approach’ are conceivable: (1) referencing international treaties, (2) referencing international soft law, referencing (3) host State and (4) home State law. These variations of the ‘referencing approach’ will be outlined in the following:

International Environmental Treaties

Regarding the determination of human rights due diligence’s material scope, referencing international human rights treaties is a broadly-established approach. Examples of explicit references to human rights treaties can be found in the UNGPs,¹⁹¹ the German NGO proposal of 2016 (Section 3 no. 1 and Annex), the US discussion draft entitled ‘Corporate Human Rights Risk Assessment, Prevention and Mitigation Act of 2019’¹⁹² and, more recently, in both the Norwegian ‘Transparency Act’¹⁹³ of 2021 and, in a limited way, in the German ‘Supply Chain Due Diligence Act’ (Section 2(1)¹⁹⁴ and the Annex to the Act). Therefore, it may seem somehow natural to pursue an ‘analogue’ approach to shape environmental due diligence’s material scope by reference to international environmental agreements. However, simply transferring the ‘human rights model’ to environmental due diligence raises a number of questions and caveats.¹⁹⁵

Firstly, an EDD obligation whose material scope relies exclusively on referencing international environmental treaties would lead to an inadequate result riddled with gaps and loopholes. Two recent examples from Switzerland and Germany may illustrate this: The Swiss National Council’s ‘indirect counterproposal’ wanted to adopt this approach by referencing exclusively the international provisions that are binding on Switzerland.¹⁹⁶ The explanatory memorandum¹⁹⁷ mentions the following treaties as a illustrative listing:

• The Montreal Protocol on Substances that Deplete the Ozone Layer,

• The Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal,

• The International Convention on Civil Liability for Oil Pollution Damage, the Cartagena Protocol on Biosafety to the Convention on Biological Diversity,

• The 1996 Protocol to the Convention on the Prevention of Marine Pollution by Dumping of Wastes and Other Matter, 1972, and

• The Stockholm Convention on Persistent Organic Pollutants.

The second example can be found in the new German ‘Supply Chain Due Diligence Act’ where Section 2(3) defines the term ‘environment-related risk’ exclusively with reference to a few specific and rather narrow prohibitions pursuant to the Minamata, POPs and Basel Conventions.

Both examples illustrate that this approach is suitable to address environmental issues only in a rather limited and selective manner. Following this approach, only a fraction of the cases that are likely to arise over time will be covered if environmental due diligence’s material scope is defined exclusively with reference to international environmental agreements. In the realm of environmental protection, and unlike that of human rights, there is no comprehensive canon of international agreements that would cover most or even all of the relevant issues of harm.¹⁹⁸ Despite a large number of international environmental agreements, international environmental treaty law is characterised by its rather fragmentary character.¹⁹⁹ Fundamental principles, such as the precautionary approach prevailing in EU environmental law, risk being insufficiently reflected if the material scope of EDD is determined using this approach.²⁰⁰

Secondly, a translation of international environmental norms that directly bind only State parties into individual obligations for private companies may be more challenging than the analogue task regarding human rights treaties.²⁰¹ Generally,²⁰² human rights protect individual rights of natural persons, therefore, it seems generally feasible to establish how private persons can impair the interests and goods protected by individual human rights.²⁰³ Translating the contents of some types of international environmental norms is equally feasible, for example, in the case of substance-related bans,²⁰⁴ activity-related prohibitions and technical regulations.²⁰⁵ However, other types of international environmental norms, such as fundamental target standards, reduction targets, cooperation obligations²⁰⁶ and procedural provisions,²⁰⁷ are more challenging if not impossible to translate into individual standards or obligations for private companies. However, in this dynamically evolving field, first attempts to translate even broadly phrased environmental agreements into concrete, individual obligations such as a duty of care for companies can already be observed in practice.²⁰⁸

A third question concerns the referral technique. Two options are conceivable: an explicit listing of specified environmental agreements or even specific norms from those agreements on the one hand or a ‘general’ reference to the entire body of binding international environmental law on the other. The Ecolex Database lists 116 multilateral international environmental agreements with global scope in force.²⁰⁹ An explicit listing technique may not, at first glance, seem to be particularly viable, however, an annex listing all the relevant agreements would enhance the usability of such a technique and make it easier to navigate the relevant obligations for the duty bearers. A second-best solution could be an illustrative list that explicitly enumerates, as a minimum, the particularly important agreements, meaning such a list would not need to be exhaustive.²¹⁰ A general reference to all international environmental law to which a home State is bound may minimise the risk of creating loopholes and need to add long annexures to relevant new laws. However, compiling such references will be more challenging in practice and may face legal objections with regard to the principle of legal certainty.

Fourthly, when environmental treaties are explicitly enumerated, the question arises whether an entire treaty can be referred to in general terms or whether an explicit reference to specific provisions is required. It has been argued that a general reference to environmental agreements would be largely inadmissible for constitutional reasons because such a reference would lack the necessary legal certainty.²¹¹ Following this view, a reference can be made only to sufficiently clear individual obligation in a specific manner and not to the entirety of an international agreement in a general manner.²¹² However, this view does not consider the characteristic feature of due diligence primarily as an obligation of conduct rather than result. Unlike a ‘directly binding command or prohibition’, a due diligence obligation does not directly bind the duty bearer to the referenced standard.²¹³ Consequently, according to the view presented here, even a general reference to an entire treaty that includes broadly phrased target standards and so forth can be designed in a sufficiently certain manner.²¹⁴

The fifth question that arises from transferring the ‘human rights model’ to environmental due diligence is: When referencing international environmental treaty law how should agreements that do not bind the State on whose territory environmental damage occurs be dealt with? Such a situation may potentially cause a conflict with the ‘prohibition of intervention’ under international law. However, such conflict can only be expected if the rule of international law prescribes conduct that is prohibited under the domestic law of the State in which the environmental damage occurs and the prohibition itself is not contrary to international law. This seems to be a rather unlikely scenario (cf. ¶ 192).

In summary then, referencing environmental agreements is feasible to define EDD’s material scope. However, for this design approach to the material scope to be both comprehensive and effective, it should be complemented by other approaches. This minimises the prospects of producing an inadequate result riddled with gaps and loopholes where many important issues would not be covered.²¹⁵

International Soft Law Provisions

The second variation of the ‘referencing approach’ to determine the material scope of EDD consists in referencing international soft law. In a previous publication, with Peter Gailhofer and Remo Klinger, the present author argued that national German law cannot directly incorporate international soft law standards, i.e. non-binding norms outside the domestic legal system, by simply making a general, dynamic reference to ‘international environmental soft law’. Rather, that publication suggested the German legislature could make reference to an exact set of soft law norms.²¹⁶ Failing to do so risks raising the objection that a parliament has delegated its legislative powers to private parties, a scenario that could potentially infringe the democratic principle enshrined in Article 20 of the German Constitution.²¹⁷ However, a ‘static reference’ to individual, precisely designated soft law standards does not raise constitutional objections.²¹⁸ Such specific references could be included in sector-specific supplementary regulations rather than in a cross-sectoral umbrella regulation.²¹⁹ An example of this regulatory approach can be found in the reference of the EU Conflict Minerals Regulation²²⁰ to the ‘OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas’ (Second Edition, OECD 2013), including all its Annexes and Supplements.

However, a more differentiated assessment of a dynamic and general reference to international soft law standards may be justified for four reasons: Firstly, referring to a substantive environmental standard as a target or reference norm for conducting due diligence obligations should not be confounded with directly binding someone to the referred standards.²²¹ Therefore, the constitutional requirements developed for externally referencing norms issued by other legislators cannot be directly transferred to the question of determining the material scope of a due diligence obligation. Secondly, due diligence primarily creates an obligation of conduct rather than one of result.²²² Thirdly, whether a reference to soft law is constitutional or not depends very much on its exact wording. As such, there may be ways to dynamically refer to international soft law standards in a constitutionally legitimate manner. For example, it could be acceptable to combine a general or catch-all clause with the requirement that ‘internationally accepted soft law standards’ be ‘taken into consideration’ when determining the required level of environmental protection the due diligence obligation is designed to provide. Such wording would make it sufficiently clear that the company subject to the due diligence obligation does have a certain amount of discretion when deciding which standard is relevant and how it should be taken into consideration. In terms of legal certainty, such wording would still be an improvement in comparison to simply having a general clause. Finally, the extent to which a dynamic, external reference to soft law is lawful also depends upon the enforcement mechanism. A due diligence obligation that is only enforced ‘privately’ by means of civil liability can include a dynamic reference with less constitutional restrictions than an obligation that is enforced by a more comprehensive regime, in particular, if it includes administrative enforcement measures or criminal sanctions.

Consequently, general and dynamic references to international soft law standards cannot be completely excluded as inadmissible as a detailed examination of the exact wording of the proposed rule is required. From a public international law and, in particular WTO law perspective, referencing international soft law standards has the advantage of invoking a spirit of multilateralism similar to referencing international binding law.²²³

‘Host State’- or ‘Place of Effect’-Standards

A third, relatively straightforward variation of the ‘referencing approach’ consists of references to the domestic law of the State on whose territory a specific value creation stage and the related infringement occurs.²²⁴

Terminology: Home State, Host State, Business-Activity State, Place of Effect

In the scholarly debate on regulating multinational/transnational enterprises, a focus is typically put on the dichotomy between home and host State law.²²⁵ However, the concept of the host State is, in particular, inadequately narrow for the present regulatory purpose and legal context.²²⁶ Literally, the term refers to a country that ‘hosts’ a foreign company as a ‘guest’ in the sense that the company may set up a subsidiary on the host State’s territory, acquire an interest in a local company or otherwise invest locally.²²⁷ However, to create a transnational EDD obligation that covers entire value chains, it is not so important whether a foreign company has its own, locally incorporated subsidiary in a third country which could be considered a host State to the foreign parent company or foreign investor.²²⁸ If a foreign company directly or indirectly purchases goods or services from an independent (so called ‘arm’s-length’) supplier in a third country, this country is technically not a host State. However, to regulate transnational value chains, this business operation may create a relevant transnational chain of causation. Hence, in both of the above scenarios, environmental risks may occur as a consequence of the operations in a third country as a consequence of the activities of a foreign company. However, in the political and scholarly debate on corporate value chain regulation, the term host State is often used in a much broader and rather untechnical way, which includes the mere presence of parts of a value chain on a country’s territory without entailing any corporate ties to a local company whatsoever.²²⁹

Irrespective of this, and notwithstanding the aforementioned widespread untechnical use of the term host State, drafting an actual legal norm will require a more precise term to be considered. This term should make clear that the only decisive criterion is that a value-creation activity in a company’s value chain is carried out or an infringement occurs on a third country’s territory. For this purpose, it would be more accurate to speak of the ‘business-activity State’ to reflect that it refers to the State on whose territory a certain business activity takes place.²³⁰ Another suitable alternative could be the term ‘place of effect’. The advantage of the latter is that it is a well-established concept in private international law: For example, the general rule in Article 4(1) Rome II Regulation refers to the law of the country in which the damage occurs (i.e. lex loci damni). In this sense, EDD could be aimed at complying with the material environmental standards applicable at the ‘place of effect’.²³¹

The approach of referencing the local law at the ‘place of effect’ in the context of transnational value chain regulation has already been established in practice. For example, Article 2(f) and (g) EU Timber Regulation, when referring to the status of timber state: “legally harvested” means harvested in accordance with the applicable legislation in the country of harvest; conversely, timber is “illegally harvested” if it has been harvested in contravention of the applicable legislation in the country of harvest. Illegality within the meaning of the prohibition to place such timber on the market (Article 4 EUTR) consequently differs depending on the place of harvest. In the terminology discussed above, the term “place of harvest” could be translated as the ‘place of effect’. Similar approaches may be found in the IUU Regulation²³² on Illegal, Unreported and Unregulated fishing and in the European Commission’s “EMAS Global” guidelines.²³³

However, the approach of referencing ‘host State’ or ‘place of effect’-norms has a weakness: It is only suited to address an enforcement deficit of the local law at the ‘place of effect’; in contrast, regulatory deficits with local law at the ‘place of effect’ cannot be tackled by this approach.²³⁴ Therefore, a simple reference to the local law applicable at the ‘place of effect’ could be a rather flawed approach with limited effect;²³⁵ nevertheless, it will be less controversial and potentially easier to accept for the business community and host States. Having said that, referencing local law in this manner may raise legal concerns with regard to WTO law²³⁶ and a home State’s constitutional law as far as the due diligence obligation is not exclusively enforced by means of private law, in particular civil liability, but also via administrative or criminal law mechanisms.²³⁷

In summary, referencing local law at the ‘place of effect’ is a feasible approach to determining EDD’s material scope; it becomes insufficient though if and to the extent that local law contains obvious loopholes or the level of protection is blatantly weak (e.g. if ‘land grabbing’ is being legalised²³⁸) or even contradicts international law. Overall, it is an approach that is particularly easy to implement and involves comparatively little compliance effort for the duty bearer, however, it is only effective to the extent that there is adequate local enforcement and no regulatory deficit.²³⁹

Home State Standards

A fourth conceivable variation of the ‘referencing approach’ to determining the material scope of EDD in transnational value chains consists of referencing the typically stricter²⁴⁰ German or European environmental law as the law of the home State of companies domiciled there.²⁴¹ Ideally, such a mechanism could provide incentives to ‘export’ higher levels of environmental protection from a company’s home State to its production sites abroad and possibly even to the sites of its foreign suppliers. The approach aims to remove existing incentives to outsource production to countries with lower environmental standards and thus lower costs. However, the approach entails more difficulties and pitfalls than a more straightforward reference to the local law at the ‘place of effect’.

Despite it being more challenging, there are a few examples where this approach has been explored in practice. The most obvious example may be the European Commission’s “EMAS Global” guidelines.²⁴² This piece of soft law requires that EMAS-certified organisations in third countries should align their operations to comply “as closely as possible” with not only local law but also with EU standards and where reference to EU standards in the environmental statement is “desirable”.²⁴³ The example may illustrate that referencing home State norms is, to some degree, already part of corporate compliance practice. However, it is obviously a non-binding, voluntary guideline and therefore cannot simply be transferred as is to a binding due diligence obligation.

Examples for a similar approach taken in binding law can be drawn from EU animal-protection law regarding the transportation of livestock and the killing of animals: Pursuant to Article 21(2)(b)(i) of the Official Controls Regulation (EU) 2017/625,²⁴⁴ in cases involving long journeys for livestock, including those from the territory of the Union to third countries, official controls shall verify compliance with the rules laying down the welfare requirements for animals in the event of their transport. This includes checks of journey logs to determine whether the journey is planned in a manner that facilitates compliance with Regulation (EC) No 1/2005. According to the case law of the ECJ, the substantive provisions of Regulation (EC) no. 1/2005 must be complied with even on those portions of a route that are outside of EU territory.²⁴⁵ A second example can be identified in Council Regulation (EC) No 1099/2009 of 24 September 2009 on the protection of animals at the time of killing.²⁴⁶ This Regulation requires live stock to be killed in compliance with certain animal protection standards to be eligible for importation to the EU.²⁴⁷

Against the backdrop of the above-mentioned State practice, references to specific EU standards for certain operations or stages of a value chain should not be immediately discarded as an option for determining EDD’s material scope in transnational value chains. Indeed, the EP’s Corporate Due Diligence and Corporate Accountability Draft Directive suggested defining the phrase “potential or actual adverse impact on the environment” inter alia with reference to EU environmental standards (Article 3(7) Draft Directive). However, it was suggested that the referenced standards be explicitly enumerated in an ‘Annex xxx’ the Directive. However, a proposal for the actual wording of the mentioned ‘Annex xxx’ was not included in the Draft Directive and, therefore, it is difficult to conclusively assess the proposal.²⁴⁸

In contrast, a general reference to all environmental regulations of a home State for an entire value chain is more likely to face legal objections as well as generate unintended side effects: In particular companies domiciled in the Global North may refrain from investing in places with lower standards, in particular in the Global South, if production sites lose the advantages they had because they were regulated by the more lenient local environmental laws. Such repercussions can be problematic from a development-policy perspective but even from an environmental one: Theoretically, the foreign direct investment could improve the environmental performance of industries and operations in third countries even if the production site that received the investment does not fully meet European environmental standards. Such incremental improvements to the environmental performance of local industries may be desirable, however, their operation may be impeded or put at risk if the EDD’s target standard is raised too much too quickly. However, this issue could be eased by adding some form of deviation clause (cf. below).

The most obvious legal objection against this approach could stem from world trade law. It needs to be clarified whether and to what extent such an approach could infringe WTO law.²⁴⁹

Both legal and development policy concerns will be less pressing if the reference to home State law is combined with an opening or deviation clause to provide justified leeway, for legal or policy reasons, from the referenced home State standard. Such an approach was proposed by the German Supply Chain Initiative²⁵⁰ and is advocated by Roda Verheyen,²⁵¹ who proposed the following wording for a statutory EDD obligation:

…are obliged to identify, assess and prioritize the actual and potential effects of their business activities on the environment (Section 2(1) no. 1-3 UVPG) on an annual basis (risk analysis). ²If there is reasonable evidence of significant environmental damage or its probable realization, a violation of environmental law at the place of operation or of requirements resulting from international agreements, as well as unjustifiable deviations from the application of EU environmental regulations relevant to the specific situation or industry, in particular from the best available technology for plants and processes, these must be verified on site (…) (duty to investigate).²⁵² (emphasis added)

Arguably, an opening clause allowing justifiable deviations from home State standards would be acceptable from a host State’s perspective if it provided sufficient flexibility to make the due diligence’s target standard viable for local conditions. An advantage of this approach is that may allow swifter enforcement of the due diligence obligation in the home State: Obliged companies, authorities, courts and lawyers can determine their relevant home State standard much easier than the relevant foreign standard at the ‘place of effect’.

5.2 General Clause or Catch-All Clause

The second basic avenue for determining the material scope of EDD, in addition to the variations of the ‘referencing approach’ outlined above, would be a general clause or ‘catch-all clause’.²⁵³ Elisabeth Henn and Jannika Jahn have convincingly argued that the environmental ‘integration principle’ may support such an approach.²⁵⁴ This principle requires consideration of environmental matters in an ‘integrated’ and a rather comprehensive way instead of a fragmented and isolated approach to deal with single-issue problems.²⁵⁵ There are two readily-conceivable approaches to design a general clause: The first employs a negative definition aimed at preventing harm to certain protected goods while the second employs a positive definition aimed at compliance with a certain standard of conduct. Both variations will be outlined in the following.

Negative General Clause Related to the Object of Protection

A general clause relating to a legal object of protection would basically create an obligation to exercise due diligence to avoid harming ‘the environment’.²⁵⁶ The most prominent example of this approach can be found in the French ‘Duty of Vigilance Act’.²⁵⁷ Article L. 225-102-4, paragraph 1, subparagraph 3, of the amended French Commercial Code states that the ‘plan of vigilance’ required by subparagraph 1 must include appropriate monitoring measures to identify and prevent “risks of serious harm to the environment”.²⁵⁸ The rather open term ‘environment’ is not defined in the law nor further elaborated in the legislative materials. In this regard, it may raise questions concerning its sufficiency in terms of legal certainty. The French Constitutional Council focused its ruling²⁵⁹ on the general nature of the terms ‘human rights’ and ‘fundamental freedom’,²⁶⁰ however, it did not mention the word environment. Moreover, only the norm providing for sanctions was declared void, not the substantive due diligence obligation as such. Finally, the sanctioning norm was worded in a very open manner that left broad leeway for the judge to exercise discretion.²⁶¹ It remains to be seen how effective simply mentioning ‘the environment’ as the object protected by the duty of vigilance will prove in practice.²⁶²

Ideally, if drafting an EDD general clause from scratch, it should go beyond simply mentioning ‘the environment’ in a generic way.²⁶³ As a minimum, such a draft should specify the object of protection in more detail to increase the regulatory impact of the clause and improve its practical applicability. One conceivable approach to describe the object of protection more precisely in this context would be to use the list of different environmental objects of protection in established regulations as a reference model.²⁶⁴ Such catalogues can be found in places such as texts that cite the list of factors that need to be considered when carrying out an environmental impact assessment in accordance with Article 3 of EIA Directive 2011/92/EU.^265,266 The list in Article 3 EIA Directive reads:

• (a) population and human health;

• (b) biodiversity, with particular attention to species and habitats protected under Directive 92/43/EEC and Directive 2009/147/EC;

• (c) land, soil, water, air and climate;

• (d) material assets, cultural heritage and the landscape;

• (e) the interaction between the factors referred to in points (a) to (d).

While it is a solid starting foundation, the above catalogue could be revised to better suit the focus of this chapter by, for example, omitting the protected elements of cultural heritage and landscape and adding more contextually appropriate objects of protection. In this regard, it could be desirable to explicitly include the issue of deforestation, even if this seems closely related to the already-mentioned aspect of climate. Similarly, an alteration to the catalogue in Article 3 of the EIA Directive to clarify the phrase “adverse environmental impact” was suggested by Colin Mackie, who recommends defining the word “environment” for the purpose of a cross-sectoral EU due diligence duty as “including (i.e. not a closed list) (…):

• (a) all fauna and flora;

• (b) land, soil, water, air; and

• (c) the atmosphere;”²⁶⁷

Another source of inspiration could be the definition of the term “environmental damage” in Article 2 of the Environmental Liability Directive 2004/35/EC.^268,269 However, if this concept were to be used as the sole reference to write a negative general clause, more substantial additions and modifications would be necessary.²⁷⁰

The draft report²⁷¹ prepared by MEP Lara Wolters, the rapporteur for the European Parliament’s JURI Committee, proposed a wording that features at least elements of a negative general clause. A centrepiece of the proposed due diligence obligation would have been the term “environmental risk” which was to be defined as:

any potential or actual adverse impact that may impair the right to a healthy environment, whether temporarily or permanently, and of whatever magnitude, duration or frequency. These include, but are not limited to, adverse impacts on the climate, the sustainable use of natural resources, and biodiversity and ecosystems. These risks include climate change, air and water pollution, deforestation, loss in biodiversity, and greenhouse emissions.²⁷²

However, in the final draft adopted by the Parliament’s Plenary, the clause was dropped and replaced by a concept that combines references to international and Union environmental standards (Article 3(7) Draft Directive).²⁷³

Finally, it may be worth considering singling out one or more objects of protection and subjecting them to a special regime. However, to ensure a high degree of coherence between various due diligence regimes it seems appropriate not to fully exempt any objects of protection but rather subject them to concretising specifics within a general EDD obligation.²⁷⁴ As an alternative, existing laws designed to protect specific environmental goods like the German ‘climate protection act’²⁷⁵ could be supplemented by a climate-protection-related due diligence obligation for companies that is modelled in accordance with a general EDD legislation.

If a legislative approach towards introducing a negative general clause was adopted, the law should specify the extent to which minor adverse effects are acceptable and do not trigger any obligations under the due diligence regime.²⁷⁶ Therefore, some kind of ‘relevance threshold’ or ‘materiality reservation’ should be considered as without such a criterion, the due diligence obligation would be triggered by any use of resources.²⁷⁷ The French ‘Duty of Vigilance Act’ stipulates that the duty of vigilance must be aimed at preventing severe violations (‘atteintes graves’) that risk or result in environmental damage. The European Parliament’s Draft Directive on Corporate Due Diligence and Corporate Accountability addressed this issue by limiting the concept of “contribution” via a de minimis threshold by excluding minor contributions explicitly: “The contribution has to be substantial, meaning that minor or trivial contributions are excluded” (Article 3(10) s. 2 Draft Directive). Alternatively, if minor environmental damage were to be exempted from the due diligence’s material scope via a general ‘adequacy test’, minimal damage would not need to be considered as part of an ‘adequate’ due diligence obligation.

Positive General Clause with Reference to a Standard of Conduct

A similar, but slightly different approach to the above would consist of drafting a positive general clause. The due diligence’s material scope would be defined with reference to a positive, broadly outlined, environment-related standard of conduct.²⁷⁸ An example of how this approach could work can be found in the BMZ’s 2019 draft where an attempt is made to define a positive standard of conduct by referring in Section 3 no. 8(c)²⁷⁹ to the “international state-of-the-art” (“Stand der Technik”, the German equivalent to what is internationally known as ‘best available techniques’ or BAT²⁸⁰).²⁸¹ A common legal definition of BAT can be found in Article 3(10) of the Industrial Emissions Directive²⁸² and, if this term is used, it may be understood as a reference to the ‘BAT reference documents’²⁸³ and the ‘BAT conclusions’.^284,285 As such, referencing the BAT-standards resembles the aforementioned reference to substantive home State law and makes the line between the two concepts, reference to home State law and a positive general clause, difficult to distinguish. Consequently, regarding the reference to BAT-standards the same potentials and pitfalls as regarding references to home state law may occur: In a best-case scenario referencing BAT-standards may incentivize the ‘export’ of advanced technology, however, unintended impediments to foreign investments are also conceivable.

While using the BAT standard may imply a reference to specified EU standards, it is possible to use this approach in a manner that entails a more international standard of conduct. Indeed, the BMZ draft pointed in this direction by adding the qualifier “international” to the term “state-of-the-art” (Section 3 no. 8 lit. c) BMZ draft). This could imply a reference to international standards, including soft law such as the ‘Good International Industry Practice’ (GIIP) that is present in the International Financial Corporation’s guidelines (‘Environmental, Health and Safety Guidelines’ (‘EHS Guidelines’) as well as ‘Industry Sector Guidelines’).^286,287 Overall, the approach may lead to similar results as explicitly referencing environmental soft law and technical regulations.

Just as in the case of reference to home State provisions, another option to avoid the above-mentioned unintended side effects could consist of integrating an opening clause similar to that suggested by Roda Verheyen.²⁸⁸ Such an approach could be particularly appropriate regarding emissions which often have harmful environmental impacts only through complex and very difficult to prove causal chains.²⁸⁹

5.3 Combined Approach

Both, the referencing approach (¶ 89 et seq.) and the use of a general clause (¶ 115 et seq.) are conceivable options to use in determining the material scope of an EDD obligation, however, both approaches have some downsides. Therefore, setting a material scope that has the greatest potential to cover as many of the foreseeable cases of environmental harm in transnational value chains that may arise, a combination of both approaches including all or some of their variations may be appropriate.²⁹⁰

Reference to the local environmental law at the ‘place of effect’ would only represent a minimum standard, therefore, it should be complemented by reference to international environmental treaty law. This would allow regulatory deficits in the local law of the ‘place of effect’ to be addressed. However, as outlined above, there is no comprehensive canon of environmental treaties that would cover all, or even most, of the relevant environmental issues. For specific issues and industries, references to certain norms within the body of a home State’s environmental norms may be considered. However, if the local law at the ‘place of effect’ has a regulatory deficit regarding a specific matter, no standards can be borrowed from international treaties and no reference to one of the selected environmental norms in home State law applies in the specific case, any remaining regulatory gaps could be covered by a catch-all provision either in form of a negative or a positive general clause.

Two variations of a combination of a general clause with references to certain environmental provisions are conceivable. They differ in the way the general clause is employed: Firstly, the general clause may have only a subsidiary ‘catch-all’ or ‘sweeping-up’ function; in this variation the general clause is relevant only as a last resort if EDD’s material scope cannot be determined by means of the references to existing substantive provisions that shall apply with priority.²⁹¹ Secondly, the general clause can serve as a basic, general rule which is subsequently concretised by some or all of the supplementary references to substantive norms; in this variation the general clause serves as a point of departure when determining EDD’s material scope for a specific case.²⁹² Notably in this context, the choice of which variation to use is somewhat immaterial as the overall result of both will be rather similar.

The key challenge of employing a combination approach consists in clarifying the relationship and, ideally, establishing a hierarchy of the various elements.²⁹³ Especially if reference to the local law at the ‘place of effect’ is included, the due diligence law must provide a sufficiently clear set of criteria that define when this standard is overridden by one of the other elements. Where local law is in breach of international law, the formulation of a corresponding collision rule should not pose major difficulties as any reference to international law will prevail. Furthermore, it appears justifiable to invoke the standard of international law, even if only the home State of the duty bearer is bound to those stricter standards while the State of the ‘place of effect’ is not. This is a viable option as long as it does not lead to the EDD that is rooted in international law prescribing conduct that is banned under local law (‘prescription conflict’). The use of a such a collusion rule also appears justifiable from the perspective of public international law and the principle of non-intervention.²⁹⁴ In the realm of environmental standards and regulations, however, encountering ‘prescription conflict’ issues seems a rather unlikely scenario.²⁹⁵

In cases where a conflict between references to weaker local laws at the ‘place of effect’ and stricter home State laws does occur, the rule could simply be that the stricter standard prevails. More difficult cases may arise when local laws at the ‘place of effect’ appear to have a regulatory deficit, although not in breach of international law, and no reference to a stricter home State provision applies. This raises the question of which circumstances lead to the local provision being deemed insufficient and a stricter standard being formulated by an interpretation of the general clause.

At first glance, the difficulties associated with the combined solution may suggest that an EDD’s material scope should rather be determined only by means of a general clause. This would render obsolete the clarification of the relationship between different points of reference for EDD. However, following this path reveals that similar difficulties arise and begs the question: How does the general clause relate to existing local environmental standards and can local environmental provisions be superseded or overridden by an EDD obligation whose material scope is determined by a general clause? Furthermore, simply employing a general clause bears the risk of leaving too much leeway for interpretation to the duty bearers, relevant authorities, and courts.

6 Enforcing Environmental Due Diligence Through Tortious Liability

To effectively prevent environmental harm in transnational value chains an EDD obligation needs to be enforced through appropriate mechanisms. Irrespective of the due diligence obligation’s material scope, a broad spectrum of possible enforcement instruments in national home State law can be taken into consideration.²⁹⁶ However, given the topic of this study, this chapter focuses on enforcement by means of tortious liability. Since tortious liability of private companies is generally a matter of national law, the relevant issues are discussed here by way of example for the German legal system.

6.1 Liability’s Twofold Function

From the legislature’s perspective, liability for tortious acts serves a twofold²⁹⁷ purpose:²⁹⁸ According to the traditional and still dominant view among legal scholars, in particular in Germany, civil liability is primarily aimed at compensation for damage.²⁹⁹ In this way, compensation through liability mechanisms can be seen as a manifestation of ‘corrective justice’. However, it is now also widely recognised that tort law has a behaviour-influencing effect.³⁰⁰ Therefore, the fact that the legislator may use tort law and liability instruments to both incentivise and deter certain behaviour is unlikely to face any significant objections.³⁰¹

Hence, a tort-based liability mechanism for human rights abuses and environmental harm in transnational value chains can be justified in two ways: Firstly, from a ‘corrective justice’ perspective, the negative impact of abuses and harm in transnational value chains should not be borne by employees and local communities involved in or impacted by those value chains. Rather, such negative external effects should be internalised in the cost function of the involved companies and ultimately reflected in the final price of their products. In a nutshell, this principle is aptly described by the much-cited catchphrase that summarised the rationale of the worker’s compensation legislation passed at the beginning of the twentieth century: “The price of the product should bear the blood of the workman.”³⁰² This normative idea can be generalised for all negative external effects so that the price of the product should bear all the costs of all negative externalities, including those related to environmental harm.³⁰³ Secondly, the legislature can use liability as a deterrent enforcement mechanism. If a perpetrator anticipates that he will be held liable and forced to compensate for any damage negligently caused by him, this can be an incentive for compliance with the required duty of care.

Coupling value chain due diligence with a civil liability mechanism also offers some advantages and can prove to be quite effective, at least in some situations. One such advantage is that when compared to administrative oversight and public enforcement, such a coupling is a low-cost, or perhaps even a no-cost, mechanism from a public spending perspective. At the same time, is certainly less vulnerable, if not immune, to legal objections regarding due diligence’s extraterritorial impacts (Sect. 7.7).

6.2 Legislative Options: “Big Solution” vs. “Small Solution”

Essentially, there are two fundamentally differing options for integrating a new due diligence obligation as a relevant standard of care into domestic tort law:

The first approach, labelled by Leonhard Hübner as the ‘small solution’,³⁰⁴ was proposed, inter alia, in the 2016 NGO proposal for a German HRDD Bill (cf. Section 15). According to the ‘small solution’, the due diligence obligation serves as a relevant standard of care in determining whether a defendant has caused damage negligently. To this end, the due diligence obligation in home State law is declared to be an ‘overriding mandatory provision’ only to the extent that it serves to determine the relevant standard of care. All other elements of the claim need to be assessed according to the law applicable pursuant to Article 4 Rome II Regulation, particularly regarding damage, causation and time limitations. This approach may more readily gather politically support as it leaves the national substantive civil liability law principally untouched while also deviating less from European Union law (Article 4(1) Rome II).

The second option, labelled by Hübner as the ‘big solution’,³⁰⁵ consists of establishing an entirely new legal basis for tort claims in the due diligence act and is—cautiously—favoured by Hübner.³⁰⁶ The ‘big solution’ requires that the entire legal basis be deemed as an ‘overriding mandatory provision’ within the sense of Article 16 Rome II Regulation. Regarding the enforcement of an EDD obligation by means of tortious liability, it has greater potential than the ‘small solution’ because some of the problems detailed below can be addressed more easily by appropriately drafting the new legal basis for a tort claim triggered by a violation of the due diligence obligation. However, the ‘big solution’ seems significantly less likely to pass the hurdles of the required legislative procedure. The legislature’s concerns regarding the liability issue in the process of developing and passing the German ‘Supply Chain Due Diligence Act’, with its last-minute amendment to explicitly exclude new civil liability claims (cf. Section 3(3) of the Act), illustrate this. Furthermore, the ‘big solution’ may face bigger legal challenges in EU primary and secondary law.³⁰⁷ However, if civil liability is provided for in a future EU directive, these issues will be less problematic, a prospect that seems plausible given the European Parliament’s Draft Directive suggested a quite far-reaching civil liability provision.³⁰⁸

6.3 Challenges of Employing Tortious Liability as Enforcement Mechanism

How effective tortious liability as an enforcement mechanism will be depends, of course, on various factors. Firstly, following a grossly simplified rational choice perspective, the costs of compliant business operations and the potential additional gains from non-compliant business models are relevant. Secondly, the method of calculating damages in the relevant legal system will impact the influence of tort law on a company’s risk calculation. For example, the deterring effects can be stronger if the damage calculation is based on the profits the perpetrator can make by violating the due diligence obligation rather than the actual losses of the victim.³⁰⁹ Moreover, the deterring effects will be even stronger if tort claims are not limited to being commensurate with the economic gains of the perpetrator but instead allow the awarding of even higher punitive damages.³¹⁰

Thirdly, in the context of complex and rather non-transparent value chains, both the probability of discovering and proving the perpetrator’s causal contribution and the likely success of the judicial enforcement of a liability claim influence the deterring effects of liability risks. One important factor related to the probable success of any judicial enforcement of liability claims is the design of certain elements of procedural law. These particularly concern the rules on the burden of proof and the issue of legal standing.³¹¹ Often, liability claims are more likely to exert behavioural impact if collective claims are allowed to enforce them. Another factor that influences the likelihood of successful ‘private enforcement’ is related to litigation costs and litigation funding options for potential claimants. These factors that may impact the effectiveness of ‘private enforcement’ by means of tortious liability will be explained in more detail in the following sections.

Actionable Damage

Tortious liability can serve as an effective enforcement mechanism only to the extent that actionable damage can be expected. This is particularly problematic in many cases involving human rights violations such as child labour, freedom of speech, freedom of association and so forth. The same applies to certain environmental harm that does not result in the impairment of human health or economic loss.³¹² Indeed, instances of purely ecological damage to ecosystems may not be actionable at all, depending on the national legal system of standing. However, several approaches to how this issue may be tackled are discussed elsewhere in this study [Chap. 6, ¶ 61 et seq. (Sect. 6.6.1)] and include actions such as establishing a legally protected interest of individuals concerning collective goods or a subjective ‘right to a healthy environment’.³¹³ While a system of administrative liability would be challenging to adopt for transnational cases due to jurisdictional restrictions,³¹⁴ there is no coercive reason why a foreign municipality should not be granted standing in a civil procedure involving restitution for purely ecological damage.³¹⁵ However, these approaches would require the creation of a new legal basis for such tort claims and, therefore, they can only be addressed by means of a ‘big solution’.³¹⁶

Regardless of these problems, private enforcement is particularly promising where large amounts of damages are at stake, especially if potential plaintiffs have the necessary means to fund their litigation efforts (example: antitrust damages actions). Certain behaviour-influencing effects are also likely to emerge if individual damage awards are not particularly high on their own, but the facts that need to be established and proven in court proceedings are of a simple nature. In this case, the claims can be enforced cost-effectively or with low risk by means of standardised and partially automated processing (example: online portals for compensation claims under the EU Flight Compensation Regulation (EC) No 261/2004³¹⁷).

Certain environmental tort claims may have such features, especially with regard to extractive industries and in cases involving industrial-plant disasters, however, many other claims regarding environmental harm do not. Even if there is theoretically-actionable damage, a substantial number of the claims filed in court are unlikely to succeed if small individual claims are spread across large numbers of individuals, even if the overall damage is tremendous. In this regard, the problems associated with establishing what amounts to actionable damage is caused by the frequently cumulative nature of environmental harm.

Burden of Proof

A critical factor determining the impact of a liability regime on corporate behaviour are the rules regarding the burden of proof.³¹⁸ Pursuant to German civil procedure, the plaintiff generally bears the full burden of proof and, as such, must deliver and prove all facts that the claim is based on. In German case law, however, there are many constellations where courts can ‘facilitate’ or ‘ease’ the burden of proof (‘Beweiserleichterung’) in various ways, such as prima facie evidence (‘Anscheinsbeweis’),³¹⁹ rebuttable assumptions (‘widerlegliche Vermutungen’) or even reverse which party bears the burden (‘Beweislastumkehr’). Relevant cases include claims regarding pharmaceutical liability,³²⁰ medical doctors’ liability,³²¹ investment advisor’s liability,³²² organizational obligations³²³ etc.³²⁴ In German environmental liability law, courts have eased the burden of proof regarding the causation of damage by emissions if the claimant can prove that the defendant exceeded relevant emission standards.³²⁵ Whereas such facilitations are usually employed by courts on a case by case basis, there are a few explicit provisions that reverse the burden of proof or ease it other ways; an example can be found in Section 6(1)³²⁶ of the German Environmental Liability Act that contains a presumption of cause.³²⁷

However, such examples remain the exception to the above-mentioned general rule: Each party bears the burden of proving all of the facts that are favourable to the respective party (referred to in German legal doctrine as ‘Rosenbergsche Formel’). Consequently, for a claim based on a breach of a new EDD obligation, a plaintiff would typically have to prove in particular that there was a culpable breach of the duty of care resulting from the due diligence standard, damage resulted and there was causation. Proving the latter in particular will be quite challenging as the plaintiff has to prove that the damage would not have occurred if the defendant had acted in compliance with his due diligence/duty of care. The more distance between the defendant and the point in the value chain where the damage occurred, the more difficult it will be to prove causation. Hence, if tortious liability is meant to be an effective enforcement mechanism, the legislature should consider easing or shifting the burden of proof for violating the due diligence obligation and/or causation in certain circumstances.³²⁸ Shifting the burden of proof to establish that there was no violation of the due diligence obligation would create a strong incentive for companies to engage in meaningful due diligence efforts and thorough documentation.³²⁹

Further research is required to identify situations in which shifting the burden of proof regarding the causal link between the harm done and a breach of due diligence, and thereby the duty of care, could be adequate. There needs to be a differentiated answer to this question, in particular if the due diligence obligation potentially covers the entire value chain. This can result in very long chains of causation and, therefore, an undifferentiated approach of generally reversing the burden of proof for all cases may face justified objections. However, shifting the burden of proof regarding causation could be justified where the damage occurs within the sphere of direct control of the defendant company,³³⁰ although doing so will require the ‘big solution’.³³¹

Regarding the problems associated with the necessity to prove there was a breach of the due diligence obligation by the defendant, the claimant’s difficulties can be further eased by other means: The German NGO proposal of 2016 and the 2019 BMZ draft suggested that the internal documentation of carrying out due diligence by the obliged company shall be done also in the interest of affected third parties: Section 11(1) of both drafts recommended stipulating that compliance with the due diligence obligations must be documented, inter alia, “to preserve evidence in the interest of those affected by human rights violations”.³³² Thereby, claimants would have access to the documentation via Section 422 ZPO (German Code of Civil Procedure) and Section 810 BGB (German Civil Code).³³³

Mobilisation Cost Factors: The Cost of Fact-Finding and Legal Action, Standing and Group Actions

The right to bring an individual action would be, at least theoretically, open to any person who has suffered an actionable loss due to a culpable breach of due diligence. However, individual actions are, in some cases, likely to be of limited effectiveness as an instrument of private enforcement due to the high “mobilisation costs” under the current Code of Civil Procedure.³³⁴ Factors that will impact the mobilisation costs include the cost rules of civil procedure, the standing of NGOs and the admissibility of collective legal action as well as the cost for pre-trial investigations and fact-finding efforts.

The ‘chilling effect’ of the ‘loser-pays’, as a principle in court proceedings, has been examined in a study regarding the legal system of the UK.³³⁵ One can assume that similar effects will be seen in the German legal system and this ‘chilling effect’ can only be partially mitigated by legal aid schemes.³³⁶ Currently, typical scenarios for cases following this path will involve victims/plaintiffs from the Global South for whom a lawsuit in Germany or another EU Member State will, in all likelihood, be particularly burdensome (e.g., language barriers, geographical distance, restrictive visa policies, legal fees and a foreign legal system that may require translation services etc.). Moreover, the facts of the case will regularly be legally and factually complex because fact-finding has to be carried out abroad with the possibility³³⁷ that foreign law has to be applied. Extensive pre-financed research will be required before such legal action can be taken. Hence, it is not surprising that filing lawsuits of this kind in Germany or elsewhere in the EU by affected claimants from the Global South is an exceptionally rare occurrence.³³⁸

If private enforcement is to develop its full behaviour-influencing potential, the use of collective legal action would be crucial. The German legal system traditionally insists on relatively restrictive requirements for legal standing.³³⁹ However, even in Germany, there are a number of legal fields in which certain associations do enjoy a right of collective action (‘Verbandsklage’). The possibility of such collective legal action is provided for in the areas of anti-discrimination of persons with disabilities,³⁴⁰ consumer protection,³⁴¹ unfair competition,³⁴² antitrust law³⁴³ and, as a result of Article 9(3) Aarhus Convention³⁴⁴ and the subsequent Directive,³⁴⁵ in the field of environmental law.³⁴⁶ Collective action will be primarily undertaken when seeking injunctive relief or seeking administrative measures to be taken. In some cases, a “confiscation of profits” can be achieved through collective action,³⁴⁷ meaning the defendant would be ordered to pay certain illegally obtained profits to the State rather than the suing claimant. This is likely to be a reason why there have been very few cases in which associations have sued for the confiscation of profits and, therefore, these provisions have been criticised as largely ineffective.³⁴⁸

With regard to a potential statutory EDD obligation in German law the right of collective action for certain environmental NGOs (‘Umweltverbandsklage’), set out in the Environmental Appeals Act (‘UmwRG’),³⁴⁹ is of particular interest. It can be legitimately asked whether Germany is, irrespective of its good intentions,³⁵⁰ in full compliance with Article 9(3) of the Aarhus Convention³⁵¹ as the catalogue defining the UmwRG’s scope in Section 1 can, at best, be regarded as sufficient only if it is interpreted very extensively.³⁵² Nevertheless, in order to clarify the question of legal standing, it seems preferable to explicitly include administrative implementation measures with regard to a new statutory EDD obligation in the catalogue of Section 1 UmwRG. If an EDD obligation were to be provided for in EU law, the legal standing of environmental NGOs could arguably be based on ECJ case law without any further amendments to the German UmwRG or the rules governing administrative courts’ procedures.³⁵³ However, if this were to be the case, an explicit clarification in the UmwRG would ideally still be included to achieve a satisfactory degree of legal clarity.

The second type of collective action established in the German legal system is ‘model declaratory proceedings’ (Musterfeststellungsklage), known in German investment law³⁵⁴ and—more recently—in consumer protection law.³⁵⁵ This type of lawsuit can be filed by a recognised consumer protection association. It aims at a binding determination of certain facts and legal questions that are relevant for deciding on individual claims (Section 606(1) ZPO). Individual consumers can join the lawsuit by registering in an official claims register (Section 609 ZPO) to the effect that they (and the defendant) will be bound by the model declaratory judgment (Section 613 ZPO).³⁵⁶

Designing a tortious liability claim as an effective mechanism for private enforcement of due diligence obligations in transnational value chains would suggest extending the model declaratory proceedings to such claims of affected parties as a collective redress mechanism. For legislative approaches at the EU level, the recently adopted Directive (EU) 2020/1828,³⁵⁷ could serve as a point of reference for the development of representative action to protect the collective interests of the environment and people who are affected by transnational value chains.

International Jurisdiction of German Courts

Jurisdiction of national Courts within the EU for claims against companies incorporated on EU territory is relatively straightforward to establish, even de lege lata.³⁵⁸ Pursuant to Article 4(1) and Article 63(1) Brussels I Recast Regulation, a company may generally³⁵⁹ be sued at the place of their statutory seat, central administration or principal place of business. The ECJ has explicitly rejected the forum non conveniens objection³⁶⁰ and, only in exceptional cases, is the Brussels I Recast Regulation not applicable.³⁶¹

A different and much more difficult question is whether, and under which circumstances, a German court has jurisdiction for a claim against a foreign company, including foreign incorporated subsidiaries of domestic parent companies.³⁶² In a number of proceedings in the UK and the Netherlands, a successful approach consisted of suing the foreign subsidiary together with the domestic parent company before a domestic court. However, this does not appear to be an approach that is readily transferable to German international civil procedure law.³⁶³ Therefore, it should be considered, as a general-policy consideration regarding access to justice for harm caused by multinational corporate groups, to moderately extent the jurisdiction of German courts with regard to foreign subsidiaries of German parent companies if a fair trial in the otherwise competent jurisdiction cannot be guaranteed.³⁶⁴ However, as long as the proposed due diligence act is only applicable to companies domiciled in Germany, these practically relevant questions do not affect the application of the proposed law.

6.4 Private International Law: Environmental Liability in Transnational Cases (Articles 4, 7, and 16 Rome II Regulation)

To optimally harness the behaviour-influencing potential of tortious liability, a due diligence obligation in a German value chain act would have to define the duty of care under the tort law that is applicable pursuant to private international law. However, it is not self-evident which national tort law applies in cases involving transnational value chains. The applicable law is generally determined by the ‘place of effect’, i.e. the country on whose territory the damage occurred (lex loci damni, Article 4(1) Rome II Regulation) [cf. Chap. 6, ¶ 44 et seq. (Sect. 6.5.1)]. The ‘place of effect’ is distinct from the place where the event giving rise to the damage occurred (‘place of action’, locus delicti commissi) and the places where any indirect consequences of the damage occurred (Article 4(1), 2nd half-sentence Rome II Regulation). The majority of severe human rights violations or environmental harm in transnational value chains involve incidents of damage occurring in third countries. Hence, in these cases, substantive German tort law does not apply to tort claims even if the case is filed at a German court and the defendant is a company incorporated in Germany. Consequently, stipulating any kind of substantive duty of care would not apply to cross-border tort claims involving harm abroad. A due diligence obligation in national home State law can be applied as a relevant duty and standard of care for tort claims, albeit only if one of the exceptions in the Rome II Regulation applies.³⁶⁵

Some authors have argued that Article 17 Rome II Regulation could open a door to interpret a HRDD-obligation as rules of safety and conduct.³⁶⁶ This view arises because, pursuant to this provision, account shall be taken in so far as is appropriate, of the rules of safety and conduct at the place of the event giving rise to the liability (i.e. locus delicti commissi). Hence, it may be argued that a HRDD-obligation in home State law shall be taken account of “in so far as is appropriate”, where relevant events, such as management or oversight failures, on home State territory gave rise to the liability. However, Article 17 Rome II Regulation leaves a significant degree of discretion to courts as applicable rules of safety and conduct are not necessarily directly applicable but merely to be “taken account of” and even then, only as far as it is “appropriate”. While the avenue via Article 17 Rome II Regulation may be worth considering when interpreting certain provisions de lege lata, a new due diligence obligation in home State law that is specifically designed to be applied to transnational value chains should rather rely on Article 16 Rome II Regulation.³⁶⁷ Pursuant to Article 16, the application of so-called ‘overriding mandatory provisions’ is cogent, i.e. provisions of the lex fori apply in a mandatory manner irrespective of the law otherwise applicable to the non-contractual obligation.³⁶⁸ Hence, the Regulation leaves Member States certain leeway to adopt overriding mandatory provisions. To avoid courts having discretion and eliminate any ambiguities in the legislation, a law can declare certain norms explicitly as overriding mandatory provisions within the meaning of Article 16 Rome II Regulation.³⁶⁹

However, in the case of liability for violating a purely environmental due diligence obligation, these questions could be less problematic. Article 7 Rome II Regulation reads:

The law applicable to a non-contractual obligation arising out of environmental damage or damage sustained by persons or property as a result of such damage shall be the law determined pursuant to Article 4(1), unless the person seeking compensation for damage chooses to base his or her claim on the law of the country in which the event giving rise to the damage occurred. (emphasis added).

It has been contested, though, whether Article 7 Rome II also applies to cases where environmental damage abroad has been caused only indirectly, in a location different to the ‘place of effect’ through an act or omission such as management failures or violations of an organisational obligation.³⁷⁰ However, arguably this view cannot be transferred to the situation where a specific and independent due diligence obligation of a company is created to prevent or minimise the chances of harm arising from activities along a transnational value chain. The act or omission that could potentially trigger the liability of the company is not a third party’s action occurring in a third country directly causing the damage, rather it is the company’s own failure to comply with the due diligence obligation.³⁷¹ Liability for breach of a due diligence obligation is not a case of third party liability where the obliged company has been attributed the action of a third party and thereby held liability for actions of the third party; by contrast, the obliged company is held liable for its own acts and omissions, namely the breach of its own due diligence obligations, in particular management failures in the home country.³⁷² Accordingly, the creation of an explicit mandatory overriding provision would not necessarily be required in order to apply an EDD obligation enshrined in national home State law in transnational liability cases. After all, the claimant would most likely have the possibility to choose the respondent company’s home State law—with the favourable due diligence/duty of care standard—as the legal basis for his claim.

If obligations are to be regulated jointly, this raises the question of whether a mandatory overriding provision supersedes the injured party’s right to choose as laid down in Article 7 Rome II for claims arising from environmental damage. In the theoretically conceivable case that the law at the ‘place of effect’ imposes a stricter standard of care than the home country’s EDD obligation, the home State regulation would fail to achieve its purpose. However, such a scenario appears rather unlikely. Insofar as the material reference point of the EDD is determined by a reference to the law at the ‘place of effect’, the aforementioned scenario is excluded from the outset. If the EDD obligation is defined by a combined approach that references both the law of the home State and the law of the ‘place of effect’, the aforesaid scenario can be avoided by providing for a precedence of the reference to the law of the ‘place of effect’ whenever the latter imposes a more stringent standard.

Another option would be to limit the overriding mandatory provision to the application of the ‘human rights’ due diligence obligation and thereby exempt ‘environmental’ due diligence. Although there will be some overlap of cases that involve human rights as well as EDD obligations, the two types of obligations can be readily distinguished. Nevertheless, given the controversy regarding the application of Article 7 Rome II Regulation to action indirectly causing harm abroad, a comprehensive overriding mandatory provision that includes environmental damage should be the preferred option.

7 Legal Objections Related to ‘Extraterritoriality’

Legal objections to unilateral environmental protection in transnational value chains by means of exercising home State jurisdiction are encapsulated by the keyword ‘extraterritoriality’.³⁷³ In order to conclusively assess these legal objections, a detailed analysis of a specific design of EDD obligations in home State law would be necessary. The outcome of such an analysis would be particularly affected by its material scope and the specific enforcement mechanism employed, especially if the latter comprises more than just a civil liability regime. However, the general principles outlined below indicate that such a piece of value chain due diligence legislation can be drafted in a lawful manner, notwithstanding any extraterritorial impacts.

Because the policy choices related to extraterritorially-effective legislation are complex and require a differentiated analysis, they can be only pointed out but it is beyond the scope of this book to analyse them in any depth (¶ 164 et seq.). Instead, this section focuses on the legal issues related to stipulating, by means of home State legislation, EDD obligations regarding transnational value chains. However, before turning to the legal analysis, a few words on terminology are necessary (¶ 167 et seq.). With regard to public international law, the lawful exercise of ‘extraterritorial jurisdiction’ that home State regulation may potentially be associated with has been called into question (¶ 173 et seq.). Secondly, with regard to the potentially discriminatory effects of the approach, these should be examined under WTO law (¶ 198). Finally, certain aspects of extraterritoriality could be discussed through the lens of national constitutional law (¶ 215 et seq.).

7.1 Excursus: Complex Policy Choices

Regulatory measures with at least some extraterritorial reach or impact can raise difficult policy questions that cannot be adequately addressed here. However, a few remarks in this regard serve to illustrate the complexity of such policy choices. A differentiated line of argument could consider, on the one hand, that market-regulating policies with extraterritorial impacts or reach are an option primarily, if not exclusively, for States with substantial market power; the economic inequality inherently brought to bear by this policy approach stems from the fact that small-market actors lack the power to force foreign manufacturers to adopt their regulatory standards. Economically smaller and less powerful States risk that foreign producers may choose to withdraw from their market rather than comply with their regulatory requirements, particularly if these are costly or difficult to implement and/or incur substantial or ongoing risk for the producer.³⁷⁴ In this regard ‘extraterritoriality’, when exercised as a policy dimension, could be regarded as a manifestation of ‘oligarchy’, as Nico Krisch pointedly remarks, because it is available to only a few economically powerful States.³⁷⁵ Consequently, asserting extraterritorially-effective policy measures could be viewed as a potentially illegitimate policy choice of a ‘legal hegemon’, who lacks democratic legitimisation vis-à-vis the affected people in the foreign territory.³⁷⁶

However, on the other hand, these reservations are not necessarily a reason to simply discard this option. The alternative for some economically-weak States to being extraterritorially impacted by wealthy and economically-powerful third States is that they are impacted by unregulated, economically-powerful multinational enterprises. The result of these power dynamics is a dilemma situation of smaller economies being caught between a rock (i.e. extraterritorial regulation by a State) and a hard place (i.e. an unregulated multinational company)—or, as Krisch puts it, between Skylla and Charybdis.³⁷⁷ Moreover, the economic power of bigger market economies and their ability to adopt extraterritorially influential policy options can also be interpreted as a responsibility or even a duty.³⁷⁸

These considerations show that from an economic, political, and moral perspective, policy choices involving domestic regulation of transnational business activities with extraterritorial effects need to be well-considered, especially with regard to potentially unintended side effects. However, the political, economic and moral questions that arise cannot be answered adequately by means of legal methods. Therefore, the remainder of this section focus on legal objections that extraterritoriality faces.

7.2 Extraterritoriality, Territorial Extension and Jurisdiction

Generally speaking, ‘extraterritoriality’ implies some kind of reference or impact to a territory that is foreign to the acting State, i.e. to persons, objects, events or situations that are situated on such territory. In the legal discourse on extraterritoriality and extraterritorial jurisdiction, certain conceptual distinctions are relevant and need highlighting.

First, extraterritoriality and extraterritorial jurisdiction are not monolithic, clear-cut concepts as they can entail a number of different ways of how a norm or measure of one State may refer to, apply to or impact persons, objects, events or situations on the territory of another State. Joanne Scott distinguishes between ‘extraterritoriality’ and simple ‘territorial extension’³⁷⁹ by suggesting that a measure should be categorised as extraterritorial when its “application does not depend on the existence of a territorial connection between a regulated activity” and the acting State.³⁸⁰ In contrast, a ‘territorial extension’ of a measure’s application is triggered by the existence of a territorial connection with the acting State.³⁸¹ As a clear example of the first, Scott mentions the ‘Counterparty Principle’ in EU financial market regulation by which “third country actors incur obligations under EU law when they enter into a contract with an EU counterparty, even where the contract in question is concluded abroad”.³⁸² As an example of territorial extension, which Scott sees as a widespread phenomenon in EU law, she points to the protection of animals at the time of killing by Council Regulation 1099/2009.³⁸³ According to Article 12 of the mentioned Regulation in conjunction with Article 12(2)(a) of Regulation (EC) No 854/2004,³⁸⁴ products of animal origin are not permitted to be imported into the EU unless the killing of the animal complied with EU rules or with requirements “that were determined to be equivalent”. In Scott’s view, the regulation based on the nationality principle (e.g. a regulation restricting the conduct of a State’s own nationals abroad) should also be categorised as extraterritorial, however, she admits that the distinction is not always clear. This is especially the case when a home State regulation applies to legal persons ‘established’ within the home State’s territory which means, from her perspective, “there may be uncertainty about whether the application of this law is triggered by a non-territorial connection (nationality) or a territorial connection (presence).”³⁸⁵

The type of laws discussed here would create an EDD obligation for companies that have their principal place of business or seat in the regulating State’s territory. Arguably, the justification for such a regulation is built upon the presence of business operations in the home State’s territory, in particular, management decisions, rather than the company’s ‘nationality’. Hence, given that an effective due diligence obligation’s scope would include a company’s global value chains, accepting Scott’s categories and terminology would mean the discussed legislative approaches should be labelled as ‘territorial extensions’. Although ‘territorial extension’ may be easier to justify than the arguably more invasively-natured extraterritoriality, Scott insists that her terminological framework is designed as more of an analytical tool rather than a ‘normative shortcut’.³⁸⁶ In particular, she argues that the existence of some kind of territorial connection is, by itself, insufficient to conclude that a measure is lawful.³⁸⁷

A similar conceptual distinction was suggested by the then Special Representative of the Secretary-General John Ruggie in the course of elaborating the UNGPs. The distinction Ruggie drew is reflected in the commentary on Guiding Principle No. 2 where it states that “domestic measures with extraterritorial implications”, such as corporate reporting requirements on a corporation’s foreign conduct, should be distinguished from “direct extraterritorial legislation and enforcement”, such as criminal punishment for crimes committed exclusively abroad.³⁸⁸ Direct extraterritorial legislation is more likely to face objections from other States than domestic measures with purely extraterritorial implications.³⁸⁹

A domestic due diligence obligation whose personal scope is limited to domestic companies, even if its material scope is applicable to events occurring abroad, may be categorised as domestic legislation with extraterritorial implications. Similarly, in its General Comment No. 24, the UN Committee on Economic, Social and Cultural Rights took the view that this kind of legislation cannot be categorised as a manifestation of the exercise of “extraterritorial jurisdiction”.³⁹⁰

Finally, a classic and crucial distinction is drawn between jurisdiction to prescribe, adjudicate and enforce, which describe the three modes by which State authority may be exercised. By imposing due diligence obligations unilaterally on companies domiciled on its territory, the home State exercises jurisdiction to prescribe.

7.3 Public International Law

The key objection against exercising any kind of extraterritorial jurisdiction or ‘territorial extension’ of domestic measures stems from its potential conflict with host³⁹¹ States’ territorial sovereignty. In order to justify an extraterritorial reach or impact given the potential conflict with another State’s sovereignty, a certain kind of connection to the acting State is required. However, even if a sufficient connection is provided, the exercise of jurisdiction shall not infringe the principle of non-intervention. The following parts of this section will discuss these key issues in more detail.

Extraterritorial Jurisdiction Versus Host State Sovereignty

Territorial sovereignty encompasses a State’s right to exercise within its territory, “to the exclusion of any other State, the functions of a State”, hence the “principle of the exclusive competence of the State in regard to its own territory”.³⁹² Accordingly, in the Lotus Case ,³⁹³ the Permanent Court of International Justice (PCIJ) issued a general prohibition to exercise power extraterritorially as far as the jurisdiction to enforce is concerned.³⁹⁴ Nevertheless, as far as the jurisdiction to prescribe is concerned, there is no prohibition in international law to exercise jurisdiction in a State’s own territory “in respect of any case which relates to acts which have taken place abroad”. In particular, when doing so, a State does not need to rely on any kind of permissive rule from international law. Indeed, international law leaves States with broad discretion as to how territorially-exercised jurisdiction relates to impacts and events that occurred abroad:

It does not (…) follow that international law prohibits a State from exercising jurisdiction in its own territory, in respect of any case which relates to acts which have taken place abroad, and in which it cannot rely on some permissive rule of international law. Such a view would only be tenable if international law contained a general prohibition to States to extend the application of their laws and the jurisdiction of their courts to persons, property and acts outside their territory, and if, as an exception to this general prohibition, it allowed States to do so in certain specific cases. But this is certainly not the case under international law as it stands at present. Far from laying down a general prohibition to the effect that States may not extend the application of their laws and the jurisdiction of their courts to persons, property and acts outside their territory, it leaves them in this respect a wide measure of discretion which is only limited in certain cases by prohibitive rules; (…).³⁹⁵

This passage from the Lotus Case’s majority opinion remains the typical starting point for discussing extraterritorial jurisdiction despite the fact its interpretation remains controversial. Some scholars read the judgment in a rather straightforward manner and concluded that according to the ‘Lotus Principle’ enshrined in the judgment, extraterritorial jurisdiction to prescribe and to adjudicate is generally permissible without further prerequisites. These authors tend to reformulate the key finding of the judgment as a ‘permissive rule’ arguing that “whatever is not explicitly prohibited by international law is permitted”.³⁹⁶ However, others suggest that such far-reaching conclusions are the result of an incomplete or incorrect reading of the judgment,³⁹⁷ declare it to be an ‘anomaly’³⁹⁸ or simply the “high water mark of laissez-faire in international relations”.³⁹⁹ Notwithstanding the persistent significance of the Lotus Case , States typically choose a more precautious approach when claiming jurisdiction by invoking some kind of connecting factor rather than purely and primarily relying on the ‘Lotus Principle’.⁴⁰⁰

Therefore, according to many scholars and State practice, measures that seek to create ‘purely’ prescriptive or adjudicative extraterritorial jurisdiction are permitted to the extent that a sufficient connection to the State asserting jurisdiction is provided.⁴⁰¹ Traditionally, rather than establishing a general, abstract definition of what a sufficient or ‘genuine link’ requires, doctrine and practice have established and now operate with a number of accepted connecting factors: the territoriality principle, the nationality or active personality principle, the passive personality principle, the protective principle, the effects doctrine, and the rather narrow universality principle.⁴⁰² Whether these ‘permissive’ principles can, or even should, be merged into an overarching principle that sets a new standard of what constitutes a genuine link that can justify extraterritorial jurisdiction⁴⁰³ is beyond the scope of this book. Even for the purposes of this chapter, it is sufficient to note that extraterritorial-prescriptive jurisdiction can be exercised lawfully as long as a connecting factor pursuant to one of the aforementioned principles can be established.⁴⁰⁴

This suggests that the discussed type of home State regulation can be designed in an essentially lawful manner, as such, by limiting the personal scope to companies domiciled in its own territory as the legislating State may always invoke the place of the statutory seat, central administration or principal place of business as sufficient territorial and personal link.⁴⁰⁵ A similar argument can be made, if the personal scope is extended to foreign companies regularly engaged in business on the regulating State’s territory. However, this approach may be more controversial. In addition, as far as an EDD obligation is aimed at the protection of global commons, the obligation’s extraterritorial implications may be justified with respect to the effects doctrine because harming global commons would also have repercussions in the regulating home State.⁴⁰⁶

This doctrinal stance corresponds with dynamically evolving and growing State practice of home State regulatory approaches,⁴⁰⁷ in particular, those discussed above (¶ 20 et seq. and ¶ 68 et seq.) and in the UK Modern Slavery Act, the Australia Modern Slavery Act and the Dutch Child Labour Due Diligence Act. Although these pieces of legislation have been the subjects of fierce political debate and faced strong opposition from actors representing business interests, critics hardly ever invoke the illegality of the measures under public international law due to their extraterritorial impact. Therefore, and to a certain extent unsurprisingly, the recently published study on behalf of the European Commission found that with regard to this style of regulation, “some transnational application of these due diligence obligations is now widely accepted in the EU”⁴⁰⁸ and that there “seems to be a consensus that states are allowed (and some argue, obliged) to regulate the adverse human rights and environmental impacts of their multinational corporations that occur outside their territories.”⁴⁰⁹ Although these findings may appear somewhat vague, the fleeting attention that is given to the issue in the comprehensive 570-page report may indicate that the issue is not seen as a fundamental problem, at least by the European Commission and the multiple authors of the report.

Of course, a conclusive evaluation would need to look at the details of a proposed regulation, however, generally speaking, the approach is not likely to face legal objections from a jurisdictional perspective. Nonetheless, some of the options of legal design presented above will certainly be more challenging to justify than others and, as such, these aspects will be discussed in the following part.

A Balancing Test?

It has been argued that to be lawful, in addition to one of the discussed links to the acting State’s territory, extraterritorial jurisdiction needs to pass some kind of ‘balancing test’ or ‘rule of reason’. Prominently, this view had been asserted in the American Law Institute’s Restatement (Third) of the Foreign Relations Law of the United States of 1987.⁴¹⁰ However, there is little evidence that such a principle could be regarded as part of customary law because, as Ryngaert put it, “given the absence of uniform State practice and opinio juris, the rule of reason does not qualify as a norm of customary international law”.⁴¹¹ Indeed, the American Law Institute largely abandoned the balancing test in its fourth edition of the above-mentioned Restatement explicitly due to a lack of evidence for relevant State practice.⁴¹² The balancing doctrine was particularly employed by US national courts in the realm of domestic antitrust law. Due to the distinct characteristics of antitrust law and the specific interests of the involved actors, it is difficult to generalise and expand these approaches to other fields of regulation. Furthermore, and again unsurprisingly, there is no generally accepted methodology of carrying out a balancing test. Other authors do not explicitly require a balancing test or a rule of reason, however, some would likely still take a more sceptical stance vis-à-vis the dynamic trend towards growing ‘territorial extension’ of more powerful jurisdictions such as the EU and the US. In their view, the traditional categories of legitimate jurisdictional links are overly simplistic in a world of de-territorialised social spaces.⁴¹³ The current practice of ‘territorial extension’ and unilateral regulation with global reach can be viewed as conflicting with the principle of exclusive territorial competence of affected third countries and the principle of international consensus.⁴¹⁴

In view of such reservations to ‘territorial extension’, and with regard to the legislative approach discussed here, there is a number of elements that could be potentially relevant when hypothetically balancing the interests of the legislating home State and indirectly affected third countries. These elements will be will be considered in the following.

First, the proposed EDD obligation with regard to transnational value chains creates a direct duty only for companies domiciled on the regulating State’s territory that imposes the due diligence obligation. The obligation is typically to be carried out in the headquarters generally situated on the territory of the regulating home State. Therefore, it may be contested that this type of home State regulation even amounts to an exercise of genuine ‘extraterritorial jurisdiction’.⁴¹⁵ In the sense of Scott’s terminology, it would be categorised as entailing ‘territorial extension’ rather than seeing to establish extraterritorial jurisdiction. Of course, the obligation does have some extraterritorial repercussions. Any company obliged by its home State is placed under that obligation to influence the conduct of associated foreign third parties abroad. However, this impact is conveyed only indirectly via a chain of private contracts, hence, foreign third parties are never directly subject to the obligations stipulated in the home State law. In this sense, the due diligence obligation is never directly applied to foreign nationals abroad.

Second, the obligation’s impact is potentially far-reaching as its ‘horizontal scope’ may cover an entire value chain. However, the discussed ‘adequacy criterion’ can limit the due diligence obligation’s ‘vertical scope’ in the value chain inter alia with regard to the company’s proximity to and leverage over the third party directly causing harm in a value chain (¶ 84). Therefore, increasing the distance from the source of the harm and decreasing the leverage held over relevant third parties means that the due diligence obligation’s scope in the given value chain is also reduced de jure. Moreover, increasing distance and thereby, generally speaking, decreasing leverage will also reduce the de facto ability to privately enforce contractual obligations reflecting the home state due diligence obligation. Therefore, the extraterritorial impact of the due diligence obligation imposed by a company’s home State is—de jure and de facto—contingent on the proximity and the leverage of the company directly subjected to the obligation. Strong leverage exerted by a big multinational over its suppliers in third countries is not a result of home State regulation as the leverage results primarily from the specifics of the business model and economic factors in play. Consequently, the due diligence obligation’s extraterritorial impact correlates with the power and leverage to potentially contribute to harm abroad. In turn, companies that have little economic power in a value chain and, therefore, little leverage regarding foreign third parties in that chain, may contribute less to potential harm abroad and, as such, the extraterritorial impact of complying with the due diligence obligation is correspondingly lower. In summary then, there is a correlation between the de facto extraterritorial impact of unregulated business operations on a home State’s territory and the de jure extraterritorial impacts of the proposed regulation. This correlation can be seen as an intentional result of the legal design of the ‘adequacy test’ in limiting the ‘horizontal’ and ‘vertical scope’ in the value chain. This design may contribute to justifying the ‘territorial extension’ because the extraterritorial impact is stronger with regard to companies that have a higher risk of substantive contribution to and complicity⁴¹⁶ with wrongdoing in third countries.

Third, as previously discussed, due diligence obligations generally create an obligation of conduct, not of result (cf. ¶ 16, 35). Thereby, even when EDD’s material scope is defined by referencing substantive-environmental standards (cf. ¶ 89 et seq.), this does not bind the company subjected to the due diligence obligation directly to the substantive standard. In this regard, the proposed legislation differs from many of the more controversial examples of ‘territorial extension’ in State practice that often create duties of result that apply to foreigners abroad.

A fourth aspect can be found in the various options for defining EDD’s material scope (cf. ¶ 87 et seq.). In particular, referencing the host State’s or international environmental standards, especially when the latter are multilateral, will face less objection than referencing the home State standard.⁴¹⁷ However, an adequate ‘opening clause’ that allows deviation from the home State’s standard, where justified, could shift the balance in the direction of allowing ‘territorial extension’. Beyond referring to multilateral standards, other mechanisms that can make ‘territorial extension’ more acceptable include consultation and cooperation processes with the affected third countries.⁴¹⁸

A fifth relevant aspect concerns the choice and design of enforcement mechanisms, as it could significantly affect the outcome of a balancing test: Whereas civil liability is unlikely to face any significant objections, administrative enforcement or criminal punishment will need a more thorough examination. Having said that, these sanctions would exclusively be imposed by home State authorities on home State ‘nationals’ and enforced on home State territory. Almost all conceivable enforcement mechanisms do not raise any major concerns except for import bans.⁴¹⁹

Overall, even if one were to require a balancing test, there are good reasons to believe that the legislating home State’s interests in protecting the environment in transnational value chains outweighs the host State’s interest in not doing so.

Prohibition of Intervention

However, this does not provide a carte blanche as the discussed kind of legislation could potentially be problematic pursuant to international law if, and to the extent that, a specific regulation could infringe the principle of non-intervention.⁴²⁰ This principle is a part of customary law and is reflected in a broad variety of treaties and declarations.⁴²¹

Although some details may still be controversial, intervention in this sense is, generally speaking, understood as interference by one State in the internal or foreign affairs of another State.⁴²² Intervention is prohibited where it interferes with ‘exclusively’ domestic affairs and is executed by coercive means.⁴²³ A definition by the ICJ reads as follows: The prohibition of intervention

forbids all States (…) to intervene directly or indirectly in internal or external affairs of other States. A prohibited intervention must accordingly be one bearing on matters in which each State is permitted, by the principle of State sovereignty, to decide freely. One of these is the choice of a political, economic, social and cultural system, and the formulation of foreign policy. Intervention is wrongful when it uses methods of coercion in regard to such choices, which must remain free ones.⁴²⁴

Although the discussed value chain due diligence legislation may be categorised as a domestic measure with extraterritorial impacts or entail ‘territorial extension’ rather than an exercise of ‘extraterritorial jurisdiction’, host States could nevertheless argue that even indirect extraterritorial effects, which are clearly intended, unduly narrow their freedom regarding how to regulate businesses operating on their territory including their freedom ‘not to regulate’. Arguably, such indirect impacts could indeed become relevant because coercive force is not limited to just military or other clearly prohibited means but can be manifest by indirect interference using economic, political and diplomatic measures.⁴²⁵ However, neither interference in exclusively domestic affairs (below 1.) nor coercion (below 2.) are likely to be raised as objections by the discussed value chain due diligence legislation. Both potential objections will depend, in particular, on the specifics of both the due diligence’s material scope and that of the enforcement mechanism:

1. It is not easy to define what may be considered as ‘exclusively domestic affairs’. According to a broad definition, domestic affairs are all matters that are not regulated by treaty, customary international law or other international norms.⁴²⁶ Therefore, means of home State regulation that are in line with international human rights obligations, which are binding on a State at the ‘place of effect’ (the host State), do not fall into the scope of exclusively domestic affairs. Hence, this approach of designing the material scope can hardly infringe the prohibition of intervention per se.⁴²⁷ This may be asserted even when due diligence requires a violation of local laws if, and to the extent that, these laws are unlawful under international, and in particular, human rights law.⁴²⁸

Nevertheless, problematic constellations remain where the due diligence legislation established by a home State requires certain extraterritorial conduct which is unlawful under foreign local law but the foreign local law does not violate any international obligations of the host State. This constellation can be described as ‘prescription conflict’.⁴²⁹ Arguably, the obligation imposed by home State law in such cases could potentially touch upon a matter of the domaine réservé of the host State. An example discussed in the literature is an obligation under home State law to ensure the establishment of works councils⁴³⁰ or the formation of trade unions⁴³¹ throughout the value chain, even if such activities are forbidden under local law and the prohibiting local laws do not violate any international obligations.

These considerations may be transferred to EDD and the various options of designing its material scope (¶ 87 et seq.) as follows: Referring to the locally applicable environmental laws of the host State/‘place of effect’ does not appear to raise any concerns with regard to the prohibition of intervention. This mechanism exclusively addresses an enforcement deficit and is designed only to ensure compliance with local laws. It is virtually inconceivable that a State could successfully assert that this constitutes a prohibited interference in domestic affairs because any non-enforcement of its own laws would be an intentional development policy and strategy to attract foreign direct investment. The second approach, which involves reference to binding international environmental treaties, will not cause any problems either provided that the host State is also bound by the international environmental obligation. However, if the host State is not bound by the relevant international environmental agreement, the situation becomes less clear. One solution to this could be integrating an opening clause for such cases that read something along the line of “…with the exception of environmental agreements that have not been ratified by the relevant host State…”. The use of a general clause, as a third strategy, also appears fairly unproblematic with regard to the prohibition of intervention. Due to its relative vagueness and openness, such a clause would leave sufficient flexibility for an interpretation that takes into account the specific local situation in a particular host State. The potentially most problematic undertaking with regard to the principle of non-intervention would be a reference to environmental home State standards. If, and to the extent that, a genuine ‘prescription conflict’ occurs as a result of the extraterritorial effects of the home State due diligence obligation reflecting home state standards, it may be argued that the conflicting local law should prevail. However, it appears rather unlikely that such ‘prescription conflicts’ will occur in the realm of environmental law as conflicts of the type mentioned above (i.e. home State due diligence requires extraterritorial conduct that is explicitly prohibited under host State law) are most likely to arise only in certain areas of human rights law (e.g., with regard to freedom of association, freedom of speech, women’s rights etc.).

Indeed, it is difficult to imagine ‘prescription conflicts’ arising in the area of environmental protection. Needless to say, environmental protection standards vary significantly around the globe, however, it seems rather unlikely that any local law would oblige businesses to harm the environment or that it would prohibit compliance with a higher environmental standard than the local one. Hence, efforts to address ‘prescription conflicts’ would appear to have rather hypothetical value in the realm of environmental law.⁴³²

2. Irrespective of whether or not the content of the proposed legislation touches upon exclusively domestic affairs of third countries, it would represent a prohibited intervention only to the extent that it brings to bear coercive means. While it is accepted that the ‘element of coercion’ does not necessarily require the use or threat of military force, it is not clear where to draw the line regarding the use of economic, political or diplomatic measures to influence activities within third States. The use of economic pressure is particularly controversial and difficult to assess⁴³³ and no accepted metric or clear State practice has yet been identified.⁴³⁴ It is, for example, contested whether relatively severe measures designed to exert economic pressure, such as boycotts and embargoes, qualify as coercion.⁴³⁵ It has been argued that a domestic governmental decision to violate internationally lawful laws of third countries, that is domestically enforced by a threat with coercion, can represent a coercive intervention into the domaine réservé of the third country.⁴³⁶ Indeed, such a normative command may cause difficulties for an obliged company facing conflicting requirements from the home and host States, however, this seems more likely to be problematic with regard to the constitutional rights of the company’s home State, in particular, the freedom of profession.⁴³⁷ In contrast, the third country’s sovereign liberty to decide freely on its domestic affairs would still be affected, albeit at best, only very indirectly.

The assessment as to whether a prohibited coercive element is present in the proposed type of legislation can ultimately only be assessed by considering in detail the specific enforcement regime employed. Naturally, some elements of a comprehensive enforcement mix will be more problematic than others, however, with regard to the focus of this chapter, civil liability as an enforcement mechanism is unlikely to raise concerns in this regard. On the contrary, it seems virtually impossible to conceive that a civil liability regime in one State could exert any kind of coercive influence on another State. Therefore, an enforcement mechanism based on civil liability appears to be a relatively safe option in terms of public international law objections regarding the due diligence’s extraterritorial impacts.

The extent to which this may differ when adding other enforcement mechanisms cannot be discussed here without knowing the specifics of the mechanisms. However, there is good reason to doubt this will become a problematic area irrespective of which further elements are added to the enforcement mix, within the bounds of reason, as enforcement of due diligence in transnational value chains will always be implemented in a more or less indirect manner. Overall, the intensity of the measure, as one of the criteria suggested for evaluating the illegality of any means of intervention,⁴³⁸ will be relatively low. It is, for example, incomparable to the impacts of an embargo or a boycott and, therefore, EDD obligations for transnational value chains in home State law will be, generally speaking, in line with the principle of non-intervention.⁴³⁹ Irrespective of the material scope, this is certainly true regarding a due diligence obligation that is enforced exclusively by means of civil liability.

7.4 World Trade Law

‘Territorial extension’ of the suggested EDD legislation may be relevant also with regard to WTO law.⁴⁴⁰ However, due to the restrictions of this chapter, the relevant issues cannot be examined conclusively here. Rather, some of the more crucial questions that may require an in-depth analysis will be briefly highlighted.

Scope

First of all, it needs to be clarified whether the discussed due diligence obligation in home State law falls within the scope of the General Agreement on Tariffs and Trade (GATT), the General Agreement on Trade in Services (GATS), the Technical Barriers to Trade (TBT) Agreement and/or the Sanitary and Phytosanitary (SPS) Agreement. Generally speaking, the GATT is focused on trade in products and, therefore, mainly deals with restrictions based on product characteristics, which is why ‘process and production methods’ (PPMs) have significant challenges to the WTO regime. PPMs can be differentiated into ‘product-related’ PPMs (PR-PPMs) and ‘non-product related’ PPMs (NPR-PPMs).⁴⁴¹ PR-PPMs have an impact on a final product’s physical characteristics that can be detected even if these characteristics are not readily apparent; an example could be the use of pesticides in agriculture or chemical substances in the textile industry that leave trace residues on a final product.⁴⁴² NPR-PPMs, in contrast, do not impact a final product in any manner that can be detected, even by laboratory analysis or microscopic examination.⁴⁴³ As far as the downstream value chain would be covered by the due diligence’s scope, in particular the reuse, recycling, disposal of products and materials, it has not yet been clarified as to whether these processes have to be treated differently than classic PPMs.⁴⁴⁴

While a PPM requirement enforced by means of an import ban is likely to constitute prima facie a violation of Article XI:1 GATT, it has not been clarified whether such measures would also be within the scope of Article III:4 GATT.⁴⁴⁵ Irrespective of this, if the import and sale of a product are prohibited, the measure is likely to be examined under Article III GATT.⁴⁴⁶ However, it is recommended here that the discussed proposal for a cross-sectoral, overarching EDD obligation be enforced with other means than import bans, in particular, civil liability (¶ 132 et seq.).

The TBT Agreement contains specific rules for PR-PPM, such as labelling requirements.⁴⁴⁷ This requires a ‘sufficient nexus’ of the PPM to the characteristics of the product.⁴⁴⁸ In contrast, according to the contested but still dominant view, NPR-PPMs do not fall within the scope of the TBT,⁴⁴⁹ therefore, as long as an NPR-PPM is not enforced with an import or sales ban or indirectly with an obligatory labelling requirement as a prerequisite for legal import or sale, it could, arguably, be excluded from the scope of both the GATT and the TBT Agreement.

However, it is questionable whether the suggested due diligence obligation is an NPR-PPM. As noted above, referencing substantive environmental standards to determine the due diligence obligation’s material scope does not directly bind a company to the referenced standards.⁴⁵⁰ Therefore, the due diligence obligation could be viewed as simply a business management standard rather than a production standard. It has been argued, that “management systems such as ISO 9000 and ISO 14000 and general policy considerations such as labour standards or human rights conditions that are not specifically related to the production of specific products” would not qualify as ‘related PPMs’.⁴⁵¹ Accordingly, the legal opinion issued by the German Supply Chain Initiative argues that a HREDD obligation in German law would fall outside both the scope of the Most-Favoured Nation (MFN) principle and the principle of non-discrimination of the GATT because such a law cannot be considered as introducing product-related restrictions.⁴⁵²

However, WTO Member States may argue that a due diligence obligation for EU companies constitutes an indirect or de facto discrimination,⁴⁵³ because it could incentivize to locate production rather in the Global North than in the Global South: Production costs in the Global South, where generally lower environmental production standards and weaker governance prevail, would increase, as here compliance with a due diligence standard would require more efforts by the involved companies themselves. In contrast, regarding production in the Global North with higher environmental standards, better-equipped authorities and more reliable governance structures, an obliged company may rely more legitimately on enforcement of environmental and social production standards by local authorities. Consequently, companies do not need to make substantial extra compliance efforts at their own expense. As a result, the comparative cost advantage of producing in the Global South would decrease while increasing in the Global North. Therefore, production in the Global South would become relatively less attractive.⁴⁵⁴ Consequently, the discussed model of due diligence legislation provides an incentive for private companies to discriminate between value chains of different origins. As a result, it may become potentially more challenging for manufacturers from certain countries with lower environmental standards, to sell their goods to commercial buyers in a State which imposes a relatively rigorous EDD obligation.⁴⁵⁵ However, it is not clear how, or indeed even if, such indirect discrimination could be tackled in a trade dispute under the WTO regime. Arguably, the discriminating effect of the discussed type of due diligence legislation depends very much on the cost- and risk-calculation of an obliged company and may also be impacted by the specifics of the enforcement mix, particularly whether the due diligence obligation falls within the scope of WTO obligations. The previously-discussed enforcement mechanism using civil liability is, once again, rather unlikely to create such discriminating effects and is thus less likely to run afoul of WTO law.

Substantive Obligations

Assuming that the above-outlined indirect discrimination falls within the scope of the WTO regime, in particular, the MFN principle (Article I:1 GATT, Article II GATS, Article 2.1 TBT, Article 2.3 SPS) and the National Treatment (NT) principle (Article III:4 GATT, Article XVII GATS, Article 2.1 TBT), could be potentially infringed by the discussed type of EDD legislation.⁴⁵⁶

Concerning the substantive obligations of non-discrimination, the issue of ‘likeness’ requires further examination. Only ‘like’ products of domestic and foreign origin (NT) and ‘like’ products from different third countries (MFN) can be subject to discrimination.⁴⁵⁷ Arguably, products that have been produced in compliance with human rights or high environmental standards could be ‘unlike’ products with lower PPM standards if, and to the extent that, consumer preferences are sufficiently strong in this regard.⁴⁵⁸ The same is true of course concerning those PPMs that change the physical characteristics of products; however, EDD will lead, rather exceptionally, to changes in product characteristics, for example, by producers avoiding the use of pesticides.⁴⁵⁹

In the context of environmental or human rights due diligence objections based on WTO law are quite obvious where due diligence is enforced by or combined with import bans, in particular in conjunction with certification and labelling obligations. Secondly, an extension of the personal scope to foreign companies that operate on the regulating State’s territory could be problematic.⁴⁶⁰ This reflects the characteristics of the better-known WTO disputes on measures regarding environmental protection that often involved import bans or other rather obvious trade restrictions (EC – Asbestos,⁴⁶¹ US – Shrimp,⁴⁶² US – Tuna,⁴⁶³ EC – Seals I,⁴⁶⁴ EC – Seals II,⁴⁶⁵ EU – Atlanto-Scandian Herring⁴⁶⁶). However, more subtle measures of environmental protection have recently become the objects of ongoing disputes, such as the EU Renewable Energy Directive (RED), that do not impose import bans but rather provide incentives to private parties to indirectly discriminate against certain products from third countries.⁴⁶⁷

Ultimately, specific details of EDD’s material scope and its enforcement mix will be decisive when assessing legality under WTO law. As noted above, some of the approaches to determine the material scope (e.g. reference to international treaties) are less problematic in this regard than others (e.g. reference to home State law) and, similarly, some enforcement measures (e.g. import bans, criminal sanctions) will be more challenging than others, in particular civil liability. Consequently, a more in-depth analysis will need to look into the details of a proposed material scope and the enforcement regime.

Article XX GATT

Even if a unilateral EDD obligation in home State law falls within the scope of the WTO regime and potentially violates one of the WTO principles, namely MFN or NT principles, an exemption under one of the exceptions could justify the measure. Relevant exceptions from WTO obligations can be found in particular in Article XX GATT.

Three exceptions in Article XX GATT could potentially be applied to justify potentially discriminating impacts of the proposed EDD obligation: Firstly, pursuant to Article XX(a) GATT, Member States may adopt measures that are necessary to protect public morals.⁴⁶⁸ Secondly, measures necessary to protect human, animal and plant life or health can be allowed pursuant to Article XX(b) GATT. Thirdly, measures relating to the conservation of exhaustible natural resources can be justified pursuant to Article XX(g) GATT. In comparison to the first two exceptions, item (g) has the advantage of not requiring a measure to pass the necessity test, however, it has also been interpreted by Panels and Appellate Bodies in a rather restrictive manner.⁴⁶⁹

Justification based on item (a) would not raise any territoriality issues because the measure is designed, arguably, to protect public morals in the regulating State’s territory. Things are more complex regarding items (b) and (g) of Article XX GATT because the goods protected by the measure are not situated in the acting State’s territory but in the territory of other Member States and third parties and, as such, the measure is extraterritorial. This may raise complex legal questions.

In Tuna I, ‘extrajurisdictional protection’ of the protected goods in Article XX(b) and (g) GATT was rejected⁴⁷⁰ while in US – Shrimp the question was not explicitly ruled on.⁴⁷¹ However, the Appellate Body held that the protection of ‘extraterritorial goods’ is not prohibited per se but that such a policy choice requires a ‘sufficient nexus’.⁴⁷² More recent cases of this type, US – Tuna II and EC – Seals, were not decided on jurisdictional grounds even though the measures at stake had an obvious extraterritorial impact. This has been interpreted as an indication that the “extraterritorial reach of unilateral measures is not the determining factor for the consistency of such measures with WTO law. It is thus unlikely that PPMs would be condemned based on their extraterritorial reach.”⁴⁷³

If a measure falls within the scope of one of the exceptions listed in Article XX GATT, it still needs to pass the test in the chapeau (‘two-tiered test’). To do so, the measure may not be “a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail” and it shall not be “a disguised restriction on international trade” (Article XX GATT). The chapeau of Article XX GATT has been viewed as having the “greatest potential in disciplining” policy measures with extraterritorial impact.⁴⁷⁴ The Appellate Body in US – Shrimp interpreted this restriction as requiring, inter alia, serious attempts in good faith to engage in negotiations in order to find a multilateral and consensual solution prior to unilateral measures as last resort.⁴⁷⁵ Although the Appellate Body accepted the intended protection of sea turtles as a legitimate policy goal pursuant to Article XX(g) GATT, the import ban for non-certified shrimp was deemed as not justified because the requirement in the chapeau of Article XX GATT had not been met. The reason for this was, in particular, the “failure of the United States to engage the appellees, as well as other Members exporting shrimp to the United States, in serious, across-the-board negotiations with the objective of concluding bilateral or multilateral agreements for the protection and conservation of sea turtles, before enforcing the import prohibition against the shrimp exports of those other Members.”⁴⁷⁶ The Appellate Body pointed to, inter alia, Principle 12 of the Rio Declaration on Environment and Development and para. 2.22 (i) of Agenda 21.⁴⁷⁷ Although the chapeau in Article XX GATT requires serious efforts be made in good faith to negotiate a multilateral solution, this amounts to a simple duty of conduct rather than one of result,⁴⁷⁸ hence, unilateral measures can be in line with the chapeau of Article XX GATT even if attempts to negotiate were not fruitful.⁴⁷⁹ Therefore, it is noteworthy that the Appellate Body did not condemn the measure simply because of its unilateral character, rather, it opened the door to member States adopting a more flexible approach to trade, the environmental and other policy-related issues.⁴⁸⁰ Furthermore, it should be noted that the negotiating requirement was applied in US – Gambling, however, this was done in a significantly more lenient way than was previously seen.⁴⁸¹

From the reasoning expressed in US – Shrimp, two conclusions may be drawn. Firstly, and generally speaking, due diligence approaches will be easier to justify if their material scope refers to multilateral-substantive standards (binding international law or non-binding international soft law).⁴⁸² Referring to host State standards may need further clarification as to how this could result in a violation of the MFN principle.⁴⁸³ More ambitious approaches, including references to home State standards, will require more rigorous scrutiny and it remains to be seen if an opening clause in an EDD obligation that references home State standards (cf. ¶ 107–114) could provide sufficient flexibility. Secondly, against the backdrop of the reasoning in the US – Shrimp, justification will be difficult if a home State were to unilaterally adopt a HREDD regime for transnational value chains, but did not support or even engage in serious multilateral negotiations on a business and human rights treaty.⁴⁸⁴ Such inconsistency in policy approaches could harm the possibility to justify the discussed type of home State legislation under Article XX GATT.

Overall, WTO law does not appear to pose insurmountable obstacles to legislating extraterritorially-effective EDD obligations. However, a more thorough examination would need to consider the details of a proposed regulation. As Carola Glinski puts it with regard to ‘corporate social responsibility’ (CSR) measures more generally: “while the extraterritoriality of CSR protection aims is not a fundamental hurdle to their admissibility under WTO law, the devil is within the details, and CSR measures, in particular those which aim at the protection of health and safety and labour standards, will have to be drafted carefully in order to not constitute a protectionist and disguised discriminatory measure.”⁴⁸⁵ Similar views have been expressed by Jelena Bäumler⁴⁸⁶ and Enrico Partiti.⁴⁸⁷

7.5 Home State Constitutional Law

Finally, a third aspect of extraterritoriality, besides public international and WTO law, may be raised with regard to the legislating home State’s constitutional law.⁴⁸⁸ Arguably, a legislative approach that references the substantive-environmental law at the ‘place of effect’ to determine the EDD’s material scope potentially leads, indirectly, to facilitating the enforcement of foreign law by home State authorities and courts. This aspect of extraterritorial effects could potentially raise eyebrows if regarded through the lens of the home State Constitution.

The application of foreign substantive law by national civil courts is a standard approach in cases involving private international law matters.⁴⁸⁹ Multilateral conflict-of-law rules that may refer not just to the lex fori but also to the law of third countries as lex causae are considered to be the dominant type of conflict-of-laws rules.⁴⁹⁰ Reflecting an established State practice the approach is generally not considered as being problematic. Therefore, as long as the EDD obligation in home State law is enforced only by means of tort law (i.e. private law) referencing foreign environmental law at the ‘place of effect’ to determine EDD’s material scope will not pose any problem.

However, in the realm of public law, the situation is more complex. Therefore, if an EDD obligation is designed to be enforced also by means of administrative or criminal law, it may require a closer examination in this regard. As there are hardly any written conflict-of-law rules in public law, any discussion in this regard must draw on general legal principles, theories and doctrines such as the “State proximity” (“Staatsnähe”) of public law as opposed to the “State distancing” (“Staatsferne”) of private law.⁴⁹¹ Under varying labels such as ‘public law taboo’⁴⁹² and the “Unilaterism Doctrine” (“Einseitigkeitsdogma”⁴⁹³), it has been contested whether a simple reference to foreign public law may lead to the application of foreign public law in a similar manner as in the realm of private international law. Indeed, it has been noted that in State practice, such references to foreign public law are not as frequent as in private international law, but they do occur.⁴⁹⁴

Another point of reference in the discussion of the constitutionality regarding the aspect of extraterritoriality concerns the principle of democracy. It could be argued that the referenced foreign law is not sufficiently legitimised by the home State’s legislature. The argument may be examined very briefly in an exemplary manner in the light of German constitutional law. Arguably, external references in an due diligence obligation that aims at protecting the environment in transnational value chains should be regarded in the light of the needs of international cooperation⁴⁹⁵ and the Basic Law’s (‘Grundgesetz’, hereafter: GG) commitment to international law (“Völkerrechtsfreundlichkeit des Grundgesetzes”⁴⁹⁶). By establishing a due diligence obligation that draws on a reference to the local law applicable at the ‘place of effect’, the home State legislature emphasises the legislative sovereignty of the relevant State where the ‘place of effect’ is situated. Moreover, the reference to the local law at the ‘place of effect’ would not result in a direct application of foreign law by a German court but simply in the application of a due diligence obligation which, in turn, facilitates compliance with local laws at the ‘place of effect’. This follows also from the observation that reference to foreign law as means to delineate EDD’s material scope does not lead to an obligated company being directly bound to a foreign norm.⁴⁹⁷

8 Conclusion

As a point of departure, this chapter identified an emerging trend in State practice that increasingly employs due diligence obligations in home State law to foster human rights in particular and, to a lesser degree, environmental protection in transnational value chains. The various legislative approaches taken in several jurisdictions have been strongly influenced by the HRDD concept outlined in the UNGPs’ ‘second pillar’. This is not overly surprising given that the UNGPs’ non-binding ‘second pillar’ can, to a certain extent, be regarded as a blueprint for this type of legislation. Current efforts focused on due diligence have led to two categories of related legislation emerging: Comprehensive concepts try to tackle all, or at least most, of the human rights issues of concern while also, at times, extending to environmental issues through the use of a single, comprehensive set of due diligence rules without limiting the scope to specific industries, stages of a value chain or objects of protection. The most prominent examples of this type of legislation are the French ‘Duty of Vigilance Act’ (2017) and the German ‘Supply Chain Due Diligence Act’ (2021). Isolated approaches, in contrast, tackle only certain and rather limited sustainability issues in settings sometimes confined to a specific industry, a particular stage of a value chain or with a limited number of objects of protection.

This chapter has explored how environmental due diligence can be designed in a home State’s national law de lege ferenda. It focused on four issues: its scope in value chains, its material scope, its enforcement by means of civil liability, and legal objections relating to its potential ‘extraterritorial’ impact.

While the ‘horizontal scope’ of due diligence should cover, as a general rule, a company’s entire value chain including its downstream parts, it must be limited in some way to adhere to the principle of proportionality. Two different models were discussed as viable options in this regard: A ‘graduated model’, which would define fixed levels of involvement (e.g. own causation, contribution, direct link) and, as a consequence, trigger different legal consequences. The second option is a ‘sliding model’ where the degree of a company’s involvement would limit its due diligence in a more flexible manner using an ‘adequacy’ or ‘appropriateness’ criterion. Relevant factors to determine ‘adequacy’ here could include, inter alia, the duty bearer’s proximity to and leverage over the entity directly causing harm in its value chain. The discussion of these models also highlighted that they are not mutually exclusive and their combination is possible.

Particular attention should be given to the design of EDD’s material scope. In this regard, the standard approach to legislating HRDD should not simply be ‘copy-pasted’ to environmental due diligence. HRDD’s material scope is typically defined by at least implicitly referencing the internationally accepted canon of human rights treaties. While it is possible to reference international environmental treaties to describe some elements of EDD’s material scope, as a stand-alone approach this would fall short of what is necessary to provide comprehensive environmental protection. This is due to the lack of a sufficiently wide-ranging and internationally accepted canon of environmental treaties that deal with all, or at least most, of the pertinent environmental issues that may occur in transnational value chains. Therefore, designing EDD’s material scope comprehensively requires a somewhat more nuanced approach.

Two main avenues for designing EDD’s material scope have been distinguished in this chapter: referencing substantive environmental provisions on the one hand and formulating a general clause on the other. Four sources of substantive environmental provisions may be taken into consideration for the referencing approach: international treaties, international soft law, local law at the ‘place of effect’ (commonly, but imprecisely referred to as host State law) and, finally, home State law. All four sources are worth serious consideration as each has its own strengths and weaknesses as briefly outlined below.

Referencing international agreements and to some degree also international soft law as such is perhaps the most commonly accepted approach to determining EDD’s material scope. Its greatest strength lies in it being the least problematic with regard to public international and in particular WTO law. Its weakness, however, stems from its patchiness. Relying solely on this approach would result in establishing an EDD obligation that has only fragmentary application, as the German ‘Supply Chain Due Diligence Act’ may illustrate.

While referencing local environmental law at the ‘place of effect’ is unlikely to face any major legal objections, from a teleological perspective, this approach will be helpful only to the extent that it will primarily address enforcement deficits in local law. However, the approach will fall short of EDD’s purpose in this regard if local law at the ‘place of effect’ is riddled by regulatory deficits.

Finally, referencing environmental home State law is probably the most challenging path to pursue and the most contestable approach in terms of its lawfulness under international and WTO law. Moreover, this approach raises concerns regarding unintended side-effects, such as impeding desirable foreign direct investments in developing countries that could promote the use of more environmentally-friendly technology in third countries. Further analysis is required to determine whether the potential legal objections this approach faces could be circumvented by means of an opening clause that allows for deviation from home State standards. For the time being, one may conclude that the approach should be considered for individual industries or other more specific concretisations rather than to broadly define the material scope of a general EDD obligation.

The second main avenue of designing EDD’s material scope, as highlighted above, is a general clause. Such a clause can take two forms: Firstly, it can be formulated in a negative way, designed to avoid harm to the environment or a number of broadly outlined objects of protection, such as ‘environmental goods’. Its second form requires it to be phrased positively to require compliance with a broadly-outlined environmental standard of conduct. One particular advantage of a general clause is that it is less likely to create loopholes than specifically referencing environmental norms. However, on its own, a general clause would leave a substantial margin of discretion and thereby leeway for companies, authorities and ultimately courts in terms of their actions and reactions to events as they occur. Therefore, while it is a useful component in its own right, a general clause should only be employed as a complement to the referencing approaches.

Turning to the design of the enforcement mechanisms, this chapter focused on enforcement by means of civil liability. EDD obligations can and should be enforced by a broad mix of instruments ranging from reporting requirements to criminal punishment. However, given the focus of this book, this chapter has left these other means of enforcement aside. From the perspective of promoting EDD in transnational value chains, civil liability appears to be a stand-out option as an effective enforcement mechanism based on its proven deterring effect. The mechanism is also less vulnerable, if not completely immune, to potential legal hurdles discussed in the final part of this chapter.

However, a number of caveats need to be considered when employing civil liability as means to enforce EDD: First, the legal design must ensure that the liability mechanism applies in relevant cases under private international law, meaning it will need to overcome the basic rule in Article 4 Rome II Regulation according to which generally the substantive tort law of the place where the damage occurred (lex loci damni) is applicable. To overcome this general rule, the liability clause must be drafted as an ‘overriding mandatory provision’ (Article 16 Rome II Regulation). Such an overriding mandatory provision can be designed in two ways: Firstly, an entire new legal basis for a claim can be created and deemed an overriding mandatory provision by law; this legislative technique has been referred to as the ‘big solution’. Alternatively, a ‘small solution’ is also conceivable whereby a stipulation is made that the due diligence standard shall simply serve as an overriding duty of care standard while applying foreign tort law. Beyond this issue of private international law, other problems can hamper the effectiveness of civil liability as an enforcement mechanism. Such problems include the need to establish that actionable damage has occurred and the fact that both the burden of proof and the cost of litigation funding can be preclusive to seeking judicial redress.

The final part of this chapter turned to the potential legal objections establishing EDD obligations regarding transnational value chains in home State legislation. It focused on foreseeable challenges that may be triggered by the extraterritorial impact of the discussed due diligence in home State law obligation.

Firstly, under general public international law, it may be asked whether the extraterritorial impacts could violate the sovereign right of third countries to regulate business operations on their territory in a manner of their choice. However, for the purpose of this chapter, it is sufficient to establish that exercising prescriptive jurisdiction is essentially lawful, even if the due diligence law has extraterritorial effects as long as a connecting factor can be established pursuant to one of the recognised relevant principles (territory, personality, effects etc.). As long as the personal scope is limited to companies domiciled on the territory of the legislating state, establishing such a connecting factor does not appear to be problematic. A more legally challenging aspect of this kind of legislation may initially seem to come from the prohibition of intervention, however, according to the view taken in this chapter, a claim of interference with exclusively domestic affairs is rather unlikely to arise from the discussed type of EDD obligations for transnational value chains. This would be imaginable only in the exceptional case of a genuine ‘prescription conflict’ where the due diligence obligation requires the environment to be treated in a way that is explicitly forbidden under the local law of the third country in question. Whether or not such prescription conflicts are realistically conceivable depends ultimately on the specific design of the material scope of due diligence. The most vulnerable approach to designing a due diligence obligation, as noted above, consists of referencing home State law. However, although home State environmental standards may be more demanding for businesses, they will not require operations that would be forbidden pursuant to more lenient environmental standards abroad. Regardless of whether a due diligence requirement, by virtue of its material scope, interferes with exclusively internal affairs of third countries, the discussed legislation is unlikely to have the essential element of coercion. In particular, it seems virtually impossible to assert that a purely civil liability regime in one State could exert any kind of coercive influence on the internal affairs of another State. Therefore, the extraterritorial impacts of a due diligence obligation enforced by a civil liability mechanism would be relatively immune to objections under public international law regarding any extraterritorial impact of the discussed kind of legislation.

Another legal objection relating to extraterritorial repercussions may stem from WTO law. Admittedly, the discussed kind of due diligence obligation may constitute indirect discrimination against some WTO Member States and thereby potentially run afoul of the most-favoured nation and the national treatment principle. Imposing the discussed type of EDD obligation may see production in countries of the Global South with relatively low environmental standards and weak local enforcement become disproportionately more costly than production in countries of the Global North with relatively high local standards and strong local enforcement. This may occur because to comply with the due diligence obligation, a duty bearer will need to spend more time and money on carrying out value chain due diligence when producing in countries with lower standards and weaker public enforcement compared to the production in countries with stronger standards and enforcement. This is because when producing in countries with higher standards the duty bearer may rely on the legitimate expectation that local standards and enforcement are sufficient or close to. Therefore, the discussed type of due diligence legislation may, arguably, result in indirect discriminating effects. Whether such indirect discrimination effects would amount to triggering GATT obligations will ultimately again depend on the enforcement mix. In this regard, the discussed enforcement by means of civil liability stands out again as rather unlikely to create such discriminating effects that could become relevant under WTO law.

However, a prima facie violation of GATT obligations can be justified pursuant to the exceptions in Article XX(a) (public morals), (b) (human, animal and plant life or health), and (g) (conservation of exhaustible natural resources) GATT. Justification based on item (a) would not raise any territoriality problems because the due diligence measure is designed to protect public morals on the regulating home State’s territory. However, the ‘extraterritoriality’ of the protected environmental goods abroad does not necessarily preclude justification under Article XX (b) and (g) GATT. While the issue of extraterritoriality under Art XX GATT has not been conclusively settled in the case law, the more recent Panel and Appellate Body reports point in direction of granting more generous exceptions. However, to be justified by one of the exceptions, the measure also needs to pass the test in the chapeau of Article XX GATT. Pursuant to the relevant case law, this requires, inter alia, serious efforts to negotiate, in good faith, a multilateral solution prior to implementing unilateral measures.

In conclusion, a comprehensive corporate environmental due diligence obligation in transnational value chains can be designed in a lawful manner in home State law. Enforcement by means of a civil liability regime appears to be an approach that is particularly immune to conceivable legal objections relating to the extraterritorial impact this kind of home State legislation potentially has.