Authored By: Meet Agarwal
Bennett University
INTRODUCTION
The rise of globalisation in the global economy has enabled multinational corporations to engage in business through complex transnational supply chains. Even though the rise of such corporations has contributed to the development of the global economy, it has also led to a host of legal challenges in ensuring corporations’ accountability for human rights abuses and environmental degradation that occur in other jurisdictions outside the corporations’ home states. The traditional approach to corporate governance has failed to ensure corporate accountability for such abuses, owing to jurisdictional limitations and the principle of corporate separateness, resulting in an accountability gap in transnational corporate governance.
The current article is focused on the consequences of the Corporate Sustainability Due Diligence Directive adopted by the European Union. The current article, therefore, discusses the consequences of the Corporate Sustainability Due Diligence Directive within the broader framework of transnational dispute resolution in assessing whether it has the potential to reduce the accountability gap in corporate governance.
The Accountability Gap in Transnational Corporate Governance
Accountability Gap refers to the inability of current legal and regulatory systems to effectively hold multinational corporations (MNCs) responsible for human rights abuses, environmental damage, or labor violations that occur across their complex global supply chain. Key components of this accountability gap include:-
1. Legal and Jurisdictional gaps: –
Lack of International Personality: Transnational corporations are not considered direct subjects of international law, meaning they often lack legal standing in international courts, leaving regulation primarily to host or home states.
Separation of Corporate Entity: Parent companies often shield themselves from liability for the actions of their foreign subsidiaries or subcontractors by arguing that they are separate legal entities, a tactic that complicates legal action, especially in cases of environmental damage or labour abuse.
Weakness of Host States: Corporations frequently operate in developing countries with weak rule of law, inadequate environmental/labour regulations, or high levels of corruption, ensuring minimal oversight.
Extraterritorial Limitations: Home states (where the parent company is based) are often unwilling to punish the foreign misconduct of their corporations, and legal systems often fail to provide forums for victims from other nations.
2. Operational and Strategic Gaps:-
Complex Supply Chains: Complex, multi-tiered supply chains allow firms to “construct deniability” regarding adverse impacts, making it difficult for communities and workers to link harmful activities to the lead firm.
Regulatory Competition (“Race to the Bottom”): Countries may lower their social and environmental standards to attract Foreign Direct Investment (FDI), allowing firms to exploit lower costs at the expense of local communities.
Judicial Strategies: Corporations often use legal tactics to delay or complicate lawsuits, including moving for dismissal based on “forum non conveniens” (arguing a foreign court is more appropriate) to avoid a binding verdict.
3. The Shift to “Soft Law”
Voluntary Mechanisms: Accountability is frequently delegated to voluntary codes of conduct, internal reporting, or “soft law” initiatives (like OECD Guidelines). These often lack binding enforcement mechanisms and depend heavily on the willingness of firms to participate.
Limited Remedy: Victims often have limited access to effective remedies, as self-certification and non-judicial grievance mechanisms frequently provide only a appearance of remediation rather than meaningful justice.
What are the benefits of these rules?
For Citizens:-
1) Better protection of Human Rights, including labour rights.
2) Healthier Environment for present and future generations, including climate change mitigation.
3) Increased trust in Businesses.
4) More transparency, enabling informed choices.
For Companies:-
1) Harmonised legal framework in the EU, creating legal certainty and level playing field.
2) Greater customer trust and employees’ commitment.
3) Better awareness of companies’ negative human rights and environmental impacts, less liability risks.
4) Better risk management, more resilience and increased competitiveness.
5)Increased attractiveness for talent, sustainability-oriented investors and public procurers.
For Developing Countries:-
1) Better protection of human rights and the environment.
2) Sustainable investment, capacity building and support for value chain companies.
3) Improved sustainability-related practices.
4) Increased take-up of international standards.
Why does the EU need to foster sustainable corporate behaviour?
The Directive will contribute to the just transition to a sustainable economy, in which businesses play a key role.
A broad range of stakeholder groups, including civil society representatives, EU citizens, businesses as well as business associations, have been calling for mandatory due diligence rules. 70% of the businesses who responded to the public consultation sent a clear message: EU action on corporate sustainability due diligence is needed.
A third of companies recognised the need to act and are taking measures to address adverse effects of their actions on human rights or the environment, but progress is slow and uneven. The increasing complexity and global nature of value chains makes it challenging for companies to get reliable information on business partners’ operations. The fragmentation of national rules on corporate, sustainability-related due diligence obligations further slows down the take-up of good practices. Stand-alone measures by some Member States are not enough to help companies exploit their full potential and act sustainably.
EU rules will provide a uniform legal framework and ensure a level playing field for companies across the EU Single Market. Such rules will also foster international competitiveness, increase innovation and ensure legal certainty for companies addressing sustainability impacts. The Directive will steer businesses towards responsible behaviour and could become a new global standard with regard to mandatory environmental and human rights due diligence.
What are the next steps?
The Omnibus proposal amending the Corporate Sustainability Due Diligence Directive with a view to simplifying the duties and reducing regulatory burden, while preserving the original policy objectives. The proposal goes to the European Parliament and the Council for their consideration and adoption. The changes will enter into force once the co-legislators have reached an agreement and after publication in the EU Official Journal. Under the proposal, Member States will have to transpose the Directive into national law and communicate the relevant texts to the Commission by 26 July 2027. One year later, the rules will start to apply to the first group of companies, following a staggered approach (with full application on 26 July 2029).
A set of guidelines to be issued by the Commission will help companies to conduct due diligence.
Legal Basis, Subsidiarity and proportionality:-
1) Legal Basis:- The proposal’s legal basis rests on Articles 50 and 114 of the Treaty on the Functioning of the European Union (TFEU). Article 50 of the TFEU is the legal basis for adopting EU measures aimed at attaining the right of establishment in the single market in company law, and it mandates the European Parliament and the Council to act by means of Directives. Article 50of the TFEU is the legal basis for Directives 2006/43/EC and 2013/34/EU, as well as part of the legal basis for Directive (EU) 2022/2464 and Directive (EU) 2024/1760. Article 114 of the TFEU is a general legal basis with the objective of establishing or ensuring the functioning of the single market – in this case, the free movement of capital and the freedom of establishment. Article 114 of the TFEU is part of the legal basis for Directive (EU) 2022/2464 and Directive (EU) 2024/1760.
2) Subsidiarity (for non-exclusive competence):- Corporate Sustainability Reporting Directive. The Accounting Directive, as amended by the CSRD, already regulates the disclosure of sustainability information in the EU. Common rules on sustainability reporting and its assurance ensure a level playing field for companies established in the different Member States. Significant differences in requirements for sustainability reporting and assurance between Member States would create additional costs and complexity for companies operating across borders, which would be detrimental to the single market. Member States acting alone are not able to modify existing EU laws to reduce the burden on companies. Corporate Sustainability Due Diligence Directive. The CSDDD ensures a level playing field across the European Union by harmonising the rules on corporate sustainability due diligence against the background of diverging existing due diligence legislation at the Member State level. In this light, the objective of simplifying and streamlining the due diligence requirements and related provisions on public and private enforcement cannot be achieved by the Member States alone. Therefore, action at the EU level is necessary.
3) Proportionality:- 9 Eno operating across borders, which would be detrimental to the single market. Member States acting alone are not able to modify existing EU laws to reduce the burden on companies. Corporate Sustainability Due Diligence Directive. The CSDDD ensures a level playing field across the European Union by harmonising the rules on corporate sustainability due diligence against the background of diverging existing due diligence legislation at the Member State level. In this light, the objective of simplifying and streamlining the due diligence requirements and related provisions on public and private enforcement cannot be achieved by the Member States alone. Therefore, action at the EU level is necessary.
Proportionality Corporate Sustainability Reporting Directive. This proposal sets out a simple and proportionate framework for sustainability reporting that would treat undertakings according to their size:– Large undertakings with more than 1000 employees (i.e. undertakings that have more than 1000 employees and either a turnover above EUR 50 million or a balance sheet above EUR 25 million)18: subject to mandatory reporting requirements and must report against the full set of ESRS, which will itself be revised and simplified.– Out-of-scope undertakings (undertakings with up to 1000 employees): not subject to mandatory reporting requirements, may use the proportionate voluntary standard to be adopted by the Commission as a delegated act, based on the VSME standard developed by EFRAG and are protected by the value-chain cap from excessive information requests from larger companies within scope. This framework is a more proportionate means of achieving the policy objectives of the CSRD.
Conclusion:-
In conclusion, the expansion of multinational corporate activities has created significant challenges in human rights violations and environmental harm within the global supply chains. The traditional legal framework was not sufficient to address these transnational disputes due to many reasons, such as jurisdictional barriers and the principle of corporate separateness. In this context, the adoption of the Corporate Sustainability Due Diligence Directive by the European Union (EU) is an important step towards strengthening corporate accountability in the global economy, and by introducing such a mandate reduces the gap that has historically limited the ability of victims to seek redressal against multinational corporations.
Reference(S):-
Cases:-
Vedanta Resources Plc. v. Lungowe
Kiobel v. Royal Dutch Petroleum Co.
Secondary Sources:-
European Commission
E. Science Direct.com
Taylor and Francis Online
ESMT Berlin
Cambridge University Press
Fian.org
