Meaningful Stakeholder Engagement in the EU Corporate Sustainability Due Diligence Directive: a just and inclusive legal framework?

In response to the increased role of business in society, more and more members or representatives of different social groups are demanding the right to be informed, consulted and involved in corporate decision-making processes. In the past decade, companies have come to realize that stakeholder engagement can contribute to service and process learning and innovation, improving the sustainability of strategic decisions, and therefore enabling companies to align social, environmental and economic performance with strategy[1]. However, many companies have been operating under voluntary standards and the lack of uniform regulations has caused legal uncertainties and uneven administrative burdens within the European Union (EU). As the EU aims to be the world leader[2] in sustainability, one of its fundamental goals was to establish a legal framework that imposes an obligation on large companies to identify and address negative human rights and environmental impacts throughout their business and supply chain. Therefore, it adopted Directive 2024/1760[3] on Corporate Sustainability Due Diligence (hereinafter the “Directive”), which, according to the European Commission, (EC), represents a significant step toward building a more sustainable and responsible economy and ensuring a level playing field for businesses throughout the EU single market. Article 13 of the Directive regulates meaningful engagement with stakeholders, who must be consulted to carry out the due diligence process. The adoption of the Directive has not come without criticism and many[4] consider the final version a “watered down” instrument compared to the original proposal; in the struggle of negotiations, Article 13 has come as a pleasant surprise, as the approach to stakeholder engagement appears to have been strengthened. This article will be dedicated to analysing whether that is the case.

 

A STEP IN THE RIGHT DIRECTION

The Directive did not appear out of thin air: human rights due diligence is a topic that has been heavily debated in the last decades and has already been addressed by international organizations, who have created guidelines to help businesses carry it out. In general, it can be said that the Directive builds on the United Nations Guiding Principles (UNGPs) and in many cases goes beyond them[5]. Other sources of inspiration for the Directive have been the OECD Due Diligence Guidance for Responsible Business Conduct (OECD Guidance) and the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct (OECD Guidelines)[6]. In fact, the Directive cites the UNGPs and the OECD instruments in its recitals as a source of inspiration, and in doing so, it turns them into the basis for its legally binding framework.  Both these instruments dealt with the issue of stakeholder engagement and how to render it fruitful, laying the foundations for what a meaningful stakeholder consultation process looks like.

One of the most positive[7] decisions made when redacting the Directive is its material scope, which encompasses the spheres of both environmental and human rights. This was already done through another OECD instrument (the Guidelines for Multinational Enterprises), which, as referred to in recital 6 of the Directive[8], broadened the scope of the obligation of due diligence to include environmental rights. However, the Directive further solidifies this pairing by making specific reference to international environmental goals like the ones set out in the Paris Agreement[9], which companies falling under the scope of the Directive will have to strive towards.

Therefore, by giving the environment such a fundamental role in this instrument, the EU ensures that stakeholder consultation will occur when the environment is, or likely will be, adversely impacted by business operations, instead of relegating due diligence (and thus stakeholder engagement) to be a purely human rights issue.

When exploring the stakeholder engagement obligations laid down in the Directive, a clear advancement has been made in offering more evident indications of when consultations should take place. The issue of time is particularly relevant, as stakeholders should be consulted to identify a problem when it is still a possibility rather than when the adverse impact has already occurred.

The UNGPs and the various OECD instruments stress the importance of preventive action and timely stakeholder consultations, but they take the approach of setting obligations to carry out stakeholder engagement only at specific moments[10]. Instead, when reading Article 13.2 in conjunction with Article 15 of the Directive, no ambiguity is left as to when stakeholder engagement should happen, which is essentially throughout the whole process of due diligence[11].

Another aspect in which the Directive has set a particularly positive standard is regarding the quality of information provided to stakeholders. UNGP n.18[12] only explicitly cites language as one of the obstacles that stakeholders could face during consultations, leaving all other issues unspecified under the generic mention of “other potential barriers”. The EU legislators expanded and unpacked what those potential barriers could be, ensuring that the information made available to stakeholders must be “relevant and comprehensive” to carry out “effective and transparent” consultations. Moreover, consulted stakeholders are allowed to request additional information, which shall be provided in an “appropriate and comprehensible format” and in a timely fashion. It is clear how all these specifications are there to give substance to the “meaningful” quality of the obligation to engage with stakeholders. The Directive also appears to have gone further than what is suggested by the OECD instruments, in particular the Guidelines, which never intended[13] to present a comprehensive overview of meaningful stakeholder engagement and primarily stressed the importance of conducting stakeholder consultations in good faith and in a timely manner.

Lastly, Article 13(5) provides that companies have a responsibility to identify and address any barriers that may exist during the engaging stakeholders process and the consequences that consultations may have on them. In particular, the provision aims to protect stakeholders by having companies ensure that participants in consultations are not subject to any form of reprisal or retribution and that their confidentiality and anonymity will be guaranteed.

 

WHAT IS MISSING FROM THE DIRECTIVE?

Article 13 is mainly concerned with setting stricter standards on when stakeholders should be consulted, how they should be protected and the quality of the information provided to them; in all these aspects it seems that the EU legislator has neglected some of the most fundamental elements of stakeholder engagement, meaning the who and the what.

An important issue highlighted[14] is the ambiguous and vague wording of the Article and its provisions and definitions. While it is true that a certain degree of vagueness is to be expected, considering that this is a directive and it still needs to be transposed into national law by each member state, many fear[15] that excessively unclear wording could lead to difficulties in operationalizing this instrument.

The vagueness of the Article can be seen from the first sentence of Article 13(1): “Member States shall ensure that companies take appropriate measures to carry out effective engagement with stakeholders.” What is the definition of effective engagement? Is there a difference between meaningful engagement and effective engagement? The choice of using these terms raises concerns because they should be understood as ‘qualifiers’, a standard used to determine whether Article 13 has been adhered to. The same logic can be applied to another definition, or lack thereof, which is that of engagement and consultations, as they are used throughout the Directive without a standard ever being set for what counts as one. With many terms being undefined, it should come as no surprise that the failure to consult stakeholders is not included in the civil liability provision of the Directive, Article 29. This was seen[16] as a blow to affected stakeholders, who could have benefited from an additional legal recourse in the case of human or environmental rights violations. This matter is of particular concern because it seems that the Directive fails to recognize the power, knowledge, and information asymmetries between companies and stakeholders.

What is more, it seems as if the Directive also fails to take into consideration the distinction between the different types of stakeholders, perhaps the most fundamental issue of meaningful stakeholder engagement in the Directive. Stakeholders are widely defined in Article 3(1)(n) and include companies’ employees, employees of its subsidiaries, trade unions and workers’ representatives, consumers and other affected individuals, groups and communities, but also national human rights and environmental institutions or civil society organisations whose purpose includes environmental protection. This expansive definition was demanded by civil society and academics, and it was incorporated into the negotiation process at a relatively late stage[17] after tedious negotiations. However, some commentators[18] fear that there are still some categories missing from it; in particular, there is no distinction between rights-holders and vulnerable stakeholders, whose only mention can be found in Recital 65. The inclusion of these sub-categories would have been an extra layer of protection from the ‘ticking boxes’[19] phenomenon, as there is a risk of companies consulting some stakeholders to fulfil their due diligence duties, but not necessarily those whose rights will be affected by their business conduct. This fear is all the more relevant when considering that the Directive does not foresee any measure that indicates which stakeholders should be prioritized[20]; instead, all stakeholders are placed on an equal footing, although some will actually or potentially be more affected than others. This shortcoming is particularly evident as the OECD Guidelines[21] highlight the fact that “the degree of impact on stakeholders may inform the degree of engagement,” whereas the Directive is completely silent on this aspect. This is not only problematic because of the aforementioned risk of abuse by companies, but also because a direct mention of this issue would have sent a strong message: engagement and consultation should be understood as a rights-holder-centric obligation[22]; after all, how can consultations and engagement with stakeholders be truly meaningful if there is a possibility of excluding those whose rights are at stake?

 

THE BIGGER PICTURE: DOES THE EU CONDUCT MEANINGFUL STAKEHOLDER ENGAGEMENT?

The core of the critiques of the Directive when it comes to meaningful stakeholder engagement goes beyond Article 13, and is geared at the fact that the rightsholders affected by the companies caught by the Directive have not been included in consultations for the drafting of the Directive itself. In the words of the UN High Commissioner for Human Rights Volker Türk, “For the past four years, work on the Directive has seen unprecedented involvement by many stakeholders, including business and my Office, as well as political commitment from EU institutions and Member States to push it forward”[23]. Stakeholders have been consulted, but did the most affected ones have a chance to participate in the consultations and negotiations? While this aspect may seem trivial, it reveals a critical aspect of how the Directive was adopted, and, more generally, how the EU legislates. The Directive was adopted in the framework[24] of the EU’s Green Deal, the EU’s policy which aims to make Europe the first climate-neutral continent by 2050; alongside its climate-related objectives, the climate transition envisaged should be “just and inclusive, it must put people first, and pay attention to the regions, industries and workers who will face the greatest challenge”[25]. When adopting the Directive it is clear that the EU was aiming to set a global standard for human and environmental rights due diligence to export through the so-called “Brussels effect”[26]. In fact, the Directive is specially designed to have an extraterritorial reach, which is already implied in the first recital which declares that EU values and international human rights “should guide the Union’s action on the international scene in fostering the sustainable economic, social and environmental development of developing countries”[27]. While these are all positive objectives, it is difficult to believe that the Green Deal’s intentions have been fulfilled with the Directive. In fact, according to Omari Lichuma[28], there is an inherent democratic deficit in the Directive, as potentially affected stakeholders from the Global South have only been consulted very few times in the drafting process. This is problematic as it renders the Directive yet another instrument which depicts Global South rightsholders as actors without agency who will be passively included in this mechanism instead of recognizing them as the key players they are[29]. In excluding Global South rightsholders an opportunity is missed, as they are more often than not the ones who can best assist companies in identifying and mitigating potential risks and adverse impacts. If the UNGP interpretive guide suggests that “the key to human rights due diligence is the need to understand the perspective of potentially affected individuals and groups,”[30] there seems to be a dissonance with the EU’s intention to be the world leader for human (and environmental) rights due diligence standards and the actual tools it creates to achieve such goals.

 

CONCLUSION

This article has aimed to analyse the obligation to conduct meaningful stakeholder engagement under the new EU Corporate Sustainability Due Diligence Directive. Some positive aspects of this instrument have been highlighted, such as the provisions aimed at protecting stakeholders, the requirement to provide them with quality information in a timely manner, and a general improvement from some of the international standards laid down in the  UNGPs and the OECD instruments. These are particularly relevant as the EU aims to become the global leader in environmental and human rights standards, which explains the extraterritorial effects the Directive sets forth. However, the text of the Directive has left quite a few key aspects of stakeholder engagement undefined or completely missing. Moreover, the choice not to differentiate between rightsholders and general stakeholders under Article 3 reveals a bigger underlying issue of the EU’s approach to creating legislation. In fact, not only were rightsholders not acknowledged in the Directive, but they have also been excluded from the possibility of contributing to the drafting of the Directive. This reveals a problematic approach of the EU vis-à-vis rightsholders of the Global South, who, despite their competencies, continue to be perceived as passive observers and recipients of standards. As the EU Member States now have less than two years to implement this instrument there will be a possibility of mitigating these issues by (I) consulting Global South rightsholders to clarify some of the more vague provisions, perhaps during the drafting of the EC Guidelines, and (II) pushing for higher standards of meaningful stakeholder engagement at the national level, as the Directive is a minimum harmonization measure[31]. These solutions could help create a best practice not only in the sense of improved quality and understanding of the legal provisions contained in the Directive, but they could also represent a first step in a new direction towards a more inclusive EU legislative (due diligence) process.

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[1]Ciro, G., Corvese. (2023). La proposta di direttiva sulla Corporate Sustainability due diligence e i suoi (presumibili) effetti sul diritto societario italiano. Orizzonti del Diritto Commerciale, 2.

[2] European Commission. (2019, September 11). EU as a global leader - The European Green Deal: Communication on the 2019 Climate Summit by the UN Secretary General. European Commission. https://ec.europa.eu/commission/presscorner/api/files/attachment/860252/EU_as_a_global_leader_en.pdf

[3] Directive (EU) 2024/1760 of the European Parliament and of the Council on corporate sustainability due diligence and amending (EU) 2019/1937 and Regulation (EU) 2023/2859 (2024).

[4] Thorens, M., Bernaz, N., & Hospes, O. (2024). Advocating for the EU Corporate Sustainability Due Diligence Directive against the odds: Strategies and legitimation. JCMS: Journal of Common Market Studies.

[5] Fielitz, P.-D., Fachin, M. G., & Pamplona, D. A. (2024, June 12). More of the same or true evolution? Meaningful stakeholder consultation and the EU Corporate Sustainability Due Diligence Directive. VerfBlog. https://verfassungsblog.de/more-of-the-same-or-true-evolution/

[6] OECD. (2023). OECD guidelines for multinational enterprises on responsible business conduct. OECD Publishing. https://doi.org/10.1787/81f92357-en

[7] Fielitz, Padma-Dolma, Melina Girardi Fachin, and Danielle Anne Pamplona, Ibid.

[8] Recital 6,  Directive (EU) 2024/1760

[9] Article 22, Directive (EU) 2024/1760

[10] Fielitz, Padma-Dolma, Girardi Fachin, Melina; Pamplona, DanielleAnne, Ibid.

[11] Ibid.

[12] United Nations, Office of the High Commissioner for Human Rights. (2011). Guiding principles on business and human rights: Implementing the United Nations “Protect, Respect and Remedy” framework (HR/PUB/11/4, No. 18).

[13] OECD. (2018). OECD due diligence guidance for responsible business conduct. OECD Publishing.

[14]Lichuma, C. O. (2023, February 15). More than meets the eye: Participatory (in)justice and the EU Corporate Sustainability Due Diligence Directive. Nova Centre on Business, Human Rights and the Environment Blog.

[15]Ciacchi, S. (2024). The newly-adopted Corporate Sustainability Due Diligence Directive: An overview of the lawmaking process and analysis of the final text. ERA Forum, 25, 29–48.

[16] Bueno, N., & Oehm, F. (2024, May 28). Conditions of corporate civil liability in the Corporate Sustainability Due Diligence Directive: Restrictive, but clear? VerfBlog. https://verfassungsblog.de/conditions-of-corporate-civil-liability-in-the-corporate-sustainability-due-diligence-directive/

[17] Bueno, N., Bernaz, N., Holly, G., & Martin-Ortega, O. (2024). The EU Directive on Corporate Sustainability Due Diligence (CSDDD): The final political compromise. Business and Human Rights Journal, 1–7. https://doi.org/10.1017/bhj.2024.10

[18] Fielitz, Padma-Dolma, Girardi Fachin, Melina; Pamplona, DanielleAnne, Ibid; and Lichuma, C. O. (2024, May 25). Harmonization pains but stakeholders’ gain: The EU Corporate Sustainability Due Diligence Directive and its implications for the meaningful engagement provisions of member states with a due diligence law. VerfBlog. https://verfassungsblog.de/harmonization-pains-but-stakeholders-gain/

[19] Oxfam America. (2021). Rights holder engagement and human rights due diligence: Aligning company practices with international standards. Oxfam America. https://webassets.oxfamamerica.org/media/documents/HRDD_Rights_Holder_Engagement.pdf

[20] OECD Watch. (2022, September). Alignment within reach: A guide to aligning business practices with the OECD Guidelines for Multinational Enterprises. https://www.oecdwatch.org/alignment-within-reach/

[21] OECD. (n.d.). OECD guidelines for multinational enterprises on responsible business conduct (No. 28).

[22] Fielitz, Padma-Dolma, Girardi Fachin, Melina; Pamplona, DanielleAnne, Ibid

[23]United Nations Office of the High Commissioner for Human Rights. (2024, February 8). UN human rights chief urges EU leaders to approve key business and human rights legislation. United Nations Office of the High Commissioner for Human Rights. https://www.ohchr.org/en/press-releases/2024/02/un-human-rights-chief-urges-eu-leaders-approve-key-business-and-human-rights

[24] White & Case LLP. (2024, April 4). Mind the gap: A comparative analysis of the CSRD, CSDDD, and SFDR as the Green Deal 2.0 for 2024–2029 unfolds. White & Case LLP. https://www.whitecase.com/insight-alert/mind-gap-comparative-analysis-csrd-csddd-and-sfdr-green-deal-20-2024-2029-unfolds

[25]European Commission. (2019). The European Green Deal (COM(2019) 640 final). Brussels.

[26]Bradford, A. (2020). The Brussels effect: How the European Union rules the world. Oxford University Press.

[27] Recital 1,  Directive (EU) 2024/1760

[28] Lichuma, Caroline Omari, ibid.

[29] Lichuma, C. O. (2024). Mandatory human rights due diligence (mHRDD) laws caught between rituals and ritualism: The forms and limits of business authority in the global governance of business and human rights. Business and Human Rights Journal, 1–20. https://doi.org/10.1017/bhj.2023.47

[30] United Nations Office of the High Commissioner for Human Rights. (2011). Human rights and business: Guiding principles on business and human rights: Implementing the United Nations “Protect, Respect and Remedy” framework (HR/PUB/12/2). United Nations. https://www.ohchr.org/sites/default/files/Documents/publications/hr.puB.12.2_en.pdf

[31]Article 4, Directive (EU) 2024/1760