In the last 10 years, several disasters related to the fashion industry, such as the collapse of the Rana Plaza garment factory building in 2013 or the revelations of forced labor of the Uighurs from 2018, have accelerated the development of a legal definition of due diligence. These laws have a profound impact on fashion brands that must continually adapt their activities to new requirements for monitoring their impact along their value chain.
The United Kingdom and France acted as pioneers by legislating in 2015 (Modern Slavery Act) and 2017 (law on due diligence) in favor of due diligence for fashion brands. In 2021, Germany with the LkSG law and the United States with the UFLPA adopted laws imposing a duty of vigilance, which we present in this article. Today, the European Union aims to widely expand these requirements with its CSDD (Corporate Sustainability Due Diligence) directive.
In this article, we provide an overview of the laws on due diligence in France (French law on the duty of vigilance of parent companies and ordering companies) and in the European Union (Corporate Sustainability Due Diligence Directive).
Due diligence regulation in France: vigilance plan, scope, and sanctions
France was among the first countries to legislate on due diligence. It drew inspiration from the OECD's definition of "due diligence": "a process that companies should implement to identify, prevent, and mitigate the actual and potential negative impacts of their activities, supply chains, and business relationships, and also be accountable for how these impacts are addressed."
Law No. 2017-399 "on the duty of vigilance of parent companies and ordering companies", published in 2017, thus imposes on companies the establishment of a vigilance plan for serious violations of human rights and fundamental freedom, health and safety, and the environment.
This plan, which must be made public, includes five measures:
- Identification and prioritization of risks,
- Regular assessment of subsidiaries, subcontractors, and suppliers of the company,
- Actions to mitigate risks or prevent serious violations,
- A mechanism for alerting and reporting risks,
- Ongoing monitoring of measures and an assessment of their effectiveness.
One of the major developments resulting from this law is that the scope of due diligence must not only include the companies and their subsidiaries but also to their suppliers and subcontractors with whom they have an "established relationship."
The report from the General Council of the Economy on the evaluation of the implementation of the due diligence law explicitly states that indirect relationships with subcontractors must be considered across the entire usual supply chain.
The law applies to companies and groups:
- With at least 5,000 employees if the headquarters are in France,
- With at least 10,000 employees if the headquarters are abroad.
However, the scope of these measures will soon be significantly expanded through their inclusion in the European directive on the corporate sustainability due diligence.
If a company has not published a compliant vigilance plan, any member of civil society (trade union, employee, NGO, etc.) can issue a formal notice to compel compliance within 3 months.
If, after being served notice, the company still does not comply with the law within 3 months, legal action can be taken, and the company may be ordered to pay a sum of money for each day of delay.
European Directive on Corporate Sustainability Due Diligence (CSDD)
The Corporate Sustainability Due Diligence Directive is heavily inspired by the due diligence integrated into French law in 2017, providing further clarification.
This directive, still not formally adopted, was proposed by the European Commission in February 2022, then amended and adopted by the European Parliament on June 1, 2023.
After 'trilogue' negotiations between the European Parliament, Commission, and Council, a provisional deal was reached on the 14th of December. The text was ready to be adopted, but the European Council ended up adopting a watered-down version of the bill that the Parliament is expected to confirm in April 2024.
What does the European CSDD Directive entail?
The European Directive on Corporate Sustainability Due Diligence defines the concept of negative impacts on human rights and the environment, requiring companies to integrate a due diligence policy into their strategy.
This due diligence policy comprises four components:
- Identify, assess, and prioritize potential or actual negative impacts arising from the company's activities, its subsidiaries, or entities in its value chain with which it has a business relationship. This is a key dimension of the directive, similar to the French due diligence law: companies must extend their due diligence to their business partners and support them in implementing vigilance measures.
- Prevent potential negative impacts by developing action plans, monitoring indicators, contractual guarantees with direct partners, or product traceability processes.
- Eliminate actual negative impacts by addressing damages, compensating affected communities, obtaining new contractual guarantees, or terminating the relevant business relationship.
- Establish complaint and alert procedures to report negative impacts.
These measures must undergo consultations with affected communities, continuous reassessment, and public disclosure. It is also emphasized that companies must pay special attention to situations of armed conflict.
To assist companies in their due diligence, the EU will publish thematic fact sheets by country and sector, especially for sectors at risk of negative impacts on the environment and human rights, such as fashion. A support desk will also be set up in each member country.
Finally, an additional noteworthy measure is the obligation for large companies to develop and put into effect a transition plan for climate change mitigation.
Who does the European CSDD Directive apply to?
The directive distinguishes between companies established within the European Union and those outside. The CSDDD applies to the European companies with over 1000 employees and a net worldwide turnover over €450 millions.
Companies established outside the EU are subject to the directive when their turnover in the EU exceeds 450 million euros.
How will the enforcement of the European CSDD Directive be monitored, and what sanctions are envisaged?
Each EU member state will designate an independent control authority competent on its national territory, collaborating with control authorities in other European countries.
Sanctions for non-compliance will also be determined individually by the states:
- Financial sanctions must have a maximum cap of at least 5% of the company's annual worldwide turnover.
- States may provide for the exclusion of non-European infringing companies from European public procurement markets.
In case of negative impacts on human rights or the environment, companies will be judged based on the proportionality of preventive, mitigating, or reparative measures taken in relation to the circumstances (company size, sector, length of the value chain, available resources, etc.).
Timeline for the application of the European CSDD Directive
📅 February 23, 2022
- Proposal for the directive by the European Commission
📅 June 1, 2023
- Adoption of an amended version of the directive by the European Parliament
📅 April 2024
- Expected adoption of the CSDDD final version
📅 1 to 3 years after the adoption of the final version
- Member States adopt the provisions of the directive into their domestic law
📅 3 to 5 years after the adoption of the final version
- Entry into force of the due diligence obligations
