Client Alerts

Client Alert: Increased Business and Human Rights Risks and Regulations for Companies Operating in the Netherlands

Volterra Fietta Client Alert
25 September 2020

On 18 September 2020, the Dutch Socio-Economic Council recommended that the Netherlands enact a mandatory human rights due diligence. This is one of the many recent business and human rights developments of which companies that do business in the Netherlands need to be aware.

Dutch companies will soon need to comply with new business and human rights standards or face significant consequences. Noncompliance with such standards could cost millions of euros in potential fines, additional operational expenses and diminished compensation in investor-State arbitration.

To avoid such costs, Dutch companies need to prepare for these changes by examining now whether their business complies with business and human rights standards. Responsible business conduct has been found to lead to lower capital constraints, better access to financing, improved investor satisfaction and better operational performance.

Background

Companies throughout the world economy now face increasing business and human rights (“BHR”) risks. For example, the COVID-19 pandemic increases the risk of child labour in the global supply chain and the accelerated transition to sustainable energy, accelerated by the COVID-19 pandemic, is accompanied by increasing business and human rights risks, for example in the cobalt and lithium industries.

In this context, Dutch companies are increasingly accused of failing to comply with business and human rights standards.

To mention five recent examples:

New BHR regulations will impose serious consequences for violations of BHR standards. Three new features are particularly worthy of note.

  1. Reduced compensation for violations of investment protections in case of noncompliance with international human rights standards

In future, a Dutch company investing in Argentina, Burkina Faso, Ecuador or Iraq may not receive full compensation for inter alia unfair treatment or expropriation by those foreign governments if the company did not comply with the UN BHR Guidelines and the OECD BHR Guidelines.

This is the probable outcome of the current bilateral investment treaty (“BIT) (re)negotiations between the aforementioned States and the Netherlands. These (re)negotiations are based on the new Dutch model BIT which provides for such a reduction as a consequence of any noncompliance with BHR standards. The second quarter 2020 Dutch progress report on trade agreements confirms that these (re)negotiations are in still in their early stages. However, if this provision finds its way into the final renegotiated BITs – which is likely – it will diminish the effective protection of non-BHR-compliant Dutch companies from the moment a new BIT comes into effect (unless the relevant State parties agree otherwise). Unlike termination, renegotiation may not offer the protection that investors enjoy under sunset clauses – provisions that extend treaty protection for a long period after termination.

The above will probably also apply to Dutch companies that invest in Nigeria, Qatar, Tanzania, Turkey, Uganda or the United Arab Emirates. The Netherlands will likely enter into similar BIT (re)negotiations with these States as, in 2019, the Netherlands received the required approval from the European Commission to do so. (At present, the Netherlands does not have a BIT in force with Burkina Faso, Iraq, Qatar, Tanzania or the United Arab Emirates).

  1. Mandatory child labour due diligence and potential future mandatory human rights due diligence

In the near future, all Dutch companies and companies that supply the Dutch market will need to determine whether there is a reasonable suspicion that child labour was used to produce their services and products. If any such company has such a suspicion, it must implement an ‘action plan’ for the purpose of identifying and preventing the use of child labour in the production of goods and services in its supply chain. Any affected company must deposit, with a yet to be identified regulator, a declaration that it has exercised such due diligence. Companies that fail to comply incur an administrative fine. A second violation is a criminal offence for which company directors can be imprisoned.

It is unlikely that companies will be required to carry out this due diligence before 2022. Although the relevant legislation was adopted in 2019, companies will only have to perform this due diligence once this law comes into force by separate decree.

In addition, the Netherlands will likely soon introduce broader human rights due diligence obligations. As noted above, on 18 September 2020 the Dutch Socio-Economic Council recommended that the Netherlands adopt legislation requiring companies to perform due diligence in line with the OECD BHR Guidelines and the UN BHR Guidelines. This recommendation follows the Dutch government’s recent publication of two reports on mandatory BHR standards. The first report recommends that voluntary agreements – such as the IRBC Agreements described below – should be supplemented by mandatory instruments. The second report sets out different options for such mandatory BHR legislation.

This coincides with a broader European trend for mandatory human rights due diligence.  The EU Commissioner for Justice has announced that the EU plans to develop a legislative proposal for mandatory BHR due diligence in early 2021. On January 2021, the EU’s Conflict Minerals Regulation will enter into force, which requires the importers of certain minerals from high-risk areas to comply with, and report on, supply chain due diligence obligations. (See also the EU Study on due diligence requirement through the supply chain.)

The same trend is observable at a national level in Europe. France has enacted legislation requiring companies to perform a human rights due diligence. And there have been calls for mandatory human rights due diligence in many other European States, such as in Austria, Belgium, Denmark, Germany, Luxembourg, Switzerland and the UK.

  1. Review of Dutch human rights guidelines

The Dutch government is currently evaluating the Agreements promoting international Responsible Business Conduct (the “IRBC Agreements”). As part of the evaluation, on 8 July 2020 the Dutch government published a report that was highly critical of the IRBC Agreements.

The IRBC Agreements provide voluntary commitments that aim to achieve international responsible business conduct and are sector-specific. There are IRBC Agreements for, among others, the following sectors: banking, food products, garments and textile, gold, insurance, metals and pension funds.

The effect of this evaluation could be threefold. It will (i) likely change to the content and compliance mechanisms of the IRBC Agreements, (ii) inform the forthcoming mandatory child labour due diligence (described above) and (iii) potentially lead to new mandatory BHR standards.

How should companies meet these challenges?

Dutch businesses and companies doing business in the Netherlands should start preparing for the upcoming BHR regulations.

Among other things, Dutch companies should urgently consider the potential effects of the new Dutch Model BIT on their investment protection in order to mitigate any potential risks. The resulting new BITs could affect the rights and protections of Dutch companies from the moment a renegotiated BIT comes into effect.

Companies should also examine whether their business and supply chains satisfy international and national BHR standards. This can be a complex exercise. BHR guidelines are abstract and ambiguous, offering little in terms of concrete guidance. Applying these guidelines to assess a company’s potential exposure to human rights risks requires specialised legal advice.

For further information about these developments and other issues related to business and human rights, please contact Graham Coop (graham.coop@volterrafietta.com ), Peter Flint (peter.flint@volterrafietta.com) or Florentine Vos (florentine.vos@volterrafietta.com).