Turning soft law into hard law - what are the implications of the EU CSDDD?

‘The closer we come to international standards the better’

Finnish MEP, Heidi Hautala, and IHRB's CEO, John Morrison, explore the EU's Corporate Sustainability Due Diligence Directive (CSDDD) and its global implications.

They discuss the challenges and opportunities of implementing the CSDDD, and the broader implications for global business. They also take a look back at Heidi’s career, from co-founding Finland's first vegetarian restaurant to becoming a pivotal figure in European politics. 

Heidi is the former Vice President of the European Parliament and has also recently joined IHRB's International Advisory Council. 

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Host: Deborah Sagoe, IHRB's Communications Coordinator
Producer & Editor: Helen Brown
Additional Contributors: Sam Simmons, IHRB's Head of Communications

Transcript

Heidi Hautala: I think it's unquestioned that the closer we come to international standards like UN Guiding Principles and OECD guidelines, the better for companies as well.

Deborah Sagoe: Hi there and welcome to Voices from the Institute for Human Rights and Business, also known as IHRB. I am Deborah Sagoe, and in this podcast you will hear from people working to make respect for human rights part of everyday business.

You've just heard from Heidi Hautala, a Finnish MEP, and former vice president of the European Parliament. She's also recently joined IHRB's International Advisory Council. Heidi's known for her work on the EU CSDDD, which is new legislation in the EU to help protect human rights in corporate activity. In this episode of Voices, my colleague John Morrison, the CEO of IHRB, spoke to Heidi about her time as an EU politician working on this and the change she hopes it will bring about. John, why did you want to interview Heidi?

John Morrison: Well, because Heidi is one of the key people behind this initiative in the European Union, as we will hear in a bit. She feels that she turned what was soft law at the UN level into hard law at the European level, and Europe's one of the biggest markets in the world. So as a vice president of the European Parliament and as somebody who was actively involved both in corporate responsibility and human rights, Heidi is really one of the heroes, I would say of recent years.

Deborah Sagoe: The EU CSDDD is a term that people know, but just explain briefly what that is and when it came into law.

John Morrison: So the mandatory human rights due diligence requirements, CSDDD has come into law at the European level and now member states have three years to put it into their national laws. So we're yet to see exactly what that will look like, but it will only relate to the biggest companies in Europe. But these companies have global supply chains that span the world, so this will have a real impact. So I wanted to talk to Heidi about that, but I also wanted to talk to her about the experiences that inform that work.

Heidi Hautala: Well, I mean now a group of people who are not so young anymore, including myself, we are celebrating 50 years of having been co-founders of the first vegetarian restaurant in Helsinki, like truly 1974 when I was basically just a kid coming out of high school.

So that was my first business experience, and it was very much based on two ideas, that we wanted to cherish the harmony between humans and nature, which sounds a little bit maybe already activistic at this point of time. And the second was that we wanted to do things, not just the think. We wanted to create jobs that were corresponding to our ideas and values.

So that was my first business experience, and from that on later, I was one of the early movers of the Green Party in Finland, and it was very clear that this, let's say contradiction of societies built by humans, including economy and ecology, nature, it was really not understood. And even it was ridiculed by many. So my early years were the kind of experience that I never experienced to have big wins immediately. It was a good experience to have to fight and to defend your positions in quite a, let's say, ignorant, even hostile environment, but to find like-minded people.

John Morrison: What I know about Finland is there is a big political economy in Finland. The state has quite a large ownership of the business world. It's quite different from, for example, the UK or very different from America, right? The overlap between the state and business is significant in Finland. What did you understand about the way you influence business? We often hear about the smart mix in European circles. What did you learn about the smart mix early on?

Heidi Hautala: I think this whole question of corporate accountability, business and human rights only came to my horizon through the UN Guiding Principles on Business and Human Rights, which was, as we both know, 2011. So I remember when I learned about that, I really felt something was deeply changing in the paradigm that indeed the state still had the main responsibility to protect human rights, but companies had the duty to respect them and that there should be access to remedy. I found this very revolutionary. But a lot of things happened in between the experience, like my early days in the Green Party, a vegetarian restaurant, and then business and human rights.

I was then elected from the Finnish Parliament to the European Parliament when Finland joined, 1995. And those early years in the European Parliament taught me a lot about business influence. But I had a really great opportunity to move a key legislation dealing with car emission standards and fuel quality. And the lesson was that the big influence had come from the oil industry who said that all these ideas of cleaner transport fuels is rubbish. It's just an assumption that they would for any common good, it only would cost and create the bankruptcies.

But it was also the first big piece of legislation that was under what we call the ordinary legislative procedure, means that the European Parliament had an equal say by the side of the member states. And we did move it dramatically to the extent that the commission had to confess that they had only been listening to the backbenchers, the oil industry, whereas the car industries started to take interest in cleaner fuels because they wanted to bring cleaner cars and engines to the market.

I think my biggest victory at that time was that the CEO of the European Oil Industry Interest Association, EUROPIA, Michel Floric had to resign because they failed desperately and disastrously their lobbying efforts towards the European Commission and member states. So that taught me about the need of transparency and accountability in political decision-making indeed and also of course in business. And that led me to a lot of quite groundbreaking work on public access to information.

I saw very early that the EU had a kind of weird principle that nothing which is not declared accessible and open is secret and closed. So I was one of the people with some friendly member states from maybe Northern Europe that we turned this principle upside down, that nothing which is not particularly defined as secret or non-public has to be open. I went to court on that. I was one of people that found that we need to test these principles in front of European courts. And yeah, I had a big victory in one of the cases. So I've become a footnote in the EU legal literature. I'm very happy. I don't need other monuments. It's called Hautala Against Council.

John Morrison: I'll look that up. I'll look that up. My background was in the Green Party in the 1980s, but not at the same level as you. But I remember the small is beautiful principles. I mean, there's a difference between being a multinational oil and gas company and being a vegetarian restaurant in Finland. So do you think size of business is a key consideration here?

Heidi Hautala: Well, I mean now I think we all realise that the size can be a big problem. We see that the European Court of Justice has now ruled that Apple and probably Google as well, that they enjoyed lots of forbidden tax deductions in Ireland. So yes, I think size can lead it to undue influence for sure. But I think we also have to understand that there is a way also to make the big ones accountable and not to eat up the small ones now with this new legislation that we are having on due diligence.

John Morrison: And transnationality? I mean there's been a big debate in the UN as to whether these laws should apply just to transnational companies or national. Is that another dividing line for you, or?

Heidi Hautala: Yeah, I mean, I'm very loyal to the UN Guiding Principles on Business and Human Rights. And I think the EU has been right so critical of the approach that has dominated these negotiations in Geneva under what they call legally binding instrument on business and human rights. And I believe that also knowing a little bit, let's say the modus operandi of the state-owned companies as I was then later around 2011, 2013, I was minister responsible in Finland for state-owned enterprise, the oversight on them.

So I totally think that they should be equally accountable than any others. So I hope that now that we are approaching the 10th round in Geneva in October of these negotiations, this question of scope as we say it, will be solved so that there not be too many caveats and exemptions because they would also just, let's say they would damage the level playing field. They would be something that would, well, protect companies for undue reasons.

John Morrison: Absolutely. Moving us forward in time. You returned to the European Parliament in 2014. I mean, obviously John Ruggie had written the UN Guiding Principles by then. You were very aware of that. You've mentioned already that that was a key source of inspiration for you. But were there any other events like the Rana Plaza factory collapse and these issues that really catalysed you into action and made you feel that we needed to move beyond the soft law of the UNGPs into harder laws? What was the tipping point for you there, the opportunity?

Heidi Hautala: Yeah, there were two things that I want to mention. One is that Richard Howitt, a former colleague of mine who is now sort of a-

John Morrison: A keen podcaster these days.

Heidi Hautala: Yes. Yeah, exactly. I'm listening to Frankly Speaking also. So Richard kind of drew me into this as one of his key allies in the European Parliament. I remember in 2014, there was an awkward moment because the two of us plus Antonio Tajani all representing three different political groups, we wanted to have an intergroup for business and human rights, but it did not catch interest enough. There was always more vitally interesting topics for the political parties. So that was 2014, but I followed a little bit in the footsteps of Richard, and I'm very grateful for his guidance and that he really took me under his arm in some way. And later when he left, I really felt that I want to continue the good work that he'd done.

But then there was another one, 2017, a couple of really impressive people from the civil society came to me in the parliament. One was Nele Meyer, who was then responsible for business and human rights in Amnesty, in Brussels, and then a Filip Gregor from Frank Bold from this public interest law firm. And they said, "Look, Heidi, maybe you are in a position to somehow convene a platform where people can interact to get into this hard law on business and human rights from purely voluntary standards." And I said, "Why not?"

And then that became, I would say, probably the best thing that I've ever done in politics. It reflects a little bit the conviction that I have that you can achieve nothing if you don't find allies. You have to be very unprejudiced, and you have to understand that people don't immediately always share your ideas. And then another conviction that I have is that I try to avoid quick political wins, like a lot of publicity overnight at the cost of some others.

So it's always for me, being loyal to the people that I've worked with because it's like what we have now in place, it's really a common achievement of many different stakeholders from businesses to international organisations to political actors, member states. So that kind of a way of working I found very useful. And I mean, some people say that my biggest asset that I have convening power. I have no idea what that actually means, but I've sometimes managed to bring people, very sort of odd people together, if that is true.

John Morrison: Heidi, I think that is what it means.

Heidi Hautala: Yeah.

John Morrison: The CSDDD, so Corporate Sustainability Due Diligence Directive, I guess there are different ways that you can turn the UNGPs into hard law, right? There are different bits. There's the disclosure reporting stuff now, the CSRD. But I mean, obviously some countries, if I take my own country with the Modern Slavery legislation, et cetera, arguably that's the roots that the UK government decided to go down after the UNGPs was to mandate disclosure, but not to tell companies what they should disclose, right?

Heidi Hautala: Yeah.

John Morrison: The US for example, I would say has probably been stronger on the trade-related measures around imports, import bans, and those questions, sanctions and tariffs, et cetera. So due diligence isn't the only way you can approach the question of hard law. Why did you choose that? What was it about the due diligence approach that appealed to you?

Heidi Hautala: Well, actually, you mentioned very important approaches from the UK, the Anti-Modern Slavery Act, and then the US Customs and Border Protection practised, still does very efficiently, sending away batches of products that have been produced with forced labour. But I guess that the due diligence in a way is the way and the means through which all these various ways should be efficient.

And I remember very well, I had the privilege to talk to the first commissioner of the UK on the Modern Slavery Act, Kevin Hyland, and I remember how incredibly frustrated he was that the companies could do whatever. There was this act, but nobody cared if companies did report or not report, and there was no accountability. So I fully understand that Kevin Hyland-

John Morrison: That hasn't changed too much, actually, just to say. It's more or less the current situation still.

Heidi Hautala: Oh, okay. Okay, but hopefully moving forward now. Of course, many of us hope without being too arrogant and proud, that the EU example could perhaps spill over to countries that are quite close to us, indeed like the UK, Canada, and others, this horizontal due diligence that we now have obliged in companies. But yeah, there are many ways.

One of course, is that we have to go back to the UN Guiding Principles and this suggestion that countries and states and entities like the EU as well, they should put in place a national action plan, action plan on business and human rights. And that I've seen opens a little bit the way for due diligence and corporate accountability and relationships between different stakeholders from civil society, labour unions to companies, international organisations.

The UNDP has been very, very helpful in helping many countries to put in place these national action plans, which is often a good first step to bring everybody around the table. From Central Asia, I've seen that to Pakistan. Now we have, I think Thailand. I think we have the first African countries now. So this is one way to ... It's a good step one.

John Morrison: Yes, definitely. What about what you got at the end of the day? You didn't get everything you wanted in CSDDD. It's a very convoluted process for those of us who don't understand European policymaking as much as we would like. I think we were all surprised by the number of steps, commission to parliament to member states and round.

But obviously civil society and maybe some businesses were disappointed by some elements of the outcome. Scope was reduced in terms of the number of companies covered, I believe by 70%. And so it's really only the larger European companies and the larger international companies that have turnover in the EU of 450 million euros a year threshold. And the EU companies have to have 1,000 employees or more, I believe.

There's also the issue of it now being seen as mainly an upstream requirement and not so much downstream. That's particularly true of financial institutions who are largely therefore out of scope in any way that matters. And a lot of leverage that comes through their lending and investment is really not directly covered. There's no reference anymore to director duties or board oversight, some of the questions I know I or we care a lot about in my organisation. So which of these things were you most disappointed by, and how do you overcome these restrictions?

Heidi Hautala: Well, I adhere to your list of deficiencies, that's clear. But you also have seen that when this whole legislation started to fall into pieces, and this is history and it's quite well known for those who followed it closely, so there's no need to repeat some juicy details. But you have seen that despite all these delusions, step 1, 2, 3, so on. So everyone who had been fighting for this legislation for quite a long time together, they said, "Take it."

Because there's two things. First of all, there was this reality of looming European elections and nobody knew last April what actually will follow. And I think we were right that we got everything done before the European elections. And the second thing is that whatever you think about the limited scope and limits to caveats for sectors like finance, the thing is that there will be spillover effects.

So I think that even if the number, indeed they say that now it's about 6,000 companies in Europe, non-European companies I cannot count, but it will have a huge impact on companies which are much smaller. I think the turnover of the total economy is much more impressive than you would believe 6,000 companies represent.

So I think it was a very good start, and there will be future reviews, attempts to try to remedy and correct all these failures because I think it's unquestioned that the closer we come to international standards, like UN Guiding Principles and OECD guidelines, the better for companies as well.

And I'm happy to see, let's say, that the fathers and mothers of the UN Guiding Principles, of course apart from John Ruggie, who unfortunately is not anymore with us, but they're all quite, let's say, they think this is the real moment when the UN Guiding Principles have been taken as far as possible at the moment.

So there will be future developments and there's dynamics for sure. I've also seen that in countries like Brazil, Kenya interestingly, there is interest in this type of legislation. So as we said in April when we've got this done in the EU or in the European Parliament, we said, this is the end of the beginning, which means that there's so much left to do.

John Morrison: That's what John Ruggie used to say. He used to use the Churchill quote as well, I think. So he used to say it wasn't the end of the beginning or it was the end of the beginning. Anyway, maybe this is the beginning of the second part as opposed to the-

Heidi Hautala: Yeah. I must say I become very emotional when I think of John. Many of us knew him personally. He got so excited and engaged in what happened in Europe in the past few years. And I feel one of my greatest privileges in this work was to get to know him.

John Morrison: No, likewise, and we were very pleased to have him as our chair for a few years. I think John is missed everywhere.

Can I just push the issue of unintended consequences a little bit? There are people who are worried and not worried just from a business protection point of view, but worried in terms of the longer-term unintended human rights impacts and developmental impacts, not just of CSDDD, but if we take as a package everything that came out of the last European Parliament, so CSRD, the EUDR on timber, and now the possibility of a forced labour import ban, et cetera, that a couple of things might happen.

One is that this might feed into the dislocation of international trade and be part of the conflicts that are going on at the World Trade Organisation and the fragmentation of trade itself. And I see some of this myself, I think is the shift from mass balance approaches to full traceability is the logic of due diligence. And in many ways that makes human rights sense. But we used to work on the basis that we would try and raise all ships. And if we're only working with some supply chains and not all supply chains, are we going to give up on the raising all ships?

And then the other concern I heard, I was with some agricultural NGOs from around the world, including Africa yesterday, and they were talking about their worries around smallholders in global supply chains that actually all these requirements might do is increase the competitive advantage of large companies and well-regulated supply chains to the disadvantage of small enterprises around the world who would have to then send their produce elsewhere in the world. Do you understand those two concerns and how would you respond to them?

Heidi Hautala: I definitely do, and I must say that I probably was one of the most explicit, most vocal persons in the European Parliament who pointed out to this issue of the smallholders, because I also have a background as a minister for international development in Finland. So I completely share those concerns. But during the past few years, we've seen that the development community has managed to get attention to this issue. So I would say that it is somewhat true that the EU did not really listen or consult the producer countries of which many are very poor and let's say not well positioned in the world market anyway.

But now it's absolutely essential that the development assistance, technical assistance, but also help to organising the smallholders around this issue of traceability is taken seriously. I think Germany has probably done the most in this area and there is a kind of what we call a team Europe initiative, which means that many more member states and the commission would work together, and this should be one of the priorities for the forthcoming European Commission in making this legislation a reality.

And this issue that you mentioned, the mass balance is really a question. I'm talking to a cocoa chocolate company, they say that, "Yes, we wanted this legislation, we were pushing for it. But how are we coping with this because our producers of cocoa beans, at some point, everything is mixed and the traceability is not there?" But there was a time when consumers were calling for GMO-free soybeans. Of course, that's more big multinationals that are controlling the trade, but this needs to be really taken very seriously. It would be one of my priorities indeed.

And then about the fragmentation and impact on trade policy. Well, I think the EU has in a way, has gotten some promising outcomes from WTO. There is this well-known Renewable Energy Directive, which Indonesia challenged in the WTO. So there seems to be a policy space for countries to move towards environmental, maybe even social requirements, but I think this field is very much in evolution. So I can't say anything specific, but yes, I've seen my colleagues raise this very often now in the WTO. There's a dedicated team in the International Trade Committee, the European Parliament, which I was also a member.

And then you also mentioned the issue of coherence between these various pieces of legislation. If we only focus on the ones that you mentioned, which deal with supply chain or value chain, yes, I think that there's some work to do there, indeed, because now all these instruments that you mentioned are there. We have seen that the EU Deforestation Regulation actually has caused a lot of tension.

John Morrison: Some people are calling for a pause button on the production. Do you believe that there should be a pause?

Heidi Hautala: I'm not sure that those countries are doing everything they can to help to solve the issue, for instance, of the traceability, which would be instrumental for the smallholder. So no, I wouldn't support that right away because I think it can also be due to lack of action, and I'd like to see more action. But anyway, this coherence of the various pieces of legislation is definitely something that needs to be understood better.

So there we are. There are challenges and there are deficiencies, but what we have is it's a moment in history where we have a different approach to consumption and production. We have to remember this is very much in this sense of SDG-12, sustainable consumption and production. So this is in essence what it should be about.

John Morrison: Exactly. And I hear the concept of double materiality talked about everywhere, I mean in China and elsewhere too. I mean, how it's applied varies, but the concept seems to have caught the global imagination.

Heidi Hautala: Yeah, and I think we have to give credit to the reporting initiatives that the major reporting initiatives have come together. It seems to me that they are becoming at least comparable. So I think companies will have an easier time when this, let's say concertation of the various standards will happen.

John Morrison: We'll see. The next three years are going to be crucial before we have the full implementation at state level. Of course, I'm very sad that during this period the UK has left the European Union. Richard Howitt is perhaps like the dodo, the British MEP, but we're very hopeful that like Jurassic Park, we can bring the British MEP back to life again.

Deborah Sagoe: So John, Heidi's talking about how important it is for business to understand this legislation. So it feels like a good time now to give some context and also clarify some terms. One thing you've noticed in this area is the concept of double materiality. What does that mean and how does it relate to the EU CSDDD?

John Morrison: So double materiality in some ways is a new way of talking about an idea that's been around for a while, and it's a relationship between business and it's not just its financial impact on the world, but the social and environmental impact it has. But double materiality now sits behind a number of EU pieces of legislation.

And simply, it's this two-way idea that social and environmental issues impact on the bottom line of a company and the financial performance of a company. And I think that's the bit that we've all been moving towards, particularly in thinking about climate change. But it also works the other around that the company's own activities then impact on people and the environment, and somehow that also needs to be managed and reported on and understood. So double materiality is that yin-yang. It's that two-way relationship between the financial performance of a company and the impacts that a company has on its external environment.

Deborah Sagoe: You've talked about the shift between mass balance and full traceability. Can you explain what they are?

John Morrison: Most of the trade that happens in the world at the moment is on a mass balance basis. And what does that mean? Well, when we buy our renewable electricity, they don't put a separate line to our house. We're buying a certain amount of percentage of green electrons that go into the grid, and that has to balance with the electrons we take out. And that is the way that most commodities are traded in the world at the moment.

So if you push for full traceability along these supply chains through mandatory due diligence and mandatory reporting, there is a danger that you're beginning to break supply. So people are not buying and selling from the global market, but are having their own siloed supply chains. And that could be weaponized in trade disputes by others, and used as an excuse, for example, for us to stop trading with China and things like that. So there is that unintended consequence.

There's also the issue of the impact on smallholders, and I know some NGOs have raised this, but it is an issue that Heidi fully appreciates.

Deborah Sagoe: You also discussed with Heidi the notion of social licence for companies. What do we mean when we talk about that?

John Morrison: Yeah, social licence, which I wrote a book about a few years ago, is this idea that companies and all forms of institution have to maintain legitimacy, trust, and consent in the eyes of society and communities and workers, et cetera. So you could think about a legal licence as the bit of paper that allows you to operate as a company, political licence, i.e., you're on the right side of governments and political views. But social licence, I would say is the other corner of that triangle. And it's increasingly important that if you don't have the trust of society and communities, they will oppose what you do and that can have very negative consequences for you.

Deborah Sagoe: And why is this idea so important for companies right now?

John Morrison: It's really important now because I think there's a big lack of trust in our society around business, particularly big business. People are cynical, people don't trust the information they're told. They're also worried. They're worried about their environment, they're worried about the planet that their children will inherit. They're worried about the price of energy, they're worried about the price of food. So given all of that, I wanted to get Heidi's views on where governments and companies should be going now.

Heidi Hautala: If I'm a bit cynical after more than 30 years in various representative institutions from local, national, European level, I start to believe that the positive influence that companies could have on addressing the global challenges, actually it's growing. And somehow politicians and political institutions are less and less capable of coping with those challenges because perhaps in business as well, but in politics, let's say the accountability is for four years until the next elections, and then who knows what. But this kind of long-term commitment from political institutions, including political parties which are composing those institutions to a large extent, it's lacking.

I mean, it's a very painful moment also to see that this whole international law order is falling into pieces. The war of Russia and Ukraine is of course a primary example touching the whole world, which the whole world does not see like that perhaps as we mostly see it in Europe.

John Morrison: So you have more faith in big, I mean, I guess because of the lack of other options. If we go back to the 1970s and you sitting in your vegetarian restaurant in Helsinki, you'd be surprised to hear yourself say that surely, that big business is your best hope?

Heidi Hautala: Perhaps, yeah. To try to revitalise the democratic institutions in countries like ours in the EU as well and around could be done by engaging citizens more in decision-making. So I think one of the maybe modest, but nevertheless good signs is that there are good experiences about what they call citizens panels to try to address issues. You can almost pick random citizens from the street or from the cafes and ask them to come together to discuss the most serious global challenges and to come to some sort of even a modest agreement from different points of view.

I worked a lot in the early '90s, especially on direct democracy. Of course now, let's say when I see that the Mexican, the politicians have decided that every judge in the country will be put to popular vote, then I have to of course say that this is the limit. This is too much. But I do believe in engaging the citizens. The EU has become much more open to the civic voices and let's say the organised civil society in the past 10 years. When I started, then people said that, "Ah, it's just the big boys discussing behind closed doors with big businesses." That's not anymore the case. So there's even hope in the EU.

John Morrison: Yeah, I'd agree with that. Well, Heidi, we're delighted you've joined our International Advisory Council. We look forward to meeting you in Geneva next month. Thank you for your time today. You've said some very interesting things, and I think you really helped put the due diligence legislation in the context of your own life and work and the inspiration that others have brought to you. So thank you again for everything you've contributed to the business and human rights world.

Heidi Hautala: Thank you, John, for this great opportunity to cooperate with your organisation.

Deborah Sagoe: It's been fascinating to hear about Heidi's life and work, as well as the implications of this legislation, which is going to affect many companies in the EU. Thank you for listening to this episode of Voices, which is brought to you from the Institute for Human Rights and Business. Until next time, be sure to share and follow this podcast. That way you would never miss an episode. And if you would like to find out more about the work that we do at IHRB, then head to ihrb.org.