With the recent French law (Access Law At: https://www.legifrance.gouv.fr/eli/loi/2017/3/27/2017-399/jo/texte) that compels large firms operating in France to realize their ‘duty of vigilance’, France has clearly made its point on ethics and transparency for businesses. This is a great initiative that will now mandate large businesses act responsibility by establishing robust mechanisms to prevent human rights violations and environmental impacts on their operations. Not only the businesses, but also their subsidiaries and businesses under their control, will be impacted by this new legislation that was enforced on 28th March 2017.
What is the coverage of the new legislation?
This new legislation covers large limited liabilities companies that meets the following criteria:
- French companies headquartered in France employing at least 5,000 employees worldwide (this is through direct or through subsidiaries); or
- Foreign companies headquartered outside France, with French subsidiaries, as long as they employ at least 10,000 employees worldwide (including through direct and indirect subsidiaries)
What the act says?
Interestingly the French regulation is unlike its contemporaries, the U.K Modern Slavery Act and the California Transparency in Supply Chain Act. Wherein the later only require business to report on the efforts taken to tackle human rights abuse in supply chain, the former actually requires developing and implementing a vigilance plan. Failure to comply with the regulation is expected to result in heavy penalties on the business. The law requires implementing various due diligence measures to identify and prevent human rights violations and damages to the environment in connection with the operations of any company.
What should the companies do?
Overall the businesses are expected to develop a vigilance plan that should ideally cover parent company, companies under its control and extend it to suppliers and subcontractors with which parent company or subsidiaries have established a commercial relationship. Such a plan should be comprehensive and should be developed by stakeholder consultation. The plan is expected to include the following components:
- Procedures for identifying, analyzing and mapping the risks of human rights and environmental abuse.
- Procedures for assessing the risks regularly and developing relevant sub procedures for the same and assessing the risks w.r.t the subsidiaries, sub-contractors and suppliers.
- Actions to mitigate the identified risks and prevent the serious violations
- Mechanisms to alert the company to potential or actual risks and procedures to develop such a mechanism by engaging with various stakeholders.
- Monitoring mechanism to assess the effectiveness of the implemented measures.
- Regular reporting of vigilance plans and actions to the public as part of annual reports.
What are the penalties?
Companies that fail to establish, implement or publish a vigilance plan could be prosecuted within relevant jurisdiction. Judiciary may send a formal notice to comply with the law to businesses within three months, failure to which may result into a civil fine of up to 10 million euros.
Commentary: Pulling out some figures for India, France and India share a good bilateral trade relationship. India’s main exports to France include (by trade % share) textile and textile articles (21.49%), machinery and mechanical appliances (7.65%), electrical machinery & equipment (6%), organic chemicals (5.96%), footwear (5.22%), mineral fuels & oils (4.84%), leather articles (3.95%) and gems and jewelry (3.69%). Similarly top French exports to India include aircraft & spacecraft (28.12%), electrical machinery & equipment (16.02%), mechanical appliances (13.32%), optical and photographic equipment (6.98%), organic chemicals (3.8%), iron & steel (3.64%), plastics (3.16%), pharmaceuticals (3.07%), articles of iron and steel (2.35%) and chemicals (2.24%). In 2016, total trade between France and India was worth around 8.58 billion Euro with a steady rise of 0.49% from 2015.
France is a major source of FDI for India with around 750 big French companies already making their way for the Indian markets. France is 9th largest investor in India with an investment totaling around 5 billion Euro from April 2000 to March 2017. The highest FDI equity inflows are in the services sector (19.74%), cement and gypsum products (16.75%), drug and pharmaceuticals (5.7%), food processing industries (5.48%) and industrial machinery (5.35%). Considering that the services sector FDI implies several services businesses are all set to develop a base in India and due to the labor intensity of the sector it is likely they will get covered under the new regulation. Similarly India was the 30th largest foreign investor in France with cumulative FDI inflows amounting to 188 million euro (December, 2014 French Central Bank) and stock portfolio of around 1 billion euro.
Most of the large French groups have their subsidiaries in India with around 39 of the 40 CAC40 (French stock market index) present in India. French companies are present in a wide range of sectors: services (BNP Paribas, Capgemini, Havas, Sodexo, etc.); pharmaceutical-chemical (Arkema, L’Oréal, Sanofi, Total, etc.); aerospace (Airbus, Dassault, Eurocopter, Safran, Thales, etc.); agro-food (Bongrain, Danone, Lactalis, Lesaffre, Pernod Ricard, etc.); electronics (Crouzet, Gemalto, Oberthur, Safran, STMicroelectronics, etc.); construction mechanics (Alstom, Cermex, Legris Group, Poclain, Sidel, etc.); electrical components (Hager, Legrand, Schneider Electric, etc.); automobile (Faurecia, Michelin, Plastic Omnium, Renault, Valeo, etc.).
Similarly around 75 Indian businesses have strong presence in France (over 150 including sub-subsidiaries).Indian companies have invested in a wide range of sectors including R&D engineering, business services, decision making centers etc and came from wide portfolio of companies including software and IT services ,pharma, energy and recycling, aerospace, naval and railway equipment and textiles and clothing sectors. Some of the leading Indian companies with strong presence in France include Rnbaxy & Wockhardt (Pharmaceuticals), Tata Consultancy Services, Infosys, Wipro (Software & IT),Tata Steel, Electrosteel (Iron & Steel), Sintex Industries (Plastics), Titagarh Wagons ( Railway wagons), Mahindra & Mahindra, Jyoti (Automobile & parts).
Major industries that share commercial ties with France with significant number of employees (especially services, manufacturing and industrial machinery sector with surging workforce) and French companies exploring Indian markets with JV’s and/or subsidiaries will be impacted by the new French regulation. While the duty of vigilance regulation will pose a regulatory risk for several businesses but it definitely can closely be aligned with the social license to operate for businesses, operating in geographies that have higher human rights abuse risk. French businesses with commercial relationships in India will be mandated to develop a vigilance mechanism that will help them closely look at various human rights abuse and environmental risks. Interestingly Indian companies too will have to abide by these laws. Overall with the regulation, new mechanism to implement effective vigilance in overall supply chains for human rights abuse and environmental damage will be developed.
Considering the sizable amount of commercial relationships between Indian and French business and the impact it can create on the overall value chain, it is likely that with the regulation, significant human rights abuse and environmental damage will reduce. Though currently only large companies (~150 corporates) are mandated to act on duty for vigilance, but gradually the smaller companies in the supply chain will also get covered indirectly and businesses will be expected to ‘act with caution’. Though several large businesses already have strong supply chain transparency practices and have well defined code of conducts on which the company and its suppliers act. But with the new regulation these code of conducts will come under acute scrutiny and the implementation of these code of conducts will be more effective. It is likely that the current audit of supply chains carried on by large businesses by employing boutique firms will shift to more stringent large professional firms that will conduct a detailed through assessment of implementation in multiple geographies and will be in a capacity to give statements of assurance.
Similarly, with the regulation the companies may also adopt digital tools for continuous monitoring of the supply chain for human rights and environmental damage in supply chain. This may also lead to product lifecycle assessments being conducted by companies to trace the origin of products and adherence to the various transparency mechanisms. It is also likely that several new consortiums or advocacy groups may take the role of developing ethical standards for supply chain transparency (like SEDEX, Rainforest Alliance, Fair Trade etc.) adhering to the requirements of French regulation. In longer run it is likely that the regulation will be amended and may include the smaller companies in its purview.
Overall considering the global trade volumes of EU (pre Brexit), these recent changes in policy and regulation (such as modern slavery act, UK and the French regulation on ‘duty of vigilance’), a trend is very clear that slowly more and more EU countries are likely to implement new regulation making the businesses act more responsibly. Businesses will be expected to take ownership of their extended supply chains. This definitely is seen as a positive sign where governments are regulating the responsibility of businesses. However, slowly when the smaller businesses start ensuring that effective measures are taken to curtail the human rights and environmental abuse, a steady tone will be set for all businesses to adhere to. Indian businesses definitely have to start looking at ways in which it can convert these regulatory risks in opportunities and become leaders in ethical business thereby establishing transparency and accountability of their actions.
So as always I am eager to hear your views, do send your views/opinion on nish at insightbynish.com. Views are my own and please don’t quote me in any formal discussions.