Due Diligence in the Implementation of the Sustainable Development Goals and the ESG Agenda: the Balance of Soft and "Hard" Regulations

Petrova Alina Viktorovna PhD in Law Deputy Director Gazprom Social Initiatives Foundation 119526, Russia, Moscow, Vernadsky Avenue, 101 k. 3, of. Petrozavodskaya str., 13, sq. 303 petrova.av@socialfondgaz.ru

Due diligence originated as a right definition back in Antiquity, when Roman private law knew a certain standard of behavior necessary to fulfill a certain duty. In this case, the person was responsible for accidental harm when it was the result of non-compliance with the generally accepted model (rules) of reasonable expected and conscientious behavior. When codifying Justinian, due diligence took the form of possible liability for harm that could have been foreseen by a bona fide subject of the relationship, who, however, did not do this ^[4].

Today, official discretion is interpreted in accordance with the legal position expressed in the Resolution of the Plenum of the Supreme Arbitration Court of the Russian Federation dated 12.10.2006 No. 53 concerning legal entities ^[3]. In this case, the non-manifestation of the counterparty's bad faith did not absolve him from responsibility, even with his own conscientious behavior, since due diligence was not shown. In 2017, this concept could have been included in Article 54.1 of the Tax Code of the Russian Federation, which regulated the issues of unjustified tax benefits, but this did not happen, due to the probably obviously evaluative nature of the concept in question. In judicial practice, in disputes about unjustified benefits, where the question of prudence inevitably arises, the courts find out the reality of transactions and business transactions and the fulfillment of relevant obligations, which closely links prudence with practice and the possibilities of extracting unjustified tax benefits.

In 2020 The Supreme Court of the Russian Federation pointed out that it is unacceptable only to identify the taxpayer's mistakes, assess the effectiveness and rationality of his decisions, since it is necessary to take into account the actions of another counterparty (suppliers), the fulfillment of tax obligations by him, as well as the nature and volume of the transaction, in general, the buyer's activities, his experience, market conditions. The court pointed out the variability of due diligence criteria, which depend on the subject and volume of the transaction ^[2].

In this article, due diligence is considered in the context of the implementation of the Sustainable Development Goals (SDGs) and the ESG agenda, as well as within the framework of the Guiding Principles of Entrepreneurship in the Aspect of Human Rights (Guidelines) ^[5], where two concepts are outlined. According to the first, due diligence is understood as a business risk management process. In accordance with the second – as a certain formalized standard of behavior, assuming the performance of duties ^[9]. Duality generates uncertainty in the understanding of the concept under consideration, and, accordingly, a significant share of discretion in its application.

In the documents of European organizations (OECD), this is a measure of prudence, activity, or diligence that can be properly expected from a reasonable and prudent entity (company, enterprise), manifested by it under specific circumstances to exercise its responsibility in a certain area ^[11], which fully complies with the Sustainable Development Goals and ESG principles.

In the UN documents, these are the actions of the company to identify, prevent and eliminate the negative consequences of its activities in relation to the environment, climate, and human rights ^[7]. In this sense, prudence is understood as a social responsibility in a broad sense. At the same time, we pay attention to the importance of "combining all three aspects without excessive orientation to a certain direction" ^{[1, p.32]}.

Following the above documents and directions, each company must correlate the potential negative consequences of its activities for the environment, climate, local community and society as a whole, i.e. all subjects (stakeholders) whose rights may potentially be violated by its production and/or other activities. This provision, although it seems obvious for a social rule of law state, at the same time is not legally fixed and is not a duty, but is only voluntarily observed within the Guidelines by those companies that follow them.

Voluntary, although massive, within the framework of existing market institutions, the nature of accession still does not provide due diligence in modern conditions of the growth of anthropogenic impact on the environment and informational impact on the rights and freedoms of citizens. In conditions of voluntariness, many companies do not know or ignore the possible risks of their activities to the environment, human rights and the normal functioning of society, which forms an irresponsible attitude towards the latter and entails socially unacceptable entrepreneurial behavior. The long-term dominance of the principle of laissez-faire (far from always corresponding to the principles of the welfare state) ^[12], including in continental Europe, has created a situation where responsibility for ignoring potential risks, even without violations and the consequences that have occurred, is not fixed. This practice inevitably led to impunity for large and international companies that use this "white spot".

In accordance with the Guidelines, due diligence should extend to the potentially harmful effects of the company's activities on the environment, climate, human rights and freedoms. At the same time, it is difficult to accurately subordinate prudence to standards, since it is not uniform, ambiguous, complex and variable, since it is derived not only from the profile of the activity, but also from its scale, levels of risks and critical impacts. In this regard, the potential harm is always different and relative, being derived from a set of individually determined factors.

It is important that prudence is not seasonal, but constant, largely depends on the dynamics of risks, monitoring of which is an integral part of it. In accordance with the Guidelines, due diligence is not a separate event, but a permanent state, the process of implementing a set of rules ^[5], built into the main activity of the company, integrated into its internal policy. Companies must constantly implement due diligence procedures, conforming to the Guidelines in their core business.

In this case, due diligence is a systematic sequence of actions, starting with an assessment of existing and potential risks and other impacts on the environment, climate, human rights from the activities of the company, its partners and its partners ^{[10, p.83]}. On the basis of such an assessment, a scale is built to assess the current or potential consequences, taking into account national, local and other conditions and features ^[8]. Then the results are interpreted, formalized and integrated into the core business of the company, which takes prompt, timely and effective measures to respond to all relevant risks and threats.

In an ideal model of processes and the current regulatory (mostly "soft") regulation, the company, exercising due diligence, seeks to prevent/or minimize its real or possible impact on the environment, climate, human rights ^{[10, p.84]}. In accordance with this, again in an ideal model, the entire internal policy of the company is built, focused in the context under consideration, on the prevention of violations.

The mandatory monitoring of the effectiveness of the measures taken is provided for in the Guidelines, which makes it possible to evaluate the results, apply incentives and sanctions for staff (UN Doc. A/HRC/8/5 ch. 63), as well as ensure transparency of this activity. Thus, in the section "Communication and accountability", the Principles recommend that companies inform stakeholders about their activities in the relevant field. These reports can be directly addressed to interested parties, or published for public information. Companies are required to disclose all information to assess the adequacy and sufficiency of measures, taking into account the observance of trade secrets, the rights of personnel and other persons affected by such measures ^{[10, p.84]}.

In Russian, as well as world practice, due diligence of companies is not legally binding and is not directly legislated. Objectively, the development of such a document is difficult, first of all, due to the complex nature of the problems, the definition and formalization of criteria for the size (volume of operations) of companies to which such an act could apply.

The need to develop a Russian "comprehensive legislative act regulating the activities of enterprises" in the field we are considering is actively and comprehensively argued in the literature ^{[6, p.88]}, there are also relevant proposals, i.e. the law-making process is in an active phase.

In this sense, the example of developed and "rich" EU members who have adopted regulatory legal acts on due diligence of legal entities is indicative, however, they mainly relate to the sphere of human rights. Thus, the French Duty of Vigilance law 2017 applies to the largest French companies, which are obliged to anticipate, identify, evaluate and eliminate the negative consequences of their activities for humans and the environment by publishing annual plans and reports on this. At the same time, the law provides for liability for the consequences that have occurred, which are related to their activities, the activities of companies under their control, as well as with suppliers and subcontractors.

In case of violation of the company's voluntarily assumed obligations, victims and other interested persons, in accordance with French law, have the right to apply to a court authorized to impose a fine of up to € 10 million, in the absence of publication of plans and reports. Up to €30 million, the fine may increase in case of damage that could have been prevented ^[13].

Similar goals are enshrined in German legislation (German Draft Law For A Human Rights and Environmental Due Diligence Act), the development and adoption of which are of particular interest. In the summer of 2020, the Federal Government presented the results of the second quantitative survey evaluating the efforts of German companies to verify compliance with the sustainable development agenda and human rights in accordance with the National Action Plan (NAP) in the field of business and human rights ^[14]. The survey showed that only 22% of the 455 companies that submitted responses to the survey proved adequate compliance with the NAP requirements. In accordance with the NAP, the federal government agreed to consider a law on mandatory human rights verification if less than 50% of German companies with more than 500 employees introduce human rights protection measures by 2020. The current government coalition agreement states that if voluntary implementation by companies proves insufficient, the government will "introduce appropriate legislation." In this case, corporations were insufficiently responsible, which forced the government and the federal legislator to take legislative action.

In Denmark (Dutch Child Labor Due Diligence Law) and Switzerland (Swiss Responsible Business Initiative), national acts also enshrine the obligations of companies (legal entities) to exercise due diligence in areas that ensure sustainable development, respectively, negligence provides for civil liability of the company.

The basis for the development and adoption of such acts in the European Union was the EU Directive 2014/95 "On disclosure of non-financial information" introduced in 2014 ^[15], according to which large companies within the jurisdiction of the EU are required to publish reports on compliance with environmental legislation, protection of human rights, combating corruption, discrimination, ensuring sexual, educational and professional diversity on the board of directors.

The directive is aimed at large companies with a staff of 500 or more employees engaged in socially significant activities. This includes 6,000 European companies and groups, including financial and credit organizations. This orientation is due to the fact that the Directive is aimed at assisting investors, consumers and all other interested parties in an objective and adequate assessment of non-financial indicators and reports of large companies, encouraging them to take responsibility in the field of sustainable development. The need to update these tasks prompted February 20 , 2020 . The EC will proceed with the revision of the directive as part of the strategy to strengthen the foundations for sustainable investment.

Thus, due diligence, considered in the context of the SDGs and ESG, not traditionally from the standpoint of detecting tax abuses, but from the standpoint of sustainable development, is provided in Russian practice so far only by means of soft regulation. At the same time, the global trend focuses on commitment, i.e. the legislative consolidation of such socially useful behavior in the interests of the Sustainable Development Goals and the ESG agenda. At the same time, the development of such acts is at the early stages of legal education, i.e. discussion of relevance, with references to the European experience, the relevance of which is not obvious for Russia in the current conditions. In addition, the transition to law-making in this area requires an accurate understanding of the existing social relations, ways and mechanisms of their regulation, which is also not yet observed. In this sense, monitoring of the research of the activities (not reports, namely the activities) of Russian companies within the framework of the ESG agenda is being updated.

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