The European Union is moving forward with its corporate sustainability due diligence directive to address companies’ negative human rights and environmental impacts.
- The European Parliament has adopted its position for negotiations with Member States on the Corporate Sustainability Due Diligence Directive.
- Once it is approved, companies will be required to identify, and where necessary prevent, end or mitigate the negative impact of their activities on human rights and the environment.
- The rules are intended to advance the green transition and protect human rights in Europe and beyond.
The European Parliament has adopted its position for negotiations with Member States on the Corporate Sustainability Due Diligence Directive, which intends to integrate human rights and environmental impact into companies’ governance. It passed with 366 votes in favour, 225 against and 38 abstentions. The next step is the trilogue, an informal negotiation between Parliament, Council and Commission, then the Parliament will be required to issue final approval.
What is the purpose of the directive?
The idea is to ensure more protection of human rights and achieve environmental goals as included in international conventions. For businesses, the new rules will bring legal certainty and a level playing field. For consumers and investors, they will provide more transparency.
Some Members States have already introduced national rules on due diligence and some companies have taken measures at their own initiative. The EU, however, identified a need for a larger scale improvement that is difficult to achieve with voluntary action.
What will companies have to do?
Companies will be required to identify, and where necessary prevent, end or mitigate the negative impact of their activities on human rights and the environment such as on child labour, slavery, labour exploitation, pollution, environmental degradation and biodiversity loss. They will also have to monitor and assess the impact of their value-chain partners including not only suppliers but also sales, distribution, transport, storage, waste-management and other areas, as well as establish and maintain a complaints procedure, monitor the effectiveness of their measures and publicly communicate on due diligence.
They will also have to implement a transition plan to limit global warming to 1.5°C and, in the case of large companies with over 1,000 employees, meeting the plan’s targets will have an impact on a director’s variable remuneration, such as bonuses. The new rules also require firms to engage with those affected by their actions, including human rights and environmental activists, introduce a grievance mechanism and regularly monitor the effectiveness of their due diligence policy.
Which businesses does it apply to?
The directive will apply to EU-based companies, regardless of their sector and including financial services, with more than 250 employees and a worldwide turnover over €40 million as well as to parent companies with over 500 employees and a worldwide turnover of more than €150 million. Non-EU companies with a turnover higher than €150 million, if at least €40 million was generated in the EU, will also be included.
According to the text adopted, the new obligations would apply after three of four years depending on the company’s size. Smaller companies will be able to delay applying the new rules by one more year.
What happens to those not complying?
Non-compliant companies will be liable for damages and can be sanctioned by national supervisory authorities. Sanctions include measures such as ‘naming and shaming’, taking a company’s goods off the market, or fines of at least 5% of the net worldwide turnover. Non-EU companies that fail to comply with the rules will be banned from public procurement in the EU.
National administrative authorities appointed by Member States will be responsible for supervising these new rules, while victims will have the opportunity to take legal action for damages that could have been avoided with appropriate due diligence measures.
The vote was welcome by various human rights and environmental groups, although many have pointed at faults in the directive. According to the European Coalition for Corporate Justice (ECCJ), the Parliament’s position includes “several major improvements” on the previous proposals by the European Commission and the Council.
For example, it aligns more closely with international standards on business and human rights by clarifying how companies can address harm and work with people who may be affected by company activities. It also lowers hurdles to access to justice for victims, by extending the statute of limitations on corporate abuse cases and offering financial and legal assistance to victims. The Parliament, however, failed to reverse the burden of proof, meaning a major barrier to justice remains, the ECCJ said, as the financial sector “is given preferential treatment in the text”.
Hannah Storey, Amnesty International policy advisor on business and human rights, echoed this sentiment: “There are some troubling exemptions in the legislation which would make it very challenging to hold financial sector firms liable under civil law for human rights abuses and environmental harms. Companies also do not have to consider possible human rights abuses stemming from the misuse of their products. EU policymakers must urgently address these omissions during negotiations.”
Nonetheless, Isabella Ritter, EU policy officer at ShareAction, said that including the rules on investor due diligence recognises that “the financial sector has a critical role to play in protecting human rights and the future of our planet”.
She added: “On a more negative note, we regret to see that the European Parliament dropped the rules on the directors’ obligations to oversee the due diligence process. Having directors’ oversight is an important part of responsible business conduct according to international guidelines and enables companies to be more resilient and efficient.”
Patrizia Heidegger, director for EU governance, sustainability and global Policies at the European Environmental Bureau, commented: “The text adopted today is a landmark in the EU’s due diligence framework, despite political compromises that watered down the ambition and potential of harmonised environmental and human rights obligations for businesses. Although this position falls short of the expectation of many, it is the closest the EU has ever been to turning long-standing OECD standards into law and to ensuring justice for victims of corporate abuse and corporate accountability for environmental harm.”