The European Parliament has adopted its position for negotiations with member states on rules to integrate human rights and environmental impact into companies’ governance under the Corporate Sustainability Due Diligence (CSDD) Directive.
The proposals would require European companies to identify, and where necessary prevent, end or mitigate, the negative impact of their activities on human rights and the environment. The rules cover areas such as child labour, slavery, labour exploitation, pollution, environmental degradation and biodiversity loss.
EU firms will also have to monitor and assess the impact of their value-chain partners. This includes suppliers but also sale, distribution, transport, storage, waste management and other areas.
Fines of at least 5% of a company’s net worldwide turnover can be applied if they fail to comply and then there is potential for reputational damage.
The directive has recently been extended to include a wider range of firms in terms of sector and size. European business groups such as BusinessEurope have already expressed concern about the potential expansion of corporate and individual liability once the directive comes into force.
They have also told the EU that the directive needs to be consistently implemented across Europe to avoid confusion.
The parliament explained that the new rules, which it passed this week, will apply to EU-based companies, regardless of their sector, with more than 250 employees and a worldwide turnover over €40m. It also applies to parent companies with over 500 employees and a worldwide turnover of more than €150m.
Non-EU companies with a turnover higher than €150m where at least €40m is generated in the EU will also be included.
Companies will have to implement a transition plan to limit global warming to 1.5° under the directive. Meeting the plan’s targets will impact a director’s variable remuneration, or bonus, at large companies with over 1,000 employees.
The parliament explained that the new rules require firms to engage with groups affected by their actions, including human rights and environmental activists. They will also have to introduce a grievance mechanism and regularly monitor the effectiveness of their due diligence policy.
To facilitate investors’ access, information about a company’s due diligence policy should be available on the European Single Access Point (ESAP), the central repository of publicly available financial and sustainability information.
Companies that fail to comply 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, explained the parliament.
According to the adopted text, the new obligations would apply after three or four years depending on the company’s size. Smaller companies will be able to delay applying the new rules by one more year.
Following the plenary vote, Rapporteur Lara Wolters said: “The European Parliament’s support is a turning point in the thinking about the role of corporations in society. A corporate responsibility law must ensure that the future lies with companies that treat people and the environment in a healthy way – not with companies that have made a revenue model out of environmental damage and exploitation. Most companies take their duty towards people and the environment seriously. We help these companies with this ‘fair business law’. And at the same time we cut off those few large cowboy companies that flout the rules.”
Europe’s risk and insurance managers face a deluge of ESG-related legislation that is welcomed by some as a great opportunity to further advance the profession and regarded by others simply as an added burden.
The CSDD complements other existing and upcoming legislative acts, such as the deforestation regulation, conflict minerals regulation and draft regulation prohibiting products made with forced labour.
Now that The European Parliament has adopted its position, negotiations with member states on the final text of the legislation can begin. Member states adopted their position on the draft directive in November last year.
European Parliament president Roberta Metsola opened the parliament’s session before the vote on the directive with a statement marking the ten-year anniversary of the Rana Plaza collapse in Bangladesh.
She said that disaster had highlighted the “terrible conditions” in which many workers produce goods for Western companies.
Metsola said that concern has continued to grow about corporate responsibility and the potential risks that business activities pose to human rights and the environment, particularly from companies with operations outside the EU.
Despite this growing awareness, a 2020 EC study found that only 37% of businesses were undertaking due diligence that considered environmental and human rights impacts.
A Committee on Legal Affairs (JURI) report on harmonising corporate sustainability due diligence across EU member states demanded amendments to the EC’s original proposal for the CSDD, much to the dismay of European business groups.
These amendments included broadening the scope of companies subject to the rules and the definition of value chain. The changes also introduced remediation for those affected by unfair corporate practices and linked the variable remuneration of directors of large companies to the implementation of climate change transition plans.
Lobbying from European business groups to try to water down the directive, in part to stop companies and their directors and officers being found liable for the actions of suppliers that they were not aware of, will now commence along with the trialogue negotiations between the European Parliament, Commission and the Council.