Due diligence: EU adopts new human rights and environmental rules for business

• Applies to companies and parent companies in and outside the EU with over EUR 450 million in turnover
• Companies must have transition plans in line with the Paris Agreement
• The companies can be forced to pay damages and be sentenced to fines for violations

The European Parliament approved with 374 votes for, 235 against and 19 abstentions the new directive on due diligence agreed with the Council of Ministers. The companies must now together with their partners in both upstream and downstream stages, i.e. in supply, production and distribution, remove or mitigate the negative impact they have on human rights and the environment. It can apply to everything from slavery, child labor and exploitation of labor to loss of biodiversity, pollution and destruction of the natural heritage.

A risk-based approach and turnaround plans

The rules shall apply to companies and parent companies in the EU with over 1,000 employees and a global turnover of over EUR 450 million. They must also apply to companies that have entered into franchise or license agreements in the EU that ensure a common identity and with a turnover exceeding EUR 80 million, of which at least EUR 22.5 million comes from royalties. Non-EU based companies, parent companies and non-EU companies that have franchise or license agreements in the EU that meet the same turnover thresholds in the Union will also be covered. Companies must allow their entire operations to be imbued with so-called due diligence. It must be visible in their investments and required business partners in contractual guarantees. The companies must improve their business plans and support small and medium-sized business partners so that they meet the new requirements. Companies must also adopt transition plans to make their business model compatible with the Paris Agreement’s global warming limit of 1.5°C.

Fines and compensation for victims

It will be the task of the EU countries to provide companies with detailed information on the web about how to apply due diligence. It must be done via practical web portals with guidance from the European Commission. They must also establish or appoint a supervisory authority to investigate and impose penalties on companies that do not comply with the rules. Here, it can be about being hanged and being fined up to five percent of the companies’ global net sales. The European Commission shall establish a network for the supervisory authorities and support the cooperation and exchange of best practices between them. If the companies fail to exercise due diligence, they become liable for the damages they cause and must pay full compensation to the victims.

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Following the vote, lead rapporteur Lara Wolters (S&D, Netherlands) said: “Today’s vote is a milestone for responsible business and a big step towards ending the exploitation of people and the planet by irresponsible companies. This law is a hard-fought compromise and the result of many years of tough negotiations. I am proud of what we have achieved together with our progressive allies. In Parliament’s next term, we will not only fight for swift implementation, but also to make Europe’s economy even more sustainable.”

Next step

The directive must now be formally approved by the Council and signed before it is published in the EU’s Official Journal. It will take effect 20 days thereafter. The EU countries then have two years to incorporate it into their national legislation.

The new rules (apart from the obligations to inform) are to be gradually applied to EU companies (and non-EU companies that reach the same thresholds for turnover in the EU):

• From 2027, they will apply to companies with more than 5,000 employees and a global turnover of more than 1,500 million euros.
• From 2028 for companies with over 3,000 employees and a global turnover of over EUR 900 million.
• From 2029 for all other companies affected by the directive – including those with more than 1,000 employees and a global turnover of more than EUR 450 million.

Background

Parliament has repeatedly called for greater corporate responsibility and mandatory due diligence legislation. The Commission’s proposal was presented on 23 February 2022 and complements current and future regulations on, among other things, deforestation, conflict minerals and bans on products made with forced labour.

By adopting this legislation, the European Parliament responds to citizens’ expectations regarding sustainable consumption, as reflected in proposal 5(13) of the conclusions of the Conference on the Future of Europe. The law also includes propositions 19(2) and 19(3) on strengthening the ethical dimension of trade and propositions 11(1) and 11(8) on the EU’s model for sustainable growth.

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