The Legal Affairs Committee of the European Parliament has approved a new bill requiring firms to take action to “alleviate the adverse impact their activities have on human rights and the environment, including slavery, child labour, labour exploitation, biodiversity loss, pollution and destruction of natural heritage”.

The Corporate Sustainability Due Diligence Directive will apply to companies both based in and trading in the EU with over 1000 employees and with a turnover of more than 450 million Euros (and to franchises with a turnover of more than 80 million Euros if at least 22.5 million was generated by royalties).

It will require such companies to integrate new ‘sustainability due diligence’ measures into their polices and risk management systems to identify and address human rights and environmental risks that not only result from their own operations, but also the operations of their subsidiaries as well as their business partners throughout the company’s so-called “chain of activities”. This includes a company’s “upstream business partners related to the production of goods or the provision of services by the company, including the design, extraction, sourcing, manufacture, transport, storage and supply of raw materials, products or parts of the products and development of the product or service” and also “the company’s downstream business partners related to the distribution, transport and storage of the product, where the business partners carry out those activities for the company or on behalf of the company”.

In addition to integrating new due diligence measures, companies within the scope of the Directive will have to engage business partners and stakeholders in order to conduct risk assessments, identifying any adverse impacts and taking “appropriate measures” to address them. ‘Appropriate measures’ are described as those that are “capable of achieving the objectives of due diligence, by effectively addressing adverse impacts in a manner commensurate to the degree of severity and the likelihood of the adverse impact, and reasonably available to the company, taking into account the circumstances of the specific case, including the nature and extent of the adverse impact and risk factors”.

Companies will also have to adopt a transition plan aimed at ensuring that their business model and strategy are compatible with the limiting of global warming to 1.5°C under the Paris Agreement, complete with time-bound climate change targets and clear explanations as to how they will be met.

Member States will be required to designate a supervisory authority charged with monitoring compliance with the due diligence and climate transition plan requirements. Foreign companies will be required to designate an authorised representative based in the Member State in which they operate who will communicate with supervisory authorities about compliance.

Failure to comply with the obligations set out in the Directive could result in a fine of up to 5% of a company’s net worldwide turnover. In addition, Member States will be required to introduce civil liability mechanisms, enabling individuals to seek compensation where a company’s failure to comply with its obligations caused them damage.

Once it has been approved by the European Parliament and Member States, the Directive will enter into force. That will commence a two-year period for Member States to adopt the necessary regulations before the obligations begin to apply to companies in three phases from 2027 onwards.

To read more, see here.