Companies’ impact on Human Rights and the Environment: European Parliament’s amendments to the Proposal for a Directive on Corporate Sustainability Due Diligence

On June 1, 2023, the European Parliament adopted crucial amendments to the proposed Directive on Corporate Sustainability Due Diligence, which mandates companies to incorporate human rights and environmental considerations into their governance (i.e. the Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937). The initial proposal was released on February 23, 2022¹, aiming to compel certain companies to implement mandatory due diligence practices, identifying, preventing and mitigating adverse impacts of their activities on human rights and the environment.

The European Parliament’s notable contribution lies in the requirement for companies to identify and address the detrimental effects of their activities on human rights and on the environment. These effects encompass various areas such as child labor, slavery, labour exploitation, pollution. Additionally, companies must assess the impact of their value-chain partners (including suppliers, sale, distribution, transport, storage and waste-management) in order to end or mitigate adverse consequences.

Furthermore, the new regulations oblige companies to develop and implement a transition plan to limit global warming to 1,5°C, aligning with the Paris Agreement’s goals and the pursuit of climate neutrality as outlined in Regulation (EU) 2021/119, commonly known as the “European Climate Law”².

Failure to meet these obligations renders the company liable for damages and exposes it to potential sanctions by national supervisory authorities. Sanctions may take various forms, including public statements indicating responsibility and the nature of the infringement, mandatory corrective actions, suspension of product circulation or exports, or pecuniary sanctions. Notably, the maximum fine imposed should not be less than 5% of the company’s net worldwide turnover. Besides, non-EU companies that fail to comply with the rules will face exclusion from public procurement processes within the EU.

These obligations apply to EU-based companies with over 250 employees on average and a net worldwide turnover exceeding €40 million in the last financial year. If a company falls short of these thresholds but is the ultimate parent company of a group with 500 employees and a net worldwide turnover exceeding €150 million, it will also be subject to the directive. Non-EU companies with a net worldwide turnover higher than €150 million, of which at least €40 million was generated in the EU, will also be bound by these obligations. Therefore, the scope of application has been expanded compared to the Commission’s initial proposal.

Following the Parliament’s adoption of its position on the proposal, the next step involves negotiations with Member states to finalise the legislation’s text.