On Wednesday, April 24, the European Parliament approved new rules requiring companies to reduce their negative impact on human rights and the environment. Here’s who they will apply to.
The European Parliament has adopted new regulations requiring companies to reduce their negative impact on human rights and the environment. These rules will apply both to companies in the European Union and to those outside it, which register a turnover of over 450 million euros.
Under these regulations, companies are required to develop a transition plan in accordance with the Paris Agreement. They will be held responsible for any damages and may be fined if they do not comply with this legislation.
The EU has adopted the new directive on the duty of care. What exactly will be banned?
Therefore, the European Parliament adopted, with 374 votes “for”, 235 votes “against” and 19 abstentions, the new directive on “due diligence” or “obligation of diligence”, according to the press release of the European institution.
This directive requires companies and their downstream and upstream partners, including in the areas of supply, production and distribution, to prevent, eliminate or reduce the negative impact on human rights and the environment.
Among the negative effects targeted by the directive are:
- slavery,
- child labour,
- labor exploitation,
- loss of biodiversity,
- pollution or destruction of natural heritage.
The criteria will apply to companies and parent companies in and outside the European Union that have more than 1,000 employees and a worldwide turnover of more than €450 million. They also apply to EU franchises with a turnover of more than €80 million, provided they earn at least €22.5 million in royalties.
The criteria also concern non-EU companies, parent companies and franchises that exceed these thresholds in the EU.
These companies will have to integrate due diligence into their policies, make appropriate investments, obtain contractual guarantees from their partners, improve their business plans or help small or medium-sized partner enterprises to comply with the new obligations.
Companies will also need to adopt a transition plan to ensure their business model is compatible with the Paris Agreement commitment to limit global warming to 1.5 degrees Celsius.
The European Commission will establish the European Network of Supervisory Authorities
Member States are responsible for providing companies with detailed information on their due diligence obligations. This information will be available online, on sites that will include the practical guidelines developed by the European Commission. Member States will also establish or designate a supervisory authority responsible for investigating and sanctioning companies that do not comply with the law. Penalties can include fines of up to 5% of the companies’ global net turnover.
In addition, the names and conduct of companies may be made public as part of the sanctions. The European Commission will establish the European Network of Supervisory Authorities to facilitate cooperation in this area and to allow the exchange of best practices. Companies will be held liable for damages caused by breach of their duty of care and will be required to fully compensate victims.
“Today’s vote represents a watershed moment for responsible business conduct and a significant step forward in our efforts to end the exploitation of people and the planet by unscrupulous companies. This law is a compromise for which we fought hard and the result of many years of difficult negotiations.
I am proud of what we have accomplished with our progressive allies. In the next mandate of the Parliament, we will fight not only for its rapid implementation, but also to further improve the sustainability of the European economy”, said rapporteur Lara Wolters (S&D, Netherlands), following the vote in the EP plenary, according to the quoted source.
The directive will be officially submitted to the approval of the Council, after which it will be signed and published in the Official Journal of the European Union. It will enter into force 20 days after the date of publication. Member States will have two years to transpose the directives into their national legislation.
How the new regulations will apply
With the exception of the communication obligations, the new regulations will apply gradually, as follows:
- starting from 2027, companies with over 5,000 employees and a turnover of over 1,500 million euros;
- starting from 2028, companies with over 3,000 employees and a turnover of 900 million euros;
- starting from 2029, to the other companies that fall within the scope of the directive (with more than 1,000 employees and a turnover of more than 450 million euros).
On numerous occasions, the European Parliament has called for increased accountability of companies and the adoption of binding legislation on their due diligence obligations. The Commission’s proposal of 23 February 2022 complements other existing or pending legislation, such as the Regulation on Deforestation, the Regulation on Conflict Minerals and the Regulation on Banning Products Made with Forced Labour.
By adopting this legislation, the European Parliament responds to citizens’ expectations expressed in the conclusions of the Conference on the future of Europe regarding sustainable consumption (proposal 5 point 13), strengthening the ethical dimension of trade (proposal 19 points 2 and 3) and promoting a model of sustainable growth (proposal 11 points 1 and 8).
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