The legal affairs committee (JURI) of the European Parliament has voted on new rules to integrate human rights and environmental impact into companies’ governance under the Corporate Sustainability Due Diligence Directive (CSDDD) proposal.

With 19 votes against three and three abstentions, MEPs on the Legal Affairs Committee adopted their position on so-called corporate sustainability due diligence.

The new corporate due diligence law will require companies to identify, and where necessary prevent, end or mitigate the negative impact of their activities, including that of their business partners, on human rights and the environment. This includes child labour, slavery, labour exploitation, pollution, environmental degradation and biodiversity loss.

More firms to be held liable

Companies would also be required to evaluate their value-chain partners when carrying out their “due diligence”, MEPs say. “This should include not only suppliers but also activities related to sale, distribution and transport. The adverse impact would have to be mitigated and remedied by adapting the company’s business model, providing support to SMEs or seeking contractual assurances.”

MEPs extended the application of the new rules, compared to the Commission proposal, to include EU-based companies with more than 250 employees and a worldwide turnover higher than EUR40m as well as parent companies over 500 employees and a worldwide turnover higher than EUR150m. The rules would also apply to non-EU companies with a turnover higher than EUR150m if at least 40 million was generated in the EU.

Detailed guidelines and sanctions

Non-compliant companies will be liable for damages and EU governments would establish supervisory authorities with the power to impose sanctions. MEPs explained that fines are to be at least 5% of the net worldwide turnover and the banning of non-compliant third-country companies from public procurement.

To facilitate compliance, member states would set up a national helpdesk and the Commission would prepare detailed guidelines.

Fight for compliance and climate change

According to the amendments, companies would have to engage with people affected by their actions, including human rights defenders and environmental activists, introduce a grievance mechanism and monitor the effectiveness of their due diligence policy.

To help combat climate change, all company directors would be obliged to implement a transition plan compatible with a global warming limit of 1.5°C. Directors of companies with over 1000 employees will be directly responsible for this step, which in turn will affect the variable parts of their pay, such as bonuses.

Rapporteur Lara Wolters (S&D, NL) noted: “I’m delighted that a broad consensus has been achieved in the committee to put forward binding rules to make businesses respect people and the planet. There is a clear will to align this directive with international best practices, and to ensure companies must do due diligence in continuous dialogue with those affected by harm, and remedying it when it occurs. If companies don’t comply, they should face sanctions, and if harm occurs that they should have avoided, then victims should be able to get justice in court.”

Commenting on the vote, Amandine Van Den Berghe, ClientEarth lawyer said: “The legal affairs committee’s position papers over some of the cracks in the Commission’s original proposal, notably by including the Paris Agreement.

“It’s now down to the European Parliament to preserve improved aspects and address remaining flaws in its full vote in May. Most importantly it will need to push for a definition that fully captures the corporate world’s environmental footprint in negotiations with the Commission and Council. Without this clarity, the EU risks rubber-stamping a paper tiger.”

The parliament is due to vote on its final negotiating position in the next JURI committee meeting which is scheduled for May 30 in Brussels.

The Ethical Trading Initiative (ETI) took the stage last year, saying, the EU Due Diligence Directive presented a real opportunity to drive respect for people and the planet, but the gaps and loopholes must be addressed.

Last October, the apparel industry got together to advance effective mandatory human rights due diligence at the EU level. The sector presented joint recommendations on the EU Corporate Sustainability Due Diligence (EU CSDD) that was proposed on 23 February 2022 and deemed it a very important step.