EU agrees rules for corporate sustainability due diligence directive

The EU has agreed a new set of rules that will require EU and non-EU textile and apparel companies to safeguard human rights and the environment within their policies and risk management systems or risk financial penalties.

The EU Parliament and council negotiators have informally agreed on new legislation for corporate sustainability due diligence that will apply to all big companies as well as smaller companies deemed to be in high-risk sectors, such as the textile and apparel sector.

Big companies are defined as EU companies and parent companies with over 500 employees and a worldwide turnover higher than €150m ($164.97m).

For the textile and apparel sector it also applies to EU and non-EU companies with over 250 employees and a turnover of more than €40m if at least €20m is generated from the manufacture and wholesale trade of textiles, clothing and footwear. Plus, these rules will apply to non-EU companies and parent companies with equivalent turnover in the EU.

EU awaits formal approval of new corporate due diligence rules

The agreed draft law still requires formal approval by the Legal Affairs Committee and the European Parliament as a whole, as well as by the Council (EU governments) before it can become enforced.

Once it is formally approved, the obligations will require companies to mitigate their negative impact on human rights and the environment, including child labour, slavery, labour exploitation, pollution, deforestation, excessive water consumption or damage to ecosystems.

Companies will be required to integrate “due diligence” into their policies and risk-management systems which includes descriptions of their approach, processes and code of conduct. It will also be mandatory for firms to adopt a plan ensuring their business model aligns with the goal of limiting global warming to 1.5°C.

Companies will have to identify, assess, prevent, mitigate, bring to an end to and remedy their negative impact and that of their upstream and downstream partners, including production, supply, transport and storage, design and distribution on people and the planet.

To do so, they will be required to make investments, seek contractual assurances from the partners, improve their business plan or provide support to their partners from small and medium-sized enterprises.

Members of the European Parliament (MEPs) have stipulated that the management of companies with over 1,000 employees will receive financial benefits for implementing the plan.

Lead MEP Lara Wolters said: “This law is a historic breakthrough. Companies are now responsible for potential abuses in their value chain, 10 years after the Rana Plaza tragedy. Let this deal be a tribute to the victims of that disaster, and a starting point for shaping the economy of the future – one that puts the wellbeing of people and the planet before profits and short-termism. I am very grateful to those who joined me in the fight for this law. It ensures honest businesses do not have to participate in the race against cowboy companies.”

Information portal for companies

MEPs explained that companies will have to “meaningfully engage” with those impacted by their actions, introduce a complaints mechanism, communicate on their due diligence policies and regularly monitor its effectiveness.

Additionally, EU governments will be required to create practical portals, dedicated to companies’ due diligence obligations, that will provide information on content and criteria, related Commission guidance and information for stakeholders.

Penalties for not following the EU’s new rules

According to the new rules, EU countries will appoint supervisory authorities to ensure firms adhere to their new obligations.

These authorities operating within the European Network of Supervisory Authorities, can exchange best practices; collaborate at the EU level; conduct inspections and investigations; and impose penalties, including fines of up to 5% of a company’s net worldwide turnover as well as the public “naming and shaming” of non-compliant firms.

Companies will be liable for breaching due diligence obligations, which means victims will have the right to compensation for damages. To motivate companies, MEPs said compliance with due diligence obligations can be used as part of the award criteria for public and concession contracts.

The Commission proposal was initially presented on 23 February 2022, following which the Federation of the European Sporting Goods Industry (FESI) and the European Environmental Bureau (EEB) called for further improvement by incorporating a set of corporate accountability amendments to safeguard human rights and environmental impact.

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

By Just Style