EU Agrees on Due Diligence Obligations for Big Businesses
The European Union has reached a provisional deal requiring large companies operating within the bloc to identify and address adverse environmental and human rights impacts in their supply chains.
Lawmakers from the European Council and European Parliament spent all of Wednesday and part of Thursday morning hashing out the details of the corporate sustainability due diligence directive, or CSDDD, which will oblige businesses of a certain size and profitability to grapple with harmful practices such as child labor, forced labor, rampant pollution, deforestation, excessive water consumption and ecosystem damage.
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Businesses will have to “integrate so-called ‘due diligence’ into their policies and risk-management systems, including descriptions of their approach, processes and code of conduct,” the European Parliament said in a statement. Firms, including those in the financial sector, will also have to adopt a plan ensuring that their business models align with limiting global warming to 1.5 degrees Celsius above pre-industrial levels.
The rules, which now have to be endorsed and formally adopted by the European Council and European Parliament before they come into force, likely sometime in 2024, will target EU and parent businesses with more than 500 employees and a net global turnover of 150 million euros ($163 million). They’ll also apply to companies with more than 250 employees and a net global turnover of 40 million euros ($44 million) if they derive at least 20 million euros ($22 million) from high-risk sectors such as the production and trade of textiles, clothing, footwear, minerals and raw agricultural materials. For non-EU companies, the CSDDD will apply if they have a net global turnover of 300 million euros ($330), albeit three years after it comes into effect.
Companies, the European Parliament said, will have to “identify, assess, prevent, mitigate, bring to an end to and remedy” both their negative impact and those of their upstream and downstream partners, including production, supply, transport and storage, design and distribution. To do so, they’ll 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,” it added.
Members of the European Parliament (MEPs) determined that businesses will have to “meaningfully engage” with those affected by their actions, establish a complaints mechanism, communicate their due diligence policies and regularly monitor their effectiveness. Each member country must also designate a supervisory authority to monitor whether companies are meeting these obligations, launch inspections and investigations wherever necessary and impose fines of up to 5 percent of a non-compliant company’s net worldwide turnover.
“This law is a historic breakthrough,” Dutch politician and lead MEP Lara Wolters, who had been shepherding the directive, said after the negotiations ended. “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 well-being of people and the planet before profits and short-termism.”
While civil society groups celebrated some of the wins they have fought for—those seeking justice, for instance, could face fewer obstacles when dealing with courts, and victims of abuses will have the right to be compensated for damages—“some important battles were lost along the way,” Sian Lea, business and human rights manager at Anti-Slavery International, said in a statement, noting a “disappointingly low number” of companies that will be required to comply with the law, along with a carve-out—if temporary—for the financial sector to conduct due diligence.
Hannah Storey, policy advisor of business and human rights at Amnesty International, agreed that exemptions for the financial sector mean that investors could “continue to fund projects which harm people and planet.” She also pointed out that the CSDDD applies only to “very large” companies, meaning “many others will be able to continue harming human rights unchecked.”
“Given the significant role some financial actors play in human rights and environmental injustices, it is a shame to see the financial sector is currently exempt from the scope, but it is reassuring to see there will be a review clause—fingers crossed for [its] inclusion ultimately,” Philippa Grogan, policy, fashion and textiles consultant, at Eco-Age, a London-based sustainability agency, told Sourcing Journal.
Grogan’s mood is more anticipatory than anything. “As a set of rules, the CSDDD stands to reshape corporate responsibility across a wide range of sectors,” she said. “By strengthening due diligence measures and embedding human rights and environmental protection into corporate governance, the CSDDD takes aim at many of the social and environmental justice issues folk like us have been working on for a long time—and that is really exciting.”
Still, others could not help but lean into their disappointment.
“Today is a dark day. Despite the historic opportunity, the negotiators agreed that financiers must be allowed to freely violate human rights and worsen the already poor health of the ecosystems,” Uku Lilleväli, sustainable finance policy officer at World Wildlife Fund Europe, said in a statement. “The deal is an insult to people and communities suffering from the severe harms that EU financiers are contributing to globally. By fully exempting financial activities from due diligence obligations, the agreement completely ignores finance as a key driving force of today’s economy, thereby severely weakening the impact of the directive. The deal also deprives the financial sector of the opportunity to foster more informed, risk-resilient financial decisions.”
Lilleväli allowed, however, that requiring companies to not only report but also implement their climate plans could be “the defining moment in alleviating corporate impacts on climate change.” At the same time, by defining environmental impacts as violations of a “narrow set” of international treaties rather than wide impact areas, negotiators have made it “difficult, if not impossible to address, for instance, air, water or soil pollution from chemicals used in the fashion, textile, mining, agriculture or other industries,” he said.
On LinkedIn, Auret Van Heerden, founder and CEO of human-rights consultancy Equiception, and former advisor at the NYU Stern Center for Business and Human Rights, pondered the larger implications of the news. “The era of voluntary standards is over,” he said. “We have definitively entered the era of mandatory human rights and environmental due diligence.”
The directive is not only a step up from the EU’s existing corporate social responsibility reporting directive, or CSRD, said Kenya Wiley, a fashion law professor at Georgetown University, but it also provides an opportunity for brands and retailers to “truly connect their sustainability, equity and inclusion goals on a global level.”
“While the CSRD focuses on transparency and reporting, the CSDDD addresses action steps to help transform fashion’s upstream and downstream activities for both EU and non-EU companies,” she told Sourcing Journal. “And it’s the actions throughout the supply chain and fashion’s talent pipeline—including in materials, manufacturing, waste avoidance and circularity—that will lead to positive, long-term change.”
National rules for some of the directive’s stipulations already exist in certain countries. The idea behind the CSDDD, however, is to create a “harmonized legal framework,” per the European Commission, providing “legal certainty and [a] level playing field” even though it may rankle firms that have home offices outside the EU but conduct significant business within the bloc.
“France and Germany already had such domestic laws,” Spanish politician Adrian Vazquez, Renew Europe’s negotiator for the text, said in a statement. “The Netherlands and other EU countries were considering introducing some, too. It was high time we gave EU-wide rules to provide legal certainty to EU businesses operating across borders. The new rules will also apply to American, Chinese or Indian companies operating in the EU market.”
