Parliament Approves the Corporate Sustainability Due Diligence Directive

The European Commission proposed the directive in February 2022. According to the Parliament's press release, the adverse impacts it covers include slavery, child labour, labour exploitation, loss of biodiversity and pollution.

Which companies are in scope

The rules apply to EU companies and parent companies with more than 1,000 employees and a worldwide turnover above €450 million. They also apply to companies with franchising or licensing agreements in the EU that ensure a common corporate identity, where worldwide turnover exceeds €80 million and at least €22.5 million comes from royalties. Non-EU companies, parent companies and franchise or licensing businesses are caught if they reach the same turnover thresholds within the EU.

What companies must do

In-scope companies must integrate due diligence into their policies, make the necessary investments, seek contractual assurances from partners and improve their business plans, and may need to support small and medium-sized partners. They must also adopt a transition plan to make their business model compatible with the Paris Agreement limit of 1.5°C of global warming.

Enforcement has two strands. Companies will be liable for damage caused by breaches of their due diligence obligations and must compensate victims in full. Supervisory authorities designated by Member States will be able to name and shame non-compliant companies and impose fines of up to 5% of net worldwide turnover.

Timeline

The rules will be phased in. They will apply from 2027 to companies with more than 5,000 employees and a worldwide turnover above €1.5 billion, from 2028 to companies with more than 3,000 employees and €900 million turnover, and from 2029 to all remaining companies in scope.

The Council must now formally endorse the text. The Corporate Sustainability Due Diligence Directive will then be published in the Official Journal and enter into force 20 days later, after which Member States will have two years to transpose it into national law. Groups that expect to be covered can use that period to map their chains of activities and review supplier contracts.

Sources

• European Parliament: Due diligence, MEPs adopt rules for firms on human rights and environment
• European Commission: Just and sustainable economy, Commission lays down rules for companies to respect human rights and environment in global value chains