On 14 December the Council, the European Parliament, and the Commission reached a preliminary agreement and entered the final stage of approval of the corporate sustainability due diligence directive. The directive imposes obligations on companies to identify human rights risks and impacts on the environment and address these risks by mitigating and providing necessary compensation. Companies will be required to include the process of “due diligence” in their operations, policies, and risk-management systems.
The landmark law is significant as it sets out obligations within companies’ value chains, serving as a reminder of the Rana Plaza tragedy 10th anniversary where 1134 workers lost their lives and 2600 workers sustained life-altering injuries. The directive sets out an obligation for large companies to address both actual and potential negative impacts on the environment and human rights within their business operations.
Who does the directive affect?
The directive applies to large EU companies with a turnover exceeding 150 million euros, and smaller companies operating within high-risk sectors – textile, agriculture, mineral resources, and construction. SMEs are not directly impacted but they can become subject to some of the obligations in the value chains.
A highly disputed decision is the exclusion of the financial sector from the obligations to assess the harmful impacts of their investments. Whilst there is a commitment from the European Commission to address this in an additional clause it may take a while before it becomes a reality. Concerning climate change, companies will be required to adopt and implement a climate transition plan following the Paris Agreement.
The directive requires states to establish a supervisory body to oversee companies’ compliance, conduct inspections and investigations, impose fines of up to 5% of global turnover, and publicly name non-compliant entities. Companies breaching their obligations will be liable for damages, enhancing access to justice for vulnerable groups with improved evidence access and reasonable claim submission timelines.
The next step in the process is the formal approval from the relevant institutions. And whilst this process continues we can be confident to say that we are witnessing the formation of “the economy of the future – one that puts the well-being of people and the planet before profits and short-termism” Lara Walters MEP.
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