European Parliament approves draft law to improve environmental, social practices of supply chains

The European Parliament has voted in favour of a draft law to ensure large companies crack down on suppliers not following certain rules in terms of their social and environmental practices.

The Corporate Sustainability Due Diligence Directive (CSDDD) addresses areas including child labour, slavery, labour exploitation, pollution, environmental degradation, and biodiversity loss.

“Companies will be required to identify, and where necessary prevent, end or mitigate the negative impact of their activities” in such areas, the European Parliament announced in a press release.

“They will also have to monitor and assess the impact of their value-chain partners including not only suppliers but also sale, distribution, transport, storage, waste-management, and other areas,” it said.

Who does it apply to?

The rules would apply to all EU-based companies with more than 250 employees and a global turnover of over 40 million euros, as well as parent companies with over 500 employees and a worldwide turnover of more than 150 million euros.

Additionally, the rules would apply to non-EU companies with a turnover higher than 150 million euros if at least 40 million euros of that is generated within the EU.

On June 1, a total of 366 members of the European Parliament (MEPs) voted in favour of the new rules, while 225 voted against and 38 abstained.

New sustainable push

Additionally, the CSDDD would require companies to introduce a transition plan aligned with the Paris Agreement objective to limit global warming to 1.5C. For companies with over 1,000 employees, meeting targets will have a direct impact on directors’ variable compensation.

“The new rules also require firms to engage with those affected by their actions, including human rights and environmental activists, introduce a grievance mechanism and regularly monitor the effectiveness of their due diligence policy,” The European Parliament said.

Companies not following the directive’s rules would be liable for damages and could be sanctioned by national supervisory authorities. Sanctions include ‘naming and shaming’, taking the company’s goods off the market or fines of at least 5 percent of their net worldwide turnover.

For companies outside of the EU, they would face being banned from public procurement in the EU.

What happens next?

Now that the European Parliament has voted in favour of the draft law, it will begin its negotiations with member states on the final text of the legislation. Member states already adopted their position on the draft directive in November 2022.

Commenting on the results of the vote, rapporteur Lara Wolters, a Dutch politician, commented: “The European Parliament's support is a turning point in the thinking about the role of corporations in society.

“A corporate responsibility law must ensure that the future lies with companies that treat people and the environment in a healthy way - not with companies that have made a revenue model out of environmental damage and exploitation.

“Most companies take their duty towards people and the environment seriously. We help these companies with this ‘fair business law’. And at the same time we cut off those few large cowboy companies that flout the rules.”