MEPs’ proposal on Corporate Sustainability Due Diligence Directive

It was reported today, 25 April 2023, that MEPs in the European Parliament's Legal Affairs Committee have adopted their position (the MEP proposal) on the proposed Corporate Sustainability Due Diligence Directive (the Directive) and put forward some significant amendments to the Commission's proposed draft.

Background

The Directive is intended to foster sustainable and responsible corporate behaviour throughout global value chains, by requiring companies to identify, and where necessary prevent, end or mitigate the adverse impacts of their activities on human rights (such as child labour and exploitation of workers) and the environment (for example pollution and biodiversity loss).

MEP proposal

In an expansion of the Commission's proposals, it is being reported that MEPs intend that the Directive will apply to all EU-based companies with more than 250 employees and a worldwide turnover higher than €40m (regardless of whether the EU company operates in a high-impact sector and in contrast to the Commission's proposed thresholds of 500+ employees and turnover in excess of €150m). Companies which do not fulfil those criteria, but which have more than 50 employees and more than €8m worldwide net turnover and which operate in one or more high-impact sectors, or are publicly listed on the stock exchange, will also eventually be required to comply with the Directive. The rules would also apply to non-EU companies with a turnover higher than €150m if at least €40m was generated in the EU.

It is further reported that under the MEP proposal, non-compliant companies would be liable for damages, with Member States required to establish supervisory authorities with the ability to impose fines for non-compliance of no less than 5% of net worldwide turnover. Non-compliant third-country entities would also be banned from public procurement within the EU.

Welcoming this step, rapporteur Lara Wolters commented: "I'm delighted that a broad consensus has been achieved in the committee to put forward binding rules to make business respect people and planet. There is a clear will to align this directive with international best practices, and to ensure companies must do due diligence in continuous dialogue with those affected by harm, and remedying it when it occurs. If companies don't comply, they should face sanctions, and if harm occurs that they should have avoided, then victims should be able to get justice in court."

In a change from the Commission's original proposal, MEPs want companies to have to engage more substantively with people affected by their actions, including human rights defenders and environmental activists, such as through grievance mechanisms, and to monitor the effectiveness of their due diligence policy. To help combat climate change, all company directors would be obliged to implement a transition plan compatible with a global warming limit of 1.5°C. Under the MEP proposal, directors of companies will be directly responsible for this step, which in turn will affect the setting of their variable remuneration, such as bonuses.

The adopted text has not yet been published. When we have had sight of the adopted text, we will prepare a further update on this important initiative. For more on the background to the Directive, see our previous publication.

Next steps

Once the Parliament adopts its mandate in an upcoming plenary, negotiations with the Council on the final text of the legislation can start. It is being reported that, once the Directive is adopted, the new obligations would apply after three or four years depending on the size and turnover characteristics of the entity in question; a longer adoption timeframe than that proposed by the Commission.

For more information in relation to this topic, please contact Liam Murphy, Knowledge Lawyer, Anne O'Neill, Senior Knowledge Executive or any other member of ALG’s Corporate and M&A team.

Date published: 26 April 2023