Europe Passes Sweeping Due Diligence Law

Author: Erik Brand, Advisor, External Relations + Stakeholder Engagement

After four years of contentious debate, in May the European Parliament gave its final green light to new due diligence rules that obligate firms to mitigate negative impacts of their businesses on human rights and the environment.

Lawmakers, who approved the Corporate Sustainability Due Diligence Directive with 374 votes for it and 235 against, hope the mandates will curb “slavery, child labor, labor exploitation, biodiversity loss, pollution or destruction of natural heritage.”

The rules require large firms, as well as their “upstream and downstream partners, including supply, production and distribution,” to prevent, end or mitigate their adverse impact on human rights and the environment, according to a parliament press release.

Legal experts interpret that language to include direct and indirect business partners in a given company’s “chain of activities,” whether large or small, upstream or downstream. Initially, the measure will apply to EU companies and parent companies with more than 1,000 employees and a worldwide net sales revenue higher than 450 million euros.

“Although the rules will be phased in over several years, the legislation could bring some significant financial penalties and certainly material risks to businesses relatively soon, no matter where they are domiciled,” said Devry Boughner Vorwerk. “The legislation raises a challenging new bar for corporate officers and business leaders who are increasingly held accountable for sustainability,” she added.

The law will also apply to companies with franchising or licensing agreements in the EU that have net sales higher than 80 million euros, if at least 22.5 million euros was generated by royalties. Non-EU companies, parent companies and companies with franchising or licensing agreements in the European Union reaching the same turnover thresholds in the EU will also be covered.

“These firms will have to integrate due diligence into their policies, make related investments, seek contractual assurances from their partners, improve their business plan or provide support to small and medium-sized business partners to ensure they comply with new obligations,” the parliament’s statement said.

Companies will also have to adopt a transition plan to make their business model compatible with the Paris Agreement’s global warming limit of 1.5°C.

Member states, which will have two years to transpose the new rules into their national laws, will create a supervisory authority to investigate and impose penalties on non-complying firms. Penalties will include being placed on “naming and shaming” blacklists, as well as fines of up to 5 percent of a company’s net sales.

If you have questions about the implications of the new rules for your business, we’d welcome hearing from you. Please get in touch with us here.