MEPs on the Legal Affairs Committee adopted with 20 votes for, 4 against and no abstentions new, so-called “due diligence” rules, obliging firms to alleviate the adverse impact their activities have on human rights and the environment, including slavery, child labour, labour exploitation, biodiversity loss, pollution and destruction of natural heritage. The requirement to prevent, end or mitigate their negative effects also concerns companies’ upstream partners working in design, manufacture, transport and supply, and downstream partners, including those dealing with distribution, transport and storage.

Scope and transition plan

The rules will apply to EU and non-EU companies and parent companies with over 1000 employees and with a turnover of more than 450 million euro and to franchises with a turnover of more than 80 million euro if at least 22.5 million was generated by royalties.

Companies will also have to integrate due diligence into their policies and risk management systems, and adopt and put into effect a transition plan making their business model compatible with the global warming limit of 1.5°C under the Paris Agreement. The transition plan should include the company’s time-bound climate change targets, key actions on how to reach them and an explanation, including figures, of what investments are necessary to implement the plan.

Civil liability and fines

Firms will be liable if they do not comply with their due diligence obligations and will have to fully compensate their victims. They will also have to adopt complaints mechanisms and engage with individuals and communities adversely affected by their actions.

Member states will designate a supervisory authority in charge of monitoring, investigating and imposing penalties on companies that do not comply. These can include fines of up to 5% of companies’ net worldwide turnover. Foreign companies will be required to designate their authorised representative based in the member state in which they operate, who will communicate with supervisory authorities about due diligence compliance on their behalf. The Commission will establish the European Network of Supervisory Authorities to support cooperation among supervisory bodies.

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Following the committee vote, lead MEP Lara Wolters (S&D, NL) said:“I’m delighted that a clear majority of Legal Affairs Committee members backed the Due Diligence Directive today. It is high time that this legislation is adopted, to stop corporate abuse and to give companies clarity in what is expected of them. I’m looking forward to the plenary vote and confident that it will be adopted swiftly.”

Next steps

Once formally approved by the European Parliament and the member states, the directive will enter into force on the twentieth day following its publication in the EU Official Journal.

Background

The Commission proposal introduced on 23 February 2022 is consistent with the European Parliament’s 2021 call for mandatory due diligence legislation. It complements other existing and upcoming legislative acts in the area, such as the deforestation regulation, conflict minerals regulation and the draft regulation prohibiting products made with forced labour.