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Europe: MEPs adopt directive on corporate sustainability due diligence

On June 1, 2023, Members of the European Parliament (MEPs) voted to adopt the proposal for a directive on corporate sustainability due diligence and amending the whistleblowing directive.

Due diligence

In particular, companies will be required to identify, and where necessary, prevent, end, or mitigate the negative impact of their activities on human rights and the environment, such as on child labor, slavery, labor exploitation, pollution, environmental degradation, and biodiversity loss. Likewise, under the directive, companies will have to monitor and assess their value chain partners including not only suppliers, but also sales, distribution, transport, storage, waste management, and other areas.

Scope

Notably, the directive will apply to EU-based companies with more than 250 employees and a worldwide turnover of over €40 million, as well as to parent companies with over 500 employees and a worldwide turnover of more than €150 million. Non-EU companies with a turnover of more than €150 million, if at least €40 million was generated in the EU, are also subject to the directive.

Director's duty of care

Specifically, the directive requires companies to implement a transition plan to limit global warming to 1.5°C, and where companies have over 1,000 employees, the plan's targets will impact director's variable remuneration (e.g. bonuses)

Sanctions

Non-compliant companies under the directive may be sanctioned by a national supervisory authority. Sanctions include measures such as 'naming and shaming,' taking a company's goods off the market, or fines of at least 5% of annual worldwide turnover.

Notably, non-EU companies found to be non-compliant with the directive may be banned from public procurement in the EU.

Entrance into force

The directive provides that new obligations apply after three or four years, dependent on company size, and that smaller companies may be able to delay the application of the directive by one year.

You can read the press release here and the directive here.