Lawmakers in the European Parliament have voted in favour of new ‘groundbreaking’ draft rules requiring companies to take responsibility for the impact of their operations and value chains on human rights, the environment, and climate change.
The vote on the proposed draft of the corporate sustainability due diligence directive (CSDDD) in the EU Parliament resulted in a majority of 366-225. This established the Parliament’s stance on the directive introduced by the EU Commission in February 2022.
The directive requires large companies to include due diligence in their policies, identify and address any negative impacts on human rights and the environment, and take steps to prevent or lessen these effects. It applies not only to the companies themselves, but also to their subsidiaries and supply chains.
“With this vote EU policy makers are recognising that current voluntary codes of conduct are not producing the seismic shift we need to ensure sustainable corporate business practices,” said Richard Gardiner, head of EU policy at World Benchmarking Alliance.
Initially, the new rules will apply to companies with over 500 employees and revenues above €150 million. This will eventually expand to include companies with more than 250 employees and revenues exceeding €40 million. Non-EU companies earning revenues within the EU above these thresholds will also be subject to these rules.
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One significant change made by the EU Parliament is the requirement for companies covered by the directive to create climate transition plans aligned with the goals of the Paris Agreement. These plans aim to limit global warming to 1.5 °C and cover emissions from scope 1, 2, and 3 sources. Companies will also be required to conduct due diligence on climate impacts to ensure alignment with the Paris Agreement’s objectives.
Additionally, companies with over 1,000 employees will need to link their performance on the climate transition plan targets to the variable compensation of directors.
Following the vote, negotiations with EU member states will begin later this month. These negotiations will focus primarily on disagreements around the scope of the new rules and the timeline for their implementation. For instance, the Parliament wants to include financial services, while EU states want to give member states the choice to apply the law to the financial sector.
For more on the CSDDD, please see our explainer below:
