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4th Mar 2024

Analysis

Hits and misses of EU supply-chain due-diligence law

  • The final text is not 'as strong as earlier versions', according to the NGO Anti-Slavery International (Photo: Unsplash)
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The EU has reached a provisional agreement on new rules to hold companies inside and outside the EU accountable for their impact on human rights and the environment — a landmark law (with some gaps at its core), known as the corporate sustainability due diligence directive.

"We celebrate that whenever a company's supplier has labour exploitation in their factory, they will have to take action to stop it or face sanctions," said Lara Wolters (Socialists & Democrats), lead MEP on the file, after the agreement was reached.

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But she added that her group regretted that the financial sector (banks, insurers and asset managers) will not have the same obligations.

The EU Commission first tabled the proposal in February 2022. The final text still needs formal approval from the European Parliament and member states, but the new law could then apply to the largest companies as early as 2027.

Both EU and non-EU companies operating in the single market with at least 500 employees and a turnover of €150m will be subject to the new legislation.

Additionally, companies in high-risk sectors with more than 250 employees and a specified turnover in agriculture, construction, extractive industries or textile manufacturing will also have to comply with these rules.

But not the financial sector, the only industry to be temporarily exempted from human and environmental rights due diligence — partly due to pressure from the French delegation, NGOs complained.

"As a result of France's pressure, the deal does not make financial players accountable for the impact of their investments on human rights and the climate," said Oxfam.

This means that these companies do not have to take responsibility for the negative impacts of their activities, those of their subsidiaries and those of their business partners.

The nature of those impacts can range from water or air pollution, harmful emissions or excessive water consumption to slavery, child labour or labour exploitation.

Yet due diligence requirements are only one of the two main parts of the deal.

Companies must also submit a plan to ensure that their business model is compatible with the Paris agreement on climate change to limit global warming to 1.5°C — this time, this includes the financial sector.

"This law will override current voluntary net zero pledges, which have largely failed, and fast track the sector to align with the Paris agreement," Richard Gardiner, EU policy head at the World Benchmarking Alliance (WBA), told EUobserver.

"After the debacle of COP28, it was vital that EU legislators mandated that companies operating in the EU must put in place a meaningful climate plan," he added.

Moreover, companies with more than 1,000 employees will receive financial incentives for implementing the plan, and compliance with the new rules could be one of the criteria for awarding public contracts.

Didn't survive unscathed

The deal marks a "significant milestone", said Oxfam EU's economic justice policy lead, Marc-Olivier Herman. "But it did not get through unscathed with the regressive business lobby and a group of EU countries led by France and Germany punching holes in the law".

The final text is not "as strong as earlier versions," agreed Sian Lea, business and human rights manager at Anti-Slavery International.

That particular NGO is disappointed that the burden of proof will remain with the (often under-resourced) victims, meaning they will have to take their case to court instead of multinationals — with some additional obstacles to their claims added under German pressure.

"Germany has made it harder for survivors of corporate abuse to stand a chance in court, with the scales tipped in favour of the companies," said Herman.

On the other hand, EU supervisors will have new powers to carry out investigations and inspections, and to impose penalties for breaches of the rules.

This means that national watchdogs will be able to fine companies up to five percent of their net turnover, as well as 'naming and shaming' them [publicly pointing out who has behaved badly or illegally].

"It's hard to imagine that any compliance officers will not take this extremely seriously and this threat should help drive a high level of compliance," said Gardiner.

In his view, the directive provides a sound basis with a series of minimum requirements for member states, which will have the discretion to go further when transposing the legislation into national law.

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