EU Parliament Approves New Supply Chain Sustainability Rules

Members of the European Parliament have today approved the Corporate Sustainability Due Diligence Directive (CSDDD), potentially making corporates in the EU and those doing business with them liable for environmental and human rights violations in their supply chains. Passed during the last plenary session before the European elections, the Directive requires firms to carry out thorough due diligence processes to better guard against environmental damage and breaches of human rights carried out by suppliers.

The CSDDD seeks to clarify expected behaviour and liability by establishing formal requirements that are aligned with international frameworks, such as the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights.

It mandates that large firms embed responsible business practices into their policy and management systems, identify and mitigate adverse impacts on human rights and environment, monitor the effectiveness of measures taken, and publicly  report on their due diligence processes.

Crucially, the CSDDD also requires companies covered by the rules to adopt and implement a climate transition plan in line with the goals of the Paris Agreement.

Companies that fail to meet the requirements set under the directive risk fines of a minimum of five per cent of their global net turnover, which have the potential to run to billions of Euros for larger multinationals.

The version of the Directive backed by the EU Council and approved by MEPs today was subject to 45 days of negotiation, after an initial draft released in January was subject to criticism from some member states who argued it faced an excessive regulatory burden on businesses.

The CSDDD was originally due to cover firms with 500 employees and a turnover of more than €150m, but following tense negotiations the threshold was raised to 1,000 employees and turnovers in excess of €450m. The changes prompted complaints from green groups that the Directive had been watered down.

But following the plenary vote, lead MEP Lara Wolters, hailed the legislation as "a milestone for responsible business conduct and a considerable step towards ending the exploitation of people and the planet by cowboy companies".

"This law is a hard-fought compromise and the result of many years of tough negotiations," she said. "I am proud of what we have achieved with our progressive allies. In Parliament's next mandate, we will fight not only for its swift implementation, but also for making Europe's economy even more sustainable."

The final step of the legislative process will take place at the upcoming Competitiveness Council in late May when EU Ministers are expected to rubber stamp the legal text. After this, the CSDDD will come into force 20 days after its publication in the EU's Official Journal.

After adoption Member states will have two years to transpose the directive into national law. The Directive will then be phased in over five years, with companies with 5,000 employees and €1.5bn turnover subject to its requirements within three years of it coming into force, before the rules are extended to cover firms with 3,000 staff members and over €900m turnover after four years. They will then come into full effect five years after their initial adoption.

For EU firms, the financial thresholds refer to global turnover, whereas those based outside the bloc will be subject to the CSDDD if their turnover within the EU exceeds the thresholds.

"This is an historic day for the EU," said Isabella Ritter, senior EU policy officer at ShareAction. "After years of hard negotiations and compromises, the first EU-wide law on corporate accountability is set to come into force. While we would have preferred a more robust and far-reaching legislation, this is a crucial step towards holding companies accountable for their negative impacts on people and the planet, including child labour, forced labour, environmental degradation and pollution.

"The approval of the CSDDD, the first law of its kind in the EU, marks the beginning of a shift away from business as usual and sets a new standard for corporate responsibility in the EU and beyond. It will empower companies to gain clarity across their value chains and bolster resilience and preparedness for future challenges."

She added that further regulation was on the way that would place even more demanding transparency requirements on businesses. "Looking ahead, the completion of the EU's due diligence framework will require the adoption of accountability rules for financial institutions for their clients' activities, ensuring a more coherent and effective system," she said.

Alexandra Mihailescu Cichon, chief commercial officer at RepRisk, added that the CSDDD fundamentally shifts the regulatory dial away from environmental and human rights pledges, policies, and intentions, and towards meaningful action.

"The CSDDD represents a crucial step towards accountability in the global business ecosystem," she said. "This regulatory milestone is a landmark agreement due to its focus on a company's value chain. It is also a natural extension of years of commitments and voluntary standards and the mainstreaming of topics such as human rights and environmental protection."

Keith Fenner, senior vice president and and EMEA general manager at ESG compliance software provider Diligent, described the announcement as "another milestone" for the EU's growing ecosystem of sustainability regulations.

Yet he warned that while the new regulation will foster greater corporate accountability and supply chain transparency, it would also introduce significant obligations for boards, risk, and compliance teams. For example, he said collecting relevant information across entire value chains and both publicly reporting and maintaining data continuously will pose a "major challenge".

As well as rubber stamping the CSDDD, the European Parliament also today voted in favour of the Commission's proposal for the EU to withdraw from the Energy Charter Treaty (ECT) - an international trade agreement that critics claim protects fossil fuel investments and makes it harder for governments to introduce decarbonisation policies.

Paul de Clerck, economic justice expert at Friends of the Earth Europe, described the news as proof people power can defeat fossil fuel interests. "After years of campaigning, we've successfully lifted the ECT's sword of Damocles threatening EU governments' climate action goals," he said.

Though 11 European countries have announced their exit from the treaty in the past two years, the bloc's decision to leave the Energy Charter Treaty still needs final approval from the EU governments in the Council.

New rules to encourage the reuse and recycling of packaging were also approved by MEPs amid a flurry of green activity. The provisionally agreed rules would introduce new targets to reduce packaging waste, including single use plastics, by five per cent by 2030, 10 per cent by 2035, and 15 per cent by 2040.

Moreover, to reduce unnecessary packaging, a maximum empty space ratio of 50 per cent has been set for grouped, transport, and e-commerce packaging, while manufacturers and importers will also have to ensure that the weight and volume of packaging are minimised. Certain single use plastic packaging types will also be banned from 1 January 2030, under the new rules.

The wave of new environmental regulations are being adopted ahead of European elections which are widely expected to result in a shift in the balance of the European Parliament in favour of nationalist and populist parties that are opposed to more ambitious environmental policies._Business Green