European Parliament Passes Legislation on Corporate Due Diligence

The European Parliament passed a series of new rules requiring EU-based companies to identify and, where needed, end the "negative impact of their activities on human rights and the environment." Such activities include child labor, slavery, pollution and environmental degradation. In addition, these companies would have to "monitor and assess the impact on their value-chain partners," including suppliers, distribution and storage, the parliament said June 1.

The rules apply to companies with over 250 employees and a global turnover over $42.97 million and parent companies with over 500 employees and turnover over $160 million. Also included are non-EU companies with a turnover above $160 million if at least $43 million of it was generated in the EU.

The parliament would further require companies to implement a transition plan to reduce global warming to 1.5 degrees Celsius and to engage with the parties affected by their actions, including activists. Companies must also "introduce a grievance mechanism and regularly monitor the effectiveness of their due diligence policy."

The penalties for noncompliance include sanctions such as "naming and shaming," taking a firm's goods off the market or fines of at least 5% of the net global turnover. Non-EU companies found to be noncompliant would be barred from public procurement. The rules would take effect after three or four years, depending on the company's size. With the passage of the rules, negotiations now begin with member states on the final text.

Markus Beyrer, director-general of business lobbying group BusinessEurope, said the parliament "failed to deliver workable due diligence rules." Beyrer argued that "over-prescriptive rules of purely punitive nature that do not distinguish between procedural mistakes and actual damages remain a concern in the Parliament’s position."