European Council, Parliament Agree on New Supply Chain Diligence Rules

The European Council and the European Parliament on Dec. 14 negotiated new rules that will make up its upcoming corporate sustainability due diligence directive, which will require companies to conduct specific due diligence on their supply chains to address various environmental and social concerns, including forced labor risks (see 2202230073). The “provisional” agreement still needs to be formally adopted by both the council and the parliament before it takes effect.

The two sides last week negotiated the scope of the directive, penalties for violators and various definitions under the law, including a list of specific activities that qualify as human rights abuses. The European Parliament said the new directive will set “obligations” for companies to “mitigate their negative impact on human rights and the environment,” including “child labour, slavery, labour exploitation, pollution, deforestation, excessive water consumption or damage to ecosystems.” That includes a requirement for companies to adopt a plan to ensure their “business model and strategy are compatible” with the Paris Climate Accords, the council said.

The directive also will require each EU member state to designate a “supervisory authority” to monitor whether firms are complying with the due diligence requirements, Parliament said. Each authority can launch investigations, and fine non-compliance businesses up to 5% of their “net worldwide turnover.” Other enforcement options may include “naming and shaming” companies that violate the rules.

Lara Wolters of the Netherlands, the parliament's lead negotiator for the directive, called the law a “historic breakthrough.” She said European companies now must be “responsible for potential abuses in their value chain.”

EU-based trade advisers said earlier this year compliance departments should be preparing for a host of new diligence requirements under the law, and that they likely will need to go beyond simply including supply chain certification clauses in their contracts (see 2308310035).