EU Parliament excludes ‘use’ from due diligence rules before committee vote

The leading legal affairs committee of the European Parliament is set to vote on its position on the proposed corporate accountability rules next week, following an agreement reached by negotiators on Tuesday (18 April).

On the night of 18 April, members of the European Parliament (MEPs) reached an internal agreement on the corporate sustainability due diligence directive, proposed by the Commission in February 2022 to hold large companies accountable for human rights abuses and environmental violations in their value chain.

The meeting allowed MEPs to resolve many contentious points that previously delayed the legal affairs committee’s vote on the file. The vote is now set to take place next week.

‘Use’ out

According to documents seen by EURACTIV, EU lawmakers finally agreed to exclude the downstream use of products or services from the directive’s scope.

The documents show MEPs agreed on the rules to be applied from the production to the sale, distribution and waste management of products or services provided by a company, leaving out due diligence and liability provisions regarding the use of products or services.

Civil society organisations already expressed concerns over such exclusion, seen as a limitation to corporate accountability, while business representatives argued that including it would excessively burden companies.

Broad scope

Compared to the original proposal, the European Parliament wants the rules to apply to a larger number of companies to ensure they conduct risk-based due diligence checks to identify, prevent and mitigate adverse impacts on human rights and the environment through a prioritisation approach.

According to the MEPs, the rules should apply to EU companies with more than 250 employees on average and a net worldwide turnover of more than €40 million and “ultimate parent companies” of a group with 500 employees and a net worldwide turnover of over €150 million. 

The rules would also apply to non-EU companies of the same size, which generated at least €40 million in the Union.

Implementation timeline

At the same time, EU lawmakers introduced a timeline for implementing the rules depending on the size of the companies.

The rules would apply three years after the directive’s entry into force to companies with more than 1000 employees and a €150 million turnover, while they would apply after four years to other companies within the directive’s scope. Companies which do not reach the €150 million worldwide threshold can wait five years before applying the rules.

Harmonisation

The compromise text also introduces a harmonisation provision to ensure a level playing field for companies across the Single Market, with possible changes to the level of harmonisation six years after the directive’s entry into force.

The provision would prevent any member states from introducing more stringent due diligence rules than those provided under the EU directive.

According to Richard Gardiner, EU public policy lead at the World Benchmarking Alliance, this could lead to a “race to the bottom” instead of driving up sustainability performance.

“While we welcome the progress being made by MEPs to reach a deal, the overall purpose of the increased company due diligence must be to ensure a ‘race to the top’ approach,” he said.

“Capping the measures companies are expected to take, via maximum harmonisation, [risks] introducing a “race to the bottom,” he added.

Financial services

As previously reported by EURACTIV, financial services, including asset managers and institutional investors, are included in the directive’s scope.

In the upcoming inter-institutional negotiations, the Parliament will need to find an agreement with EU governments, which agreed to leave it up to member states whether to include financial services in the directive’s scope in their common position in December 2022.

Committee vote ahead

The legal affairs committee is expected to vote on the compromises and adopt its report on 25 April.

This will allow the Parliament to finalise its position on the file during the 31 May – 1 June plenary session before entering into negotiations with member state governments in the EU Council.

[Edited by János Allenbach-Ammann and Alice Taylor]