The EU’s legislative branch, the European Commission, introduced a new directive obliging major companies to check their supply chains for environmental issues. The initiative aims to mitigate negative impacts of business activities on the environment.
The EU has passed a spate of legislation over the previous year aimed at improving and standardising the ESG efforts of major companies. This includes an effort to make ESG disclosures and credit ratings more transparent and consistent in order to ensure that green investments are truly sustainable.
The Commission’s Directive on corporate sustainability due diligence claims that all EU limited liability companies of over 500 employees and over $170 million in net turnover worldwide should perform due diligence every year to ensure their suppliers do not harm the environment. The Directive also aims to help avoid using child or forced labour during business activities.
“Companies have a corporate due diligence duty to identify, bring to an end, prevent, mitigate and account for negative human rights and environmental impacts in their operations, subsidiaries and value chains. In addition, certain large companies need to plan to ensure that their business strategy is compatible with limiting global warming to 1.5°C in line with the Paris Agreement. Directors are incentivized to contribute to sustainability and climate change mitigation goals,” the European Commission said in a statement published on its website.
The Directive also outlines another group of companies, with over 250 employees and more than $45 million of turnover, operating in so-called high-impact sectors such as textiles, agriculture, and extraction of minerals. These companies will also have to carry out such due diligence.
The European Commission claims that the Directive will not affect 99 percent of EU’s companies but will impact around 13,000 large and high-impact EU firms and some 4,000 non-EU firms with operations in the EU.
It should be noted that the European Commission’s proposal will have to gain the approval of the European Parliament and EU member states, which might take months and even a year to move forward.
