EU adopts position on company human rights and environmental impact operating standards

The European Parliament has confirmed its position for negotiating with member states on critical human rights and environmental impact from companies’ governance (ESG) issues, with industry observers anticipating positive outcomes with legal protection for key cocoa supply chain communities, writes Neill Barston.

As the EU noted, firms will now been required to identify, and where necessary prevent, end or mitigate the negative impact of their activities on human rights and the environment such as on child labour, slavery, labour exploitation, pollution, environmental degradation and biodiversity loss.

The combined proposals that have been put forward on due diligence and environmental protections have gained notable support from organisations including Caobisco European confectionery trade organisation, which has welcomed legal frameworks to underpin the sector’s operations in cocoa farming origin countries including Ghana and Ivory Coast.

Crucially, the parliament added that under the proposed new legislation, businesses will also have to monitor and assess the impact of their value-chain partners including not only suppliers but also sale, distribution, transport, storage, waste-management and other areas.

Notably, the latest rules will apply to EU companies across sectors, including financial services, operating with more than 250 employees with a turnover of over €40 million, and also to those operating with parent companies with 500 staff and revenues above €150 million. As previously noted, last year saw delays reportedly mount up for the proposed legislation due to industrial lobby groups attempting to influence the policy, expressing concern for the impact on major industries.

As part of the new proposed legislation, companies will also have to implement a transition plan to limit global warming to 1.5° and in the case of large companies with over 1000 employees, meeting the plan’s targets will have an impact on a director’s variable remuneration (f.e. bonuses). The new rules also require firms to engage with those affected by their actions, including human rights and environmental activists, introduce a grievance mechanism and regularly monitor the effectiveness of their due diligence policy. To facilitate investors’ access, information about a company’s due diligence policy should be also available on the European Single Access Point (ESAP).

Crucially, the new framework also states that non-compliant companies will be liable for  damages and can be sanctioned by national supervisory authorities, including “naming and shaming”, taking a company’s goods off the market, or fines of at least 5% of the net worldwide turnover. Non-EU companies that fail to comply with the rules will be banned from public procurement in the EU. The new ruling is anticipated to be brought in within the next three to four years, depending on company size.

However, the move did not gain universal support within the European Parliament, with 366 votes cast in favour of adopting the policies, 225 against, and 38 abstentions, reflecting the earlier challenges to the proposals raised last year.

“The European Parliament’s support is a turning point in the thinking about the role of corporations in society. A corporate responsibility law must ensure that the future lies with companies that treat people and the environment in a healthy way – not with companies that have made a revenue model out of environmental damage and exploitation. Most companies take their duty towards people and the environment seriously. We help these companies with this ‘fair business law’. And at the same time we cut off those few large cowboy companies that flout the rules,” noted rapporteur Lara Wolters (S&D, NL) following the plenary vote.