EU law would require companies to identify rights, environmental impacts

Companies in the European Union will soon have to meet stronger reporting requirements for sustainability and workers' rights in their global supply chains, the European Commission announced Feb. 23 while separately proposing a ban on imported products made using forced or child labor.

Under the so-called corporate sustainability due diligence directive, large businesses will be required to identify and prevent adverse impacts of their activities on human rights and the environment, the commission said. The policy covers workers' rights, human rights and environmental issues such as pollution and biodiversity loss and also applies to supply chains within the EU.

"We can no longer turn a blind eye on what happens down our value chains," EU Commissioner for Justice Didier Reynders said Feb. 23. "We need a shift in our economic model."

Some companies have already enhanced transparency on these issues, Reynders noted, but more comprehensive action is needed and will not be achieved with voluntary action. "This proposal is necessary because we need to avoid fragmentation," the commissioner said. "We need legal certainty, and it's important to create a level playing field."

The law will apply to EU-registered companies with more than 500 employees and a global turnover of more than €150 million. In sectors defined as high-risk for environmental and human rights breaches — including textiles, mining and agriculture — the threshold is €40 million for companies deriving more than half of their turnover from those activities and includes businesses with 250 employees or more.

The scope extends to non-EU companies with turnover generated in the EU aligned to either of those thresholds, though small and medium-sized enterprises are not covered.

EU companies in the larger category, referred to as Group 1, will also need to align themselves with the Paris Agreement on climate change, which means their strategies are compatible with limiting global warming to 1.5 degrees C.

Company directors will be responsible for overseeing the implementation of the due diligence measures, and EU member states will appoint national administrative bodies to supervise adherence to the rules, imposing fines in cases of noncompliance. Victims of breaches can take legal action.

The law needs to be ratified by the European Parliament and the European Council, after which EU nations will have two years to transpose it into national legislation.

Tick-box or burden?

The commission's proposal reflects a growing trend of companies and their directors factoring in human rights and climate change implications when making business decisions, according to Guillaume Croisant, managing associate at law firm Linklaters in Brussels.

"The proposal goes further by placing responsibility on companies to adopt a plan to ensure that their business model and strategy align with the Paris Agreement," Croisant said in an email. "Where climate change is identified as a principal risk on the company's operations, this action plan will have to include emission reduction objectives."

However, while "an important piece of the corporate sustainability puzzle," there is a risk that the commission's plan does not have enough teeth to focus accountability on decision-makers, said Julia Otten, policy officer at law firm Frank Bold. The commission "risks proposing a default solution to companies that relies on tick-boxing and pushes the responsibility further down the supply chain," Otten said via email.

Lobby group BusinessEurope pushed back on the proposal, saying it hampers European companies' global competitiveness. "This proposal adds to the already excessive cumulative burden imposed on European business over the last years. It is unrealistic to expect that European companies can control their entire value chains across the world, including 'indirect' third-party suppliers or even customers," the organization said in a statement Feb. 23.

Ban on forced labor

Separate from the due diligence law, the European Commission will legislate for a ban on products made using forced or child labor from its single market, the organization said Feb. 23. The instrument, presented in the Communication on Decent Work Worldwide, will also cover goods produced inside the EU. Details on the ban's design are pending.

The move follows the introduction of a ban on all products imported from the Chinese region of Xinjiang by the U.S. government in December 2021, which applies unless companies can prove an absence of forced labor. A spokesperson for the Chinese Mission to the EU said Feb. 21 that the accusation of forced labor in Xinjiang has "no factual basis and is a lie fabricated by anti-China forces."

The U.S. law disrupted the country's solar industry, which draws many of its imports from Xinjiang, a hub for solar panel manufacturing. While it could be years before a ban impacts Europe's solar industry, Walburga Hemetsberger, CEO of trade association SolarPower Europe, welcomed the commission's efforts to tackle forced labor.

"Ensuring human rights are respected and addressing the global climate challenge go hand in hand. This will be achieved with well-designed, responsible, and end-to-end supply chain traceability systems across the economy, including for the solar sector," Hemetsberger said in a Feb. 23 statement.

"Such a system will allow solar power to play its leading role in the necessary energy transition, while ensuring no products made with forced labor are able to enter the European solar supply chain," Hemetsberger added.