The European Parliament has voted in favour of new rules which require companies to consider their impact on the environment and human rights, also introducing a directive for the development of climate transition plans.
The ruling comes as a shift in the EU’s stance on corporate sustainability, placing additional responsibilities on organisations to mitigate their environmental footprint. This move indicates the European Parliament’s ongoing commitment to tackling climate change and enforcing sustainable practices in the business sector.
The directive, known as the corporate sustainability due diligence directive (CSDDD), was first proposed by the EU Commission in February 2022. The directive calls for companies to integrate due diligence into their policies, identify possible or actual harmful environmental impacts and human rights infringements, and take steps to prevent or minimise these. It applies to company operations, subsidiaries and value chains.
Initially, the new rules will apply to companies with over 500 employees and revenues exceeding €150m, and will later include companies with over 250 employees and €40m in revenue. Additionally, non-EU firms generating revenues in the EU beyond these thresholds will also be expected to comply with the new rules.
One key shift in the Parliament’s position is the requirement for businesses to implement climate transition plans in line with the Paris Agreement’s objective of limiting global warming to 1.5°C. This includes due diligence on climate impacts and encompasses Scope 1, 2, and 3 emissions. Furthermore, companies with more than 1,000 employees are expected to link directors’ variable compensation to the success of these climate transition plans.
In a press conference post the voting, Lara Wolters, rapporteur on corporate sustainability, termed the requirement for climate transition plans as “groundbreaking”. She also highlighted that financial service providers, including asset managers and other investors, would be required to comply with the new rules, a decision that deviates from the EU Council’s position.
The legislation also proposes sanctions and supervisory mechanisms for non-compliant companies, including potential removal of a company’s goods from the market, fines up to 5% of the firm’s global revenues, or for non-EU companies, bans from public procurement in the EU.
“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,” Wolters said.
Source: Fintech Global