The European Parliament on Dec. 14 agreed on new rules requiring large companies to scrutinize the social and environmental impacts of their supply chain activities more closely.
Under the directive on corporate sustainability due diligence, companies will need to include due diligence protocols that identify and remedy violations in their supply chains, including imported components. The rules will apply to businesses with more than €150 million in global turnover and over 500 employees.
Issues covered by the law include child labor, slavery, labor exploitation, pollution, deforestation, excessive water consumption or damage to ecosystems. Companies also need to adopt plans to show they comply with the Paris Agreement on climate change, through which nations aim to limit global warming to 1.5 degrees C.
The financial sector is temporarily excluded from obligations on the non-climate-related issues.
EU nations will be able to impose penalties on noncompliant companies, including "naming and shaming" and issuing fines of up to 5% of net global turnover.
The obligations will also apply to companies with over 250 employees and with a turnover of more than €40 million if at least €20 million are generated in higher risk activities such as the extraction and trade of mineral resources and the manufacturing of related products; the manufacturing of textiles and clothing; agriculture including forestry and fisheries; or food production. The rules will also apply to non-EU companies.
Europe's solar sector, which relies largely on the import of equipment from China, will face more scrutiny under the new obligations. Companies in manufacturing powerhouse Xinjiang, a region in western China, have allegedly used the forced labor of Uyghur Muslims to make panels and other goods, a practice that China denies.
A potential ban on forced labor is still making its way through the legislative process in Brussels, with policymakers evaluating key points such as the allocation of the burden of proof, or whether companies need to be able to demonstrate the absence of forced labor.
"[T]he burden of proof is a topic that must be handled responsibly," trade group SolarPower Europe said Nov. 27. The association was responding to reporting by French newspaper Le Monde that said the group was lobbying to weaken a potential forced labor ban.
Responsible business now the norm
Under the new directive, companies will have to identify, assess, prevent, mitigate, bring to an end and remedy the negative impact of their activities, the EU said.
To do that, businesses need to make investments, seek contractual assurances from partners, improve their business plan or provide support to their partners. Victims can also sue companies for failures to adhere to the new requirements, and companies need to put complaints mechanisms into place.
Each EU country will appoint a supervisory authority to monitor whether firms adhere to the obligations.
"Responsible business conduct will become the norm in Europe," Lara Wolters, lead member of the European Parliament on the file, said at a press conference Dec. 14. While it will not be possible or easy in every case, companies need to use their power to force change in their supply chain, Wolters said.
The business community supported the introduction of an EU-wide policy, which will help avoid fragmentation of standards, according to EU Commissioner Didier Reynders.
"This agreement is a valuable outcome towards establishing an EU-wide framework for responsible business conduct. We call on negotiators to finalize technical details in time for adoption before the end of this Parliament's mandate," said Julia Otten, senior policy officer at law firm Frank Bold.
The law firm also said excluding the financial sector from part of the directive is "a missed opportunity to foster accountability for human rights violations in connection to the financial sector."
S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.