EU Proposes New Law To Make Sure Suppliers Comply With ESG Standards

The European Commission, the legislative branch of the European Union, proposed on Wednesday a new directive to have the largest firms operating in the bloc check their supply chains for environmental issues and prevent, mitigate, or end adverse impact their activities have on the environment.

Under the proposed Directive on corporate sustainability due diligence, all EU limited liability companies of substantial size and economic power, that is over 500 employees and over $170 million (150 million euro) in net turnover worldwide, will have to perform due diligence annually to make sure their suppliers do not harm the environment or use child or forced labor.

Another group of companies, with over 250 employees and more than $45 million (40 million euro) of turnover, operating in defined high-impact sectors such as textiles, agriculture, and extraction of minerals, will also have to carry out such due diligence. The proposal 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 European Union.

“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 own operations, subsidiaries and value chains. In addition, certain large companies need to have a 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 incentivised to contribute to sustainability and climate change mitigation goals,” the European Commission said.  

“With these rules, we want to stand up for human rights and lead the green transition,” EU Commissioner for Justice Didier Reynders said in a statement.

The European Commission’s proposal will have to gain the approval of the European Parliament and EU member states, which could take months and even a year.

By Tsvetana Paraskova for Oilprice.com

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