On Wednesday, the European Parliament made a significant decision by voting in favor of a new law that mandates larger companies operating within the bloc to scrutinize their supply chains for potential instances of forced labor or environmental harm.
The legislation, known as the Corporate Sustainability Due Diligence Directive (CSDDD), was approved by 374 votes to 235, with 19 abstentions.
The directive imposes fresh obligations on companies to conduct comprehensive audits of both their “upstream” partners involved in design or manufacturing and their “downstream” partners responsible for transportation, storage, and distribution of products.
Critics argue that the directive imposes additional layers of regulatory burden on businesses, potentially resulting in severe penalties, putting European companies at a disadvantage compared to global competitors, and dampening investment in the region.
Despite concerns, the legislation underwent revisions to address worries about excessive bureaucracy raised by certain EU members. Notably, Germany refrained from supporting the directive.
Starting from 2028, the law will be applicable to companies with more than 1,000 employees and a net worldwide turnover exceeding 450 million euros ($480.8 million).
This threshold is adjusted from the initial proposal, which suggested criteria of over 500 employees and 150 million euros in turnover for EU-based companies.
The new law mandates companies to proactively prevent, mitigate, or end any potential or actual harm to human rights and the environment, including issues such as child labor and biodiversity degradation.
Financial institutions will primarily focus on assessing their upstream partners in their due diligence processes. Furthermore, companies are expected to develop strategies outlining their transition toward a low-carbon economy.
