Parliament raises the bar on the due diligence law, but the devil is in the details

Posted on June, 01 2023

In a plenary vote today, the European Parliament steps into the final negotiations of the Corporate Sustainability Due Diligence Directive. It takes a significant stride forward in enhancing the due diligence law and in holding companies accountable for environmental harm and human rights violations.

“MEPs resisted the temptation of short-term political gains and sent a powerful message that companies must be held accountable for the environmental harm they cause. Today's vote represents a significant milestone in our transition to a new era of corporate responsibility in Europe and beyond,“ said Uku Lilleväli, Sustainable Finance Policy Officer at the WWF European Policy Office.

MEPs agreed to require investors and asset managers, alongside other financial institutions, to identify and address sustainability-related harms in their portfolios. However, the text presents inconsistencies, as the value chain scope, defining which business relationships companies should monitor and engage with, entirely excludes the companies and funds that investors finance.

Building on the Commission’s limited list of specific environmental conventions, the Parliament rightfully expanded the definition of environmental harms that companies must consider in due diligence, by introducing broader environmental impact categories[1]. This allows all companies to identify and address environmental risks most relevant to them. Gaps remain, however, as conventions to specify some categories, such as biodiversity loss, were excluded[2].

The Parliament made a step further in accelerating the climate transition by requiring all companies in the Directive’s scope to adopt and implement science-based climate targets and transition plans. Importantly, the position stipulates that companies must incentivise their directors to meaningfully implement the plans by linking their bonuses to sustainability goals.

While acknowledging the progress made in certain aspects of the text, there remains room for improvement in addressing crucial details that hinder the law’s objectives to protect the planet and human rights from harmful business conduct and to support businesses in sustainability pursuits.

Regrettably, MEPs have decided to delay the wider implementation of the Directive until at least 2028, with a review clause to potentially improve the text only in 2029. This is not aligned with the urgency of effectively addressing the climate and environmental crises.

The vote today concluded the discussions in the Parliament and will serve as the starting point for the final negotiation phase between the Commission, Council and Parliament, who aim to finalise the text by late this year or early 2024.

WWF urges Member States and the Commission to improve provisions on financial sector inclusion, environmental due diligence, climate transition plans and director’s remuneration in the final trilogue negotiations, to ensure that the upcoming law will be meaningful for both companies and the planet.

Notes:
[1] In addition to specific international environmental conventions, the Parliament’s position defines the following environmental categories that the companies must consider as they identify and prevent, mitigate or end environmental harms in their operations and value chains:
a) climate change;
b) biodiversity loss;
c) air, water and soil pollution;
d) degradation of land, marine and freshwater ecosystems;
e) deforestation;
f) overconsumption of material, water, energy and other natural resources;
g) harmful generation and mismanagement of waste, including hazardous substances;

[2] An example of an essential convention that was excluded from the list of conventions is the Convention on Biological Diversity, which could specify obligations for companies to conduct due diligence on the conservation and sustainable use of biodiversity, on the ecosystem, species and genetic levels.

Parliament raises the bar on the due diligence law,