The European Parliament has voted for a new law that will require larger companies operating in the bloc to check whether their supply chains are using forced labor or causing environmental damage and to take action if they do.

Why It Matters

EU lawmakers backed the Corporate Sustainability Due Diligence Directive (CSDD) with 374 votes in favor, 235 against, and 19 abstentions.

The directive imposes new requirements for companies to fully audit their "upstream" partners in design or production and "downstream" partners handling transportation, storage, and distribution of products.

Business groups have complained that it introduces more layers of regulatory burden, with potentially harsh penalties, places European companies at a disadvantage compared to competitors, and discourages investment in Europe.

Sanctions include fines of up to 5% of global turnover.

Context

The rules have been watered down to persuade some EU members concerned about overburdening companies with bureaucracy. Germany has still not managed to support it.

The rules, starting in 2028, will apply to companies with over 1,000 employees and a net global turnover of over 450 million euros.

The initial proposal set thresholds for EU companies at over 500 employees and a turnover of 150 million euros.

The law requires companies to prevent, end, or mitigate potential or actual harm to human rights and the environment, such as child labor and biodiversity loss. It also requires the remediation of actual negative impacts caused.

Financial companies will only need to consider upstream partners in their checks. Companies will also need to prepare plans outlining how they will transition to a low-carbon economy. (Photo: Freepik)