This article is taken from a larger piece written by the Responsible Investor, read the full article here.
1 June 2023, Brussels
Today, the European Parliament gave the green light to a new law that will force companies to ensure their supply chains meet various environmental and human rights standards.
The Corporate Sustainability Due Diligence Directive (CSDDD) got the green light from members of the European Parliament on Thursday with 366 for, 225 against and 38 abstentions.
The road to the directive clearing the parliamentary hurdle has been bumpy. MEPs were voting on a cross-party compromise reached in the parliament's legal committee in April.
The next steps for the CSDDD will be discussions between parliament, the European Council and the European Commission, which are expected to begin in the coming weeks.
Richard Gardiner, head of EU policy at the World Benchmarking Alliance, told Responsible Investor that the vote is another significant step in closing the corporate accountability gap. "With this vote, EU policymakers are recognising that current voluntary codes of conduct are not producing the seismic shift we need to ensure sustainable corporate business practices," he said. "In particular, large investment funds can no longer hide behind their clients and must recognise their global impact. Momentum for hard law is growing and companies and finance alike must be ready for this regulatory shift."
Amandine Van Den Berghe, a lawyer at ClientEarth, agreed. "As controllers of the purse strings, financial actors have huge influence over corporate behaviour," she said. "It is not a bold move to require asset managers and financial institutions to conduct due diligence, it's common sense."
In a press briefing, Lara Wolters, the rapporteur on corporate sustainability, said the inclusion of financial institutions will likely remain a key battleground. "The council's position has been not in line with parliament's, to say the least."
For large companies with more than 1,000 employees, meeting the plan's targets could have an impact on directors' variable remuneration. However, wider proposed rules on directors holding legal responsibility for implementing and overseeing the due diligence process of their companies did not make it through.
Isabella Ritter, EU policy officer at ShareAction, described this as "disappointing". "Having directors' oversight is an important part of responsible business conduct according to international guidelines, and enables companies to be more resilient and efficient," she told RI.
Gardiner echoed this: "Change needs to come from the top down. Without the legal mandate, we will always be lacking real corporate leadership on sustainability." More broadly, Gardiner said Thursday's vote will have wider implications when it comes to the EU's other sustainability initiatives.
"This vote only reinforces the importance of good quality reporting under the upcoming European Sustainability Reporting Standards (ESRS)," he said. "When companies go to carry out their due diligence, they will need in depth and materially relevant data on their supply chain to this.
"In effect, both laws reinforce each other, and this vote pushes the focus to enhance the ambition of the ESRS."
Read the full article from the Responsible Investor, here.