Governments water down EU directive on corporate due diligence: will affect only large companies

Brussels – At the third attempt, the new European corporate sustainability regulations pass the scrutiny of member countries. But the compromise on the due diligence directive is on the low side: as it stands, the obligation to mitigate adverse impacts on human rights and the environment throughout the supply chain will only apply to companies with more than 1,000 employees and a worldwide turnover of at least €450 million.

To overcome the stalemate on the agreement reached among EU institutions last December 14, the Belgian presidency of the EU Council had to make “important changes” to the original text, meeting “the concerns of state and business.” In the end, a classic Pyrrhic victory took shape today at the Committee of Permanent Representatives of the 27 member countries (COREPER): several governments, including those of Italy and France, were convinced of the directive’s goodness, but at the price of considerably scaling it back.

In the vote submitted to the ambassadors, Germany, Hungary, Czech Republic, Bulgaria, Slovakia, and Lithuania reportedly abstained, while Sweden and Austria placed ballot reservations. Rome and Paris voted in favour, thus blowing up the blocking minority that had twice, on February 8 and 28, prevented confirmation of the interinstitutional agreement.

“In the EU, it matters how products are made,” rejoiced the Belgian EU presidency as he announced the unblocking of the directive aimed at “promoting sustainable and responsible corporate behaviour, and emphasizing human rights and environmental considerations for companies’ operations.” However, the scope for action has shrunk sharply from the text that came out of the trialogues, which imposed ethical and environmental constraints throughout the supply chain for all companies with more than 500 employees and a worldwide turnover of more than €150 million. It had also expanded the same obligations for medium-sized enterprises (with more than 250 employees and a turnover exceeding 40 million euros) in the sectors of production and wholesale trade in textiles, clothing and footwear, agriculture, forestry and fishing, food production and trade in agricultural raw materials, mining and wholesale trade in mineral resources or manufacture of related products, and construction.

In the face of the resistance expressed on February 28 by 14 national governments (Sweden, France, Italy, Germany, Bulgaria, Slovakia, Hungary, Luxembourg, Estonia, Finland, Lithuania, Czech Republic, Malta, and Austria), the EU Council was forced to propose raising the thresholds for applying the rules from 500 to 1,000 employees and from 150 million to 300 million in turnover, cashing in on Helsinki’s endorsement. However, in an effort to secure an agreement before today’s meeting, the Belgian presidency circulated a new compromise text in which the minimum turnover for the application of the directive was raised to 450 million.

Palazzo Chigi defined it as a “balanced and effective” text in a note, “which concentrates burdens on large companies that are better able to monitor their supply chains and contribute to the mitigation of the effects of economic activities on climate change, as well as to the protection of the human rights of people affected by the company’s activities.”

Not only small and medium-sized companies are entirely exempt from the obligations, but exceptions also apply to a good chunk of what can be called, for all intents and purposes, large companies. For example, the famous Italian cosmetics and perfumery brand Kiko S.p.A., owned by the Bergamo-based Percassi Group, according to the rankings related to 2022 compiled by Quotidiano Nazionale, has a turnover of €405 million. It would thus be exempt from control obligations over its supply chain, assuming the text of the European directive, which will have to go back to the Eurocamera for final approval, is confirmed by MEPs despite the substantial corrections made by the council when the agreement had already been reached.