The European Parliament voted on June 1st on a proposed directive that enforces tighter regulations on companies regarding their climate impact. The vote – 366 for and 225 against, establishes a “duty of corporate due diligence” which means companies will be required to identify and address the impact of their activities and value chains on human rights and the environment, as well as adopt and implement climate transition plans.
The proposed directive initially applies to companies with over 500 employees and more than €150 million in revenues. It will extend later to include companies with over 250 employees and €40 million in revenue. Non-EU companies with revenues earned in the EU above the thresholds would also be required to follow the rules.
Under the regulations, companies will also have to terminate, prevent, mitigate, and take responsibility for any climate impact or negative impacts on human rights arising from their operations, subsidiaries, and value chains.
The regulation includes sanctions and supervisory mechanisms for companies failing to comply. Some of them are taking the company’s goods off the market, and fines that are 5% of the company’s global revenues. For non-EU companies sanctions include bans from public procurement in the EU.
Along with identifying and addressing their negative environmental impact, companies must also develop a plan to ensure that their business strategy aligns with the Paris Agreement’s 1.5°C goal. If their climate impacts are identified as a principal risk or impact from their operations, they will also have to have emissions reduction objectives. Companies with more than 1,000 employees are obligated to tie the performance of the plan to directors’ variable compensation.
European courts reserve the right to hold companies accountable for failing to fulfill their obligations, regardless of where the environmental violations occurred globally.
The proposed directive also includes companies from the financial sector like asset managers and other investors. As the US financial sector has been worried about those rules that go further than their national regulations, negotiations between EU institutions are starting now.
The vote from the European Parliament is positive signal regulations are strengthening going forward for large emitters. That means they will be forced to start taking serious big steps in changing their business models so the world can finally move forward from living with environmental degradation caused by human activities.