STRASBOURG — EU institutions on Thursday backed ambitious rules to compel companies to safeguard the environment and human rights in their supply chains, but a carve-out for financial institutions won by France risks leaving the sector largely unchecked.
The due diligence rules — initially presented by the EU executive in February 2022 — would require EU-based companies to police their global value chains for environmental or human rights risks. They are part of a broader push from Brussels to put a greener and more human face on international business.
“Responsible business conduct is going to become the norm in Europe, and this is a huge milestone,” Lara Wolters, an MEP with the Socialists & Democrats who led work on the file in the European Parliament, told reporters after the deal was struck after some 18 hours of thorny negotiations.
“Abuses such as child labor to extract cobalt [for] smartphones, rainforest degradation for soy ending up in our supermarkets, fruit pickers on European fields, these are just some of the examples of irresponsible business practices that now companies can no longer look away from,” she added.
NGOs welcomed the deal, with Arianne Griffith, corporate accountability lead at Global Witness, calling it a “ground-breaking new law that could finally curb the unchecked power big companies have enjoyed for so long.”
According to Thursday’s agreement — which still contains a host of gaps, meaning details will need to be hashed out in technical discussions — the rules will apply to large companies with more than 500 employees and a net worldwide turnover of €150 million, and to non-EU companies if they have a €300 million net turnover generated in the EU within three years of the rules entering into force.
Companies will have to identify, prevent and put an end to their negative social and environmental impact and that of their partners, from production and transport to design and distribution. They will also be required to adopt a plan to ensure that their business model and strategy is compatible with the Paris Agreement targets to limit global warming.
Off the hook
But here’s the catch: Most of these rules will not apply to financial institutions such as banks and insurers, which experts say play a major role in financing projects that cause social and environmental harm.
In a win for the Council of EU and especially France, negotiators on Thursday agreed to exempt the entire sector from having to ensure that loans or investments are not linked to human rights abuses.
“Together with the liberal French government, the financial lobby has prevailed,” said lawmaker René Repasi, also of the Socialists & Democrats, who led work on the financial provisions of the directive in the Parliament.
“We have missed the opportunity to effectively integrate into EU supply chain law an industry that makes huge profits in the EU single market and plays a key role in respecting human rights and the environment due to its influence on the real economy.”
Paris had led a major push that intensified in recent weeks to ensure the sector does not fall under the rules, causing member countries to revise their initial position just weeks before the final round of negotiations, collectively calling for a carve-out.
While the sector will still have to perform checks on its suppliers and the products it uses, it is exempt from performing due diligence on its clients — something the European Parliament had been pushing for. Instead, the agreement includes a review clause to assess a possible future extension of the rules to the sector.
Manon Aubry, an MEP who led work on the file for The Left, called the coverage of the financial sector in Thursday’s deal “very limited.”
Financial institutions are, however, required to adopt plans to align their business with climate goals — a crucial step, according to Richard Gardiner, EU public policy lead with the World Benchmarking Alliance.
“Big banks and asset managers will now be legally mandated to both adopt and implement a meaningful transition plan,” he argued, pointing out that the law will “override current voluntary net zero pledges, which have largely failed, and fast track the sector to align with the Paris Agreement.”
Lobby group Insurance Europe was generally pleased with the agreement. Philippe Angelis, manager at the lobby group, said it “recognises the challenges and risks of including financial services’ downstream value chain and we welcome the decision to exclude those for now.”
The European Banking Federation declined to comment and the European Fund and Asset Management Association did not respond to a request for comment by the time of publication.
Bjarke Smith-Meyer contributed reporting.
