The European Union (EU) is taking a significant step towards ensuring that businesses operating within its member states adhere to sustainable and ethical practices. On April 25, the European Parliament’s legal affairs committee voted to approve the draft EU corporate sustainability due diligence directive (CSDDD), requiring thousands of large companies to identify and mitigate human rights abuses, such as child labour or slavery, and environmental damage by suppliers.

Under the proposed rules, EU companies with more than 250 employees and a turnover of more than 40 million euros ($44 million) will have to comply with sustainability and ethical guidelines. Non-EU companies operating within the bloc with a net turnover of at least 40 million euros will also be subject to these requirements. However, small and medium-sized companies have been excluded from the scope of the directive, following opposition from center-right parties.

One of the significant measures proposed by the CSDDD is a legal requirement for directors of companies with over 1,000 employees to be responsible for implementing a plan to cut carbon emissions. The member states will have to set out penalties for breaches. The directive is supported by many environmentalists, who see it as a crucial step towards making companies accountable for their carbon footprint.

The financial services sector, initially included as an option in the EU states’ agreement last December, has now been made mandatory. However, there have been concessions for areas like asset management. The inclusion of the financial sector is an essential aspect of the directive, given its impact on climate change.

The CSDDD is expected to be rolled out in phases from around 2030, and lawmakers aim to start negotiations with EU states for a final deal by the end of the year. However, climate lobbyists have expressed their disappointment with the timeline, stating that it may take too long for significant changes to be implemented.

“It’s disappointing that MEPs have backed plans which would mean many of the biggest corporations in the EU wouldn’t have to lift a finger until 2030 – this is time we cannot afford to lose,” said Aurelie Skrobik, corporate accountability campaigner at Global Witness. The CSDDD represents a significant shift towards sustainable business practices and is expected to have far-reaching implications for businesses operating within the EU.

The EU sends a clear message that sustainability is a top priority by ensuring that companies are held accountable for their environmental impact and ethical practices.

The proposed rules will undoubtedly create challenges for many businesses, especially those operating within the financial sector. However, it is essential to recognise that these challenges are necessary to build a more sustainable and equitable future. The EU’s initiative is a step towards creating a world where businesses prioritise sustainability and ethical practices, and we can only hope that other regions will follow suit.