May 3rd 2024



The European Parliament has approved new rules forcing companies to reduce their negative impact on human rights and on the environment. The law applies to companies in the European Union, third countries and parent companies. Companies must create a transition plan that complies with the Paris Agreement and will be liable for damages and can be fined in the event of non-compliance.

The rules apply to companies and parent companies in the Union with more than 1,000 employees and a worldwide turnover of over 450 million euros. They also apply to franchises or licence agreements guaranteeing a common corporate identity, with a worldwide turnover of over 80 million euros if at least 22.5 million euros are from royalties. Third country companies, parent companies and companies with franchise or licence agreements in the EU with the same turnover are also covered by the legislation. These companies must integrate due diligence into their policies, make related investments, seek contractual guarantees from their partners, improve their business plan or provide support to small and medium-sized partner companies to ensure compliance with the new obligations. Companies must also adopt a transition plan to make their business model compatible with the 1.5 °C global warming limit set in the Paris Agreement.

Member States are obliged to provide companies with detailed online information about their due diligence obligations through practical portals containing the Commission’s guidelines. They must also set up or designate supervisory authorities to investigate and sanction non-compliant companies. These include ‘reporting and disclosure’ and fines of up to 5 per cent of the net turnover of companies worldwide. The Commission will set up a European Network of Supervisory Authorities to support co-operation and facilitate the sharing of good practices. Companies are liable for damages caused by failure to fulfil their due diligence obligations and must fully compensate their victims.

‘The Textile and Clothing Association of Portugal (ATP) sees this directive as an opportunity to strengthen the reputation of our industry, demonstrating our commitment to business ethics and environmental protection. We are ready to face the challenges and lead by example,’ says Mário Jorge Machado, president of ATP.

The directive must now be formally approved by the Council, signed, and published in the Official Journal of the EU, and will enter into force after 20 days. Member states have two years to incorporate the new rules into their national legislation.

The new rules (with the exception of reporting obligations) will be applied gradually to EU companies (and those from countries outside the EU that achieve the same turnover in the EU):

– from 2027 – to companies with more than 5,000 employees and a worldwide turnover of over 1.5 billion euros;

– from 2028 – to companies with more than 3,000 employees and a worldwide turnover of 900 million euros;

– from 2029 – to the remaining companies falling within the scope of the directive (including those with more than 1,000 employees and a worldwide turnover of more than 450 million euros).