European Parliament: Large companies face draconian penalties for exploiting workers, directors face bonus cuts for global warming

The European Parliament on Thursday adopted its position for talks with member states on rules for integrating human rights and environmental impact into corporate governance.

According to a statement from the European Parliament, companies will be required to identify, and where necessary prevent, cease or mitigate the negative impact of their activities on human rights and the environment, such as child labor, slavery, labor exploitation, pollution, environmental degradation, and loss of biodiversity. They will also have to monitor and assess the impact of their partners in the value chain, including not only suppliers but also entities related to sales, distribution, transport, storage, waste management, and other areas.

Rules for 250 Croatian companies

The new rules will apply to companies based in the EU, regardless of the sector they belong to, including financial services, with more than 250 employees and a turnover exceeding 40 million euros, as well as parent companies with more than 500 employees and a global turnover exceeding 150 million euros. These rules will also apply to about 250 companies based in Croatia.

The rules will also cover non-EU companies with a turnover exceeding 150 million euros, if at least 40 million euros of that amount was generated in the EU.

Bonus cuts for top directors

Companies will have to implement a transition plan aimed at limiting global warming to 1.5°C, and in the case of large companies with over 1000 employees (of which there are 68 in Croatia), meeting the goals of that plan will affect the variable part of the director’s salary (e.g., bonuses). The new rules also require companies to cooperate with those affected by their actions, including human rights and environmental activists, to introduce a grievance mechanism and regularly monitor the effectiveness of their due diligence policy. To facilitate access for investors, corporate information on the company’s due diligence policy should also be available at a single European access point (ESAP).

Sanctions and supervisory mechanism

Companies that do not comply with the rules will be held liable for damages and may be sanctioned by national supervisory authorities. Sanctions include measures such as public naming, removal of goods from the market, or fines of at least 5% of the company’s net global turnover. Non-EU companies that do not comply with the rules will be banned from accessing public procurement procedures in the EU.

According to the adopted text, the new legal obligations would apply after three or four years, depending on the size of the company. Smaller companies will be able to postpone the application of the new rules for an additional year, according to the statement from the European Parliament. However, before that, negotiations with member states are on the agenda.