The European Commission has approved a proposal for a directive on corporate sustainability due diligence, which will establish a common set of rules for companies operating in the EU.

The EU emphasized the "critical role" firms play in fostering a sustainable economy and society, stating that the new directive will "advance the green transition and protect human rights in Europe and beyond.”

Companies will have to do the following in order to comply with the new due diligence requirement: Integrate due diligence into policies; Identify actual or potential adverse human rights impacts in its own operations, subsidiaries and value chain; Prevent or mitigate potential impacts; Bring to an end or minimize actual impacts; Monitor the effectiveness of the due diligence policy and measures; Identify actual or potential adverse environmental impacts in its own operations, subsidiaries and value chain; Establish and maintain a complaints procedure, and Publicly communicate on due diligence.

This means that businesses will be liable for their employees' food, clothing, water, and sanitary needs in the workplace. Companies of a particular size will also be required to develop a plan to guarantee that their business strategy is compatible with the Paris Agreement's goal of limiting global warming to 1.5°C.

Small and medium-sized businesses (SMEs) will be excluded from the directive, but it will have an impact on three types of larger businesses. The first category covers all EU limited liability firms with more than 500 employees and global net revenue of at least £125 million (€150 million).

The second category covers all other limited liability companies with more than 250 workers and net revenue of at least £33 million (€40 million globally) that operate in identified high-impact areas. The restrictions will begin to apply to these businesses two years later than they will to Group 1.

The third category covers all non-EU businesses that generate revenue in the EU and meet the above-mentioned standards.

The new guidelines, according to the commission, are intended to prevent legal fragmentation of due diligence laws across markets and ensure a clearer perspective of a company's activities and supply chain while also creating economic benefits.

The proposal will be presented for approval to the European Parliament and Council. If passed, member states will have two years to transcribe the directive into national legislation and notify the Commission of the relevant texts.

Member states will be responsible for monitoring corporations' compliance with the new standards and may impose penalties or issue orders requiring companies to comply with the due diligence obligation. It will also allow victims to be paid for their losses and hold firms accountable. Victims will be able to file a civil liability suit in front of the appropriate national courts under the new proposal.

The EU Commission says that the new plan will incur costs for companies because they will have to set up and operate due diligence processes and procedures.

Didier Reynders, Commissioner for Justice said that this proposal is a true game-changer in the way corporations manage their commercial activities throughout their worldwide supply chain. They wish to defend human rights and lead the green transition with these rules. They can no longer ignore what occurs further down their value chains. Their economic model needs to change. The market has been gathering momentum in favor of this move, with consumers demanding more environmentally friendly items. He is confident that many business leaders will support this cause.

Thierry Breton, Commissioner for the Internal Market, said that while some European companies are already leaders in sustainable corporate practices, many more have hurdles in evaluating and improving their environmental impact and human rights track record. Companies find it particularly challenging to obtain trustworthy information on their suppliers' operations due to the complexity of global value chains. The fragmentation of national rules stymies progress in implementing best practices. Their plan ensures that large market actors take the lead in minimizing risks across their value chains, while also assisting small businesses in responding to change.

The announcement comes one month after the Competition and Markets Authority (CMA) launched an investigation into environmental claims in the UK fashion retail sector, as more companies claim to utilize "recycled materials" and be more "sustainable."