Lawmakers in the European Parliament voted 366-225 on Thursday on new rules requiring companies to identify and address the impact of their activities and value chains on human rights and the environment, as well as a new requirement to adopt and implement climate transition plans.

The new rules form Parliament’s negotiating position on the EU Commission’s proposed corporate sustainability due diligence directive (CSDDD), released in February 2022. The EU Council adopted its position on the directive in December 2022.

The Commission’s proposed directive would require companies to integrate due diligence into policies, identify actual or potential adverse human rights and environmental impacts, prevent or mitigate potential impacts and end or minimize actual impacts, and would apply to company operations, subsidiaries and value chains.

The new rules initially apply to companies with over 500 employees and more than €150 million in revenues, extending later to companies with over 250 employees and €40 million revenue. Non-EU companies with revenues earned in the EU above the thresholds would also be required to follow the rules.

One of the most significant changes adopted in the EU Parliament’s position compared to the initial proposal is the requirement by companies covered by the directive to implement climate transition plans aligned with the Paris Agreement objective to limit global warming to 1.5°C, encompassing Scope 1, 2 and 3 emissions. Companies will also be required to perform due diligence on climate impacts, also aligned with Paris Agreement goals.

In addition to requiring climate transition plans, the rules would also require companies with more than 1,000 employees to tie performance on the plan’s targets to directors’ variable compensation.

In a press conference following the vote, Lara Wolters, rapporteur on corporate sustainability called the inclusion of the climate transition plan requirement “groundbreaking,” adding, “that’s the piece that was missing after the CSRD,” referring to the EU’s upcoming sustainability reporting requirements for companies.

Parliament’s position would also apply more broadly than the proposal adopted by the EU Council, by including financial services providers such as asset managers and other investors, while Council’s position left the decision to include these companies up to member states.

The new rules would also include sanctions and supervisory mechanisms for companies that fail to comply, which could include having the company’s goods taken off the market, the imposition of fines as high as 5% of the company’s global revenues, or – for non-EU companies – bans from public procurement in the EU.

Wolters said:

“The European Parliament’s support is a turning point in the thinking about the role of corporations in society. A corporate responsibility law must ensure that the future lies with companies that treat people and the environment in a healthy way – not with companies that have made a revenue model out of environmental damage and exploitation.”