Preventing backsliding on corporate sustainability
The EU’s proposed Directive on Corporate Sustainability Due Diligence aims to advance the green transition and protect human rights. But it has faced significant opposition amid a general backsliding on sustainability measures in Europe.
On 15 March, the EU Council approved the bloc’s proposed Corporate Sustainability Due Diligence (CSDDD or the ‘Directive’). The road to approval had been more difficult than expected, with some EU Member States expressing last minute opposition. The proposed Directive will now move to the EU Parliament for approval before becoming law, potentially before the parliamentary elections in June.
The proposed Directive, first adopted by the European Commission in February 2022, was progressing steadily through the approval process until earlier in 2024, when Germany signalled its opposition. Several other EU Member States followed suit, leaving the Directive in a state of flux until the EU Council’s approval was given in mid-March.
Duty-bound
The CSDDD would establish a corporate due diligence duty that focuses on negative human rights and environmental impacts found in a company’s operations, its subsidiaries and its value chains. It builds on the UN Guiding Principles on Business and Human Rights and the Organisation for Economic Co-operation and Development’s Guidelines for Multinational Enterprises on Responsible Business Conduct.
To begin with, the duty would apply to large EU limited liability companies with more than 500 employees and a worldwide turnover of net €150m or more. The rules would also apply to non-EU companies that generate the same turnover value in the bloc three years after the Directive enters into force. After two years of implementation, the rules would apply to smaller companies – with more than 250 employees and a net turnover of €40m or more – that operate in what the EU considers to be high-impact sectors, such as textiles, agriculture and mineral extraction.
Contrary to the views of some national leaders, harmonising legislation would lessen the administrative burden for companies operating in Europe
Under the CSDDD, in-scope organisations would be required to identify, account for, mitigate, prevent and bring to an end their negative environmental and human rights impacts. They’d need to establish and maintain a complaints procedure and publicly communicate on due diligence. Certain large companies would also be mandated to ensure their strategy is compatible with limiting global warming to 1.5 degrees Celsius, in line with the Paris Agreement.
The CSDDD would introduce duties for the directors of in-scope EU companies. These would include setting up due diligence processes and overseeing their implementation, in addition to integrating due diligence into corporate strategy. As part of their duty to act in the best interest of the company, directors would be required to take into account the human rights, climate and environmental consequences of their decisions.
EU Member States would designate an authority to ensure effective enforcement of the CSDDD. They could impose fines or issue orders requiring a company to comply. The European Commission would also set up a European Network of Supervisory Authorities to bring together representatives of the national bodies to ensure a coordinated approach.
Under the proposed Directive, victims would have the option to bring a civil liability claim before a national court. Member States would be required to adapt their rules on civil liability to cover cases where damage results from failure by a company to comply with its due diligence obligations.
Last minute opposition
In Germany, one of the ruling coalition parties, the Free Democratic Party (FDP), opposes the CSDDD. It argues the Directive would place an unreasonable bureaucratic burden on German and European businesses, which would threaten their competitiveness. The other parts of the coalition support the CSDDD, but, because of the FDP’s opposition, the German government said in early February it would abstain from an upcoming vote on the CSDDD.
Italy was then reported to be considering similar action, as were other EU Member States. The CSDDD was consequently taken off the 9 February agenda of the Coreper group, which is composed of each EU country’s deputy permanent representative.
On 28 February the Coreper group voted against endorsing the CSDDD. A statement by the Belgian Presidency of the Council of the EU said that, ‘despite the efforts of the Presidency, the necessary support wasn’t found. We now have to consider the state of play and will see if it’s possible to address the concerns put forward by the member states.’ A fresh vote was scheduled for 8 March but was dropped from the meeting agenda on the day. It wasn’t until 15 March that the EU Council finally voted to support the Directive.
EU parliamentary elections will take place between 6–9 June. The final opportunity to make the CSDDD law would be the last plenary session of the European Parliament before the election, scheduled for the week beginning 22 April. Now that the EU Council has approved the proposed Directive, there’s hope it can become law before the elections in June.
Defending the Directive
The CSDDD seeks to harmonise European legislation on corporate sustainability due diligence by providing common and clear rules for companies operating in the EU market, which will prevent legal fragmentation. The European Commission argues the legislation will advance the green transition and protect human rights.
Supporters of the proposed Directive say, contrary to the views of some national leaders, harmonising legislation would lessen the administrative burden for companies operating in Europe because they’d only have to report on these issues once. The clear requirements of the CSDDD would also offer companies certainty on which actions to take.
Companies such as ALDI and Bayer argued that the Directive represents the only opportunity to level the EU-wide playing field
The European Commission argues that regulation is needed because voluntary action by companies tends to focus on the first link in the supply chain – but human rights and environmental harms often occur further down. Voluntary efforts can also lead to fragmentation and progress can be slow when it’s not driven by mandatory harmonised obligations.
Meanwhile, the argument that the CSDDD would make business uncompetitive is a familiar one; it’s been used across jurisdictions to defend actions by governments that weaken or remove their commitments to addressing negative environmental or human rights impacts.
Under the three-pillared approach of the UN Guiding Principles on Business and Human Rights, however, states have an obligation to protect human rights, just as businesses have a responsibility to respect them. This includes the right to a safe, clean, healthy and sustainable environment.
Over recent years many businesses have recognised that integrating environment, social and governance (ESG) matters into their strategy creates value and makes them more competitive. The European Commission says that around 70 per cent of the companies that participated in its preliminary study on due diligence and its 2021 open public consultation ‘agreed that a harmonized EU legal framework on due diligence for human rights and environmental impacts is needed’.
Many organisations have already begun working on targets and transition plans that would align with the requirements of the CSDDD. In recent years, investors have required some organisations to report against environmental standards such as those of the Taskforce on Climate-Related Financial Disclosures and the Sustainability Accounting Standards Board. Both sets are now part of the International Sustainability Standard Board’s new sustainability reporting standards, International Financial Reporting Standards (IFRS) S1 and S2. Many more organisations have voluntarily reported against these and other environmental and social standards.
The EU’s new sustainability reporting rules, the Corporate Sustainability Reporting Directive (CSRD), came into force at the start of 2023. The rules apply from the 2024 financial year and require a wider range of large companies and listed small and medium-sized enterprises to report against the European Sustainability Reporting Standards, which cover human rights, the climate crisis and biodiversity. Sustainability and human rights reporting is already a reality for European organisations that fall within the scope of the CSRD.
In late February, a group of large, medium-sized and small companies, including notable German corporations such as ALDI and Bayer, expressed their concern that German support for the CSDDD would be withdrawn. In a statement, they argued that the Directive represents the only opportunity to level the EU-wide playing field, especially for companies that already comply with the German Supply Chain Act. Implementing the CSDDD would mean ‘that competitive advantages at the expense of people and the environment will finally be prevented’. They added that enacting the CSDDD would provide companies with legal certainty and fair competitive conditions.
Proponents of the CSDDD insist the proposed Directive isn’t about making businesses uncompetitive. Rather, it aims to ensure fair competition and a level playing field, where advantage isn’t gained at the expense of human rights or the environment. In this context, it seems hard to defend opposing the Directive in the name of keeping business competitive.
It’s easy to get caught up in the intricacies of European policymaking and lose sight of the important motives driving this legislation – for example, the need to prevent future human rights disasters akin to the Rana Plaza collapse in Bangladesh in 2013 and to ensure businesses keep their end of the bargain on important climate commitments such as the Paris Agreement.
Rachael Johnson is a freelance journalist and can be contacted at rachael.editorial@gmail.com