The EU and the uncertain path towards the Corporate Sustainability Due Diligence Directive

The path towards the adoption of the Corporate Sustainability Due Diligence Directive (CSDDD) in the European Union (EU) has proven to be winding, encountering a series of obstacles that have cast uncertainty on the fate of this legislative proposal. The CSDDD aims to make environmental, social, and governance (ESG) due diligence mandatory for European companies, with the goal of improving the sustainability of business operations and reducing negative impacts on human rights and the environment.

Despite a provisional agreement reached between the European Parliament and the EU Council in December 2023, the failure of approval by the Council has halted the legislative process. This stalemate has generated uncertainty about the fate of the directive, especially considering the deadline of the European Parliament's mandate.

But what is the CSDDD?

The CSDDD proposal aims to integrate mandatory ESG due diligence – environmental, social, and governance – for European companies, rather than being optional, as the current legislative framework provides. Specifically, companies would be required to identify potential negative impacts on ESG aspects related to their operations, partners, subsidiaries, and supply chains.

The idea stems from the need for success in transitioning to a green economy and climate neutrality, in line with the European Green Deal and the United Nations Sustainable Development Goals, especially those related to human rights and the environment. This requires the implementation of comprehensive processes to mitigate negative impacts on human rights and the environment in value chains, integrating sustainability into corporate governance and management systems, and framing business decisions in terms of human rights, climate and environmental impact, as well as the company's long-term resilience.

Voluntary action does not seem to have led to widespread improvements; in fact, some EU companies have been associated with negative views regarding human rights and the environment, with issues related to human rights such as forced labor, child labor, inadequate health and safety in the workplace, worker exploitation, and environmental impacts such as greenhouse gas emissions, pollution, loss of biodiversity, and ecosystem degradation.

The Stalemate

The main opposition to the directive came from Germany, which feared that the CSDDD could damage European competitiveness and threaten supply chains. This opposition has caused a deadlock in the Council, preventing the adoption of the directive. Germany is followed by the Italian and French governments. In January, the Free Democratic Party of Germany, the minor coalition partner of the government, withdrew its support for the agreement, stating that the directive, previously negotiated and approved by the German government, would unreasonably burden small and medium-sized enterprises in high-risk sectors.

But only companies large enough to meet a combination of employee and turnover thresholds fall within the scope of the proposed law. Small and medium-sized enterprises, which represent 99% of all EU businesses, would have no legal obligations.

In mid-February, reports emerged of negotiations between German Finance Minister Christian Lindner of the Free Democratic Party and Italy. Lindner, representing the German government, reportedly agreed to block a draft EU regulation on packaging to appease Italy; in return, Italy promised to block the due diligence directive.

In recent days, France has also played an unexpected negative role, seeking to limit the scope of the proposed law to companies with more than 5,000 employees. Manon Aubry, a left-wing member of the French Parliament, noted that France's proposal would exclude 98% of large companies, as reported by Human Rights Watch.

Over 140 civil society organizations have urged EU governments to adhere to the key principles agreed upon in December 2023 and to move forward with the law. Doing so is crucial for leveling the playing field for large companies and overcoming reliance on voluntary corporate action. Failure to pass the law would have significant consequences, including loss of coherence among various EU laws on ESG and lack of a common level of due diligence obligations at the European level.

Next Steps

The next step involves further assessment by the Belgian presidency of the Council, which will seek to address member states' concerns in consultation with the European Parliament. However, if the provisional agreement is not approved by March 7, it is likely that work on the directive will continue in the next European Parliament term, making the adoption of the law uncertain, at least in its current form. While the EU is committed to promoting corporate sustainability, the path towards the CSDDD remains uncertain, with significant implications for the future of European legislation on ESG.

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Translated by Stefania Errico