A key piece of EU legislation that sets out mandatory obligations for companies to address their negative impacts on human rights and the environment has today suffered a significant blow, failing to gain final approval from the European Council, following objections from countries such as Germany and Italy, despite a provisional agreement on the regulation previously reached by the Council with the EU Parliament.
The setback for the Corporate Sustainability Due Diligence Directive (CSDDD) follows a four-year process to advance the regulation, starting with European Commission studies in 2020 on directors' duties and sustainable corporate governance and on due diligence requirements in the supply chain, which led to the draft CSDDD proposed by the Commission in February 2022, establishing obligations for companies to identify, assess, prevent, mitigate, address and remedy impacts on people and the planet – from child labor and slavery to pollution and emissions, deforestation and ecosystem damage – in your upstream supply chain and in some downstream activities such as distribution and recycling.
Although the Council adopted its position on the directive at the end of 2022 and reached an agreement on the CSDDD with Parliament in December 2023, the vote on its approval in the Council was postponed last month after Germany threatened did not support the regulation due to concerns from bureaucratic sectors and the potential legal impact it would have on companies, and was cast into doubt when Italy also subsequently withdrew its support.
Although a last-ditch attempt was made today to pass the directive in the Council, these efforts were reportedly further undermined by a last-minute effort by France to significantly reduce the scope of the new rules to apply only to companies with more than 5,000 employees, rather than the proposed limit of 500 employees, effectively eliminating around 80% of companies from CSDDD obligations.
After trying to gain approval, the Belgian Presidency of the Council released a statement, saying:
“The final compromise text on the Corporate Sustainability Due Diligence Directive (CSDDD) was presented for approval by ambassadors at Coreper.
“Despite the efforts of the Presidency, the necessary support (VMQ) was not found.
“We now need to consider the situation and see whether it is possible to respond to the concerns raised by Member States, in consultation with the European Parliament.”
Key aspects of the CSDDD included requirements for companies to integrate due diligence on impacts into their risk management policies and systems, including descriptions of their approach, processes and code of conduct, as well as requiring companies to adopt transition plans that ensure their business models and strategies are aligned with the Paris Agreement objective of limiting global warming to 1.5°C.
The CSDDD also included requirements for companies to engage with those affected by their business activities, with obligations including the introduction of a complaints mechanism, as well as the establishment of a supervision and sanctions system, with member states to create supervisory authorities to monitor compliance and impose penalties, including “snitch and shame” and fines of up to 5% of global annual revenue.
The group focused on sustainability expressed its disappointment at the non-compliance with the directive. In a statement released following the announcement of the Belgian Presidency, Uku Lilleväli, Sustainable Finance Policy Officer at WWF's European Policy Office, said:
“It is outrageous that, in the 21st century, some European legislators want to allow companies to ignore human rights and environmental integrity, all under the pretext of short-term profits. Let's be clear: the law would not burden companies with unnecessary bureaucracy; instead, it would ensure a level playing field and help companies navigate necessary transitions in an informed and responsible way.”
Isabella Ritter, head of EU policy at ShareAction, said:
“Those who blocked this legislation today showed indifference to worker exploitation and environmental degradation. They allowed internal political struggles to take priority over the well-being of the planet and its people, which is unacceptable. The global community is watching and the EU's credibility and leadership are at stake.
“It is now a race against time for the Belgian Presidency to work with EU leaders to end the impasse and find a way to ensure this crucial legislation is passed.”
