Corporate sustainability due diligence is a key tool for the board of any modern company. Some EU Member States (yes, you, Finland and Germany!) are now in the process of jeopardising the political consensus achieved on the proposal for the Corporate Sustainability Due Diligence Directive (CSDDD) in December 2023. In this blog post, we explain why this matters, why we care, and what will happen without the CSDDD.
Why is corporate sustainability due diligence important?
Legally compliant, forward-looking corporate governance is not possible without corporate sustainability due diligence. There are already EU law requirements concerning reporting on corporate sustainability due diligence, notably in the Corporate Sustainability Reporting Directive (CSRD). The procedural and substantive rules on corporate sustainability due diligence are also for that reason urgently needed. These rules specify and thereby strengthen the double materiality principle in the European Green Deal, brought to reality in the reporting regime of the CSRD.
Done properly, corporate sustainability due diligence facilitates a comprehensive understanding of the positive and negative impacts of the business of the company, on people and communities, on global and local environment. Corporate sustainability due diligence is an essential first step to stop human rights abuse and other exploitation of people, to cease environmental destruction, and to reverse illicit financial flows. This is crucial for modern risk management, including to mitigate the risks of lawsuits. It is fundamentally important for good corporate decision-making, for the profitability of the company itself now and for the future.
Why do we care about the Corporate Sustainability Due Diligence Directive?
For more than a decade we have been involved in multijurisdictional research projects on the barriers to and drivers for sustainable business. In the EU-funded SMART project (2016-2020), we developed extensive reform proposals. It is no secret that we have argued for a stronger and more comprehensive reform than the CSDDD, and that we are strong critics of the Anglo-American push for shareholder primacy and the way that it has been allowed to influence the European debate. The CSDDD is not as strong, as clear, and as well-aligned with internationally recognised norms for corporate sustainability as it should be.
However, with all its weaknesses, the CSDDD is a crucial piece of legislation, one step forward, and a historic possibility for the EU and its Member States to be global leaders for sustainability. We were happy that the Commission, the European Parliament and the Member States in the Council managed to work out a compromise in their trilogy in December and the final text in January. For this reason, the behaviour of German and Finnish policymakers, and possibly also in other Member State governments, ahead of the decisive vote in the Council on 9 February, is surprising and disappointing. We are not sure that the Finnish government or politicians in the German ruling parties realise what they are doing.
What will happen without the Corporate Sustainability Due Diligence Directive?
Legal uncertainty will continue to be a pressing issue, for European companies and their corporate decision-makers – and for all those affected across the global value chains of European businesses. There will be more lawsuits against European businesses. European businesses will find that there is even less of a level playing field, and a more chaotic regulatory environment – even within Europe – for cross-border business.
Several European states have already enacted their own version of corporate sustainability due diligence rules, and if the Directive fails, more is to come. The costs of navigating this chaotic and evolving regulatory landscape is what Member States interested in the competitiveness of their businesses should be worried about.
So, dear Member States (yes, we are still looking at you, Germany and Finland!), don’t abstain or vote against the CSDDD on 9 February. Don’t push business ahead of you and say that the CSDDD is causing too much work for the businesses and the Member State legislatures. Business is increasingly and with ever louder voices asking for the level playing field and the legal certainty that only mandatory legislation can give them. Don’t mess this up. Be as future-oriented as your businesses are starting to realise that they have to be.