Today, on 24 May 2024, the Council of the European Union finally adopted the Corporate Sustainability Directive (CSDDD). With this final major legislative step concluded, the CSDDD is now set to become law in all the 27 Member States of the European Union, and the three European Free Trade Association (EFTA) states Norway, Iceland and Lichtenstein.
Crisis upon crisis on the path towards adoption of the Directive
The CSDDD has come close to stranding twice in the first months of 2024. The first time was when some Member States, notably Germany, Finland, and Sweden, undermined the political consensus on the Directive text in December 2023, which was achieved through the interinstitutional trilogue process in the EU. The planned vote in the Council of the EU Member States, which was supposed to take place in February 2024, had to be postponed to seek a new political consensus to save the CSDDD. Only after intense political work behind the scenes, with some horse-trading between Germany and Italy, and with a dramatic reduction of the scope of the CSDDD, was it possible to secure the Council vote in March 2024. With the European Parliament’s adoption of the Directive on 24 April 2024, the CSDDD seemed to be in the clear. Yet there was more in store in the weeks between April and May 2024.
The Member States managed to surprise us a second time, with one Member State considering to withdraw its support for the CSDDD, which would have been fatal, as the positive Council vote in March was with a very narrow margin. However, also crisis number two was averted. The Permanent Representatives Committee (Coreper) confirmed the adoption of the CSDDD on 15 May 2024, paving the way for the final adoption of the CSDDD in the Council today.
The EU has adopted a whole range of ambitious legislative proposals promoting more sustainable business over the last few years, including, for example, the Corporate Sustainability Reporting Directive (CSRD) of 2022, which requires reporting on due diligence. So, why is the CSDDD so extremely controversial?
Opening the door to company law reform – for the first time in EU history
In our article, Corporate Purpose and the Misleading Shareholder vs Stakeholder Dichotomy, we explore the theoretical, ideological and political backdrop to the controversy. The European Commission’s Sustainable Corporate Governance initiative, launched in 2020, was a milestone in the EU’s attempts at promoting more sustainable business. It was the first time that the EU launched an initiative with the explicit aim of reforming company law and corporate governance to facilitate the contribution of business to sustainability. There was – and still is – a strong research basis for reforming company law. As we have contributed to showing in our multijurisdictional comparative company law analyses over more than a decade, reforming company law is a key piece in the jigsaw puzzle of regulation for sustainable business.
Company law across jurisdictions gives the board, and by extension senior executive management, a broad discretionary space to run the company as the board sees best to promote the interests of the company. This includes the urgent issue of shifting companies over onto a more sustainable path. Governing companies towards sustainability also makes business sense, to mitigate the risks of unsustainability and to gain a competitive advantage in changing markets. However, the discretionary space is taken over by the law-and-economics, Anglo-American influenced social norm of shareholder primacy. This social norm dictates, contrary to company law, that the duty of the board is to maximise returns to shareholders. This pervasive norm, which is so strong that it has become a legal myth, keeps boards and senior executive management on a shareholder primacy path. It is a main barrier to more sustainable business.
Company law set to remain the missing piece in the regulatory toolbox for sustainability
Through a rather reticent attempt at reforming the duties of the corporate board in the proposal for the CSDDD back in February 2022, the Commission challenged shareholder primacy, and sparked an extremely ideological discussion. One study by a consultancy, amongst the several that the Sustainable Corporate Governance initiative was based on, was used as a strawman in the wave of criticism against the initiative. Instead of going into a company law discussion of whether a reform is needed and what such a reform could look like, shareholder primacy advocates, including some company law scholars, claimed that the Commission was seeking to introduce stakeholder theory. Positioning and constraining the debate within a shareholder vs stakeholder dichotomy sidelined company law and left the debate with no middle ground and a number of ideologically informed statements, including from the so-called ‘Nordic Company Law Scholars’.
Clearly, company law is a sacred cow to shareholder primacy advocates – the one area of law that cannot be touched, while a number of other economic areas of law, including financial market law, securities law, banking law, accounting and reporting law, product law, and public procurement law, are being reformed.
What does this mean for the future of European businesses, and for their contribution to sustainability?
The potential of the (much-reduced) Corporate Sustainability Due Diligence Directive
Shareholder primacy advocates were in action long before the Commission adopted the proposal for the CSDDD in February 2022. While the Commission’s aims in launching the Sustainable Corporate Governance initiative were ambitious and research-based, lobbyists used the Commission’s own Regulatory Scrutiny Board to stop the Commission’s proposal internally, twice. The February 2022 proposal was therefore a third attempt – and, as we discuss in our article – one that was very much on the defensive. Rather than setting out a reform to stimulate sustainable corporate governance generally, its emphasis was on due diligence. And the very reticent company law rule on the duties of the board, were taken out in the December 2023 consensus, because of resistance in the Council. What remains now, are due diligence rules, applicable to a very small number of large European companies (and some third-country companies). Yet, thanks to the hard work and counter-lobbyism by civil society, sustainability-oriented businesses, policymakers and academics, the CSDDD may still turn out to be a significant contribution to the regulatory framework.
Corporate sustainability due diligence is a key tool for the corporate board, and it is a necessary element of changing the way companies operate. Ideally, it should have been included as an element of a comprehensive, sustainability-oriented company law reform. Nevertheless, the CSDDD will not operate in a vacuum. It provides the procedural and substantive rules on corporate sustainability due diligence, which complement the reporting rules on the same in the CSRD. Its mandatory rules apply directly to only relatively few companies. Yet, these rules give an anchor in law for strengthening the argument for due diligence as a general requirement for companies in light of the UN Guiding Principles for Business and Human Rights and the revised OECD Guidelines for Multinational Enterprises on Responsible Business Conduct.
Corporate sustainability due diligence, done properly, makes it possible for the corporate board to gain a comprehensive understanding of the positive and negative impacts of the business of the company, on people and communities, on global and local environment. For those affected by corporate behaviour, 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. Due diligence is a crucial tool in modern risk management, mitigating the risks of lawsuits, amongst other issues. It is important for good corporate decision-making and for sustainable value creation now and for the future.
The question remains, however, whether the current regulatory framework, including the CSRD and the CSDDD, absent company law rules with clear board duties, will be strong enough to change corporate decision-making. A comprehensive, sustainability-oriented company law reform would have given the increasing number of sustainability-oriented businesses a stronger basis for change, with a clearer level playing field and legal certainty. It would also have sped up the contribution of business, as key economic actors, to the transformation towards sustainability. Getting mandatory corporate sustainability due diligence rules into place, supported by the mandatory reporting rules on due diligence, is a step forward. Much work is required by all involved actors to ensure that the evolving regulatory framework has the intended effect of facilitating sustainable business.