Do EU state leaders dislike the new rules on corporate sustainability so much that they are willing to delegitimize the EU legislative process? It may seem this way, especially if we look at this spring's peculiar events in Brussels where some state leaders almost torpedoed the EU's new Corporate Sustainability Due Diligence Directive (CSDDD).
This blog post sets out to explain the rocky road towards adoption for the Directive, why the political unrest and delays occurred, and what the drama in Council this spring may indicate for the EU as the leading star of Corporate Sustainability.
Two years in the making
The Directive, first proposed by the Commission in 2022, is a crucial law which aims to hold corporations accountable for labour- and environment-related abuses across their supply chains. The proposal was launched through the ordinary legislative process and thus sent to the Council and Parliament to draft, in parallel, their positions. Initially, the Council in their General Approach favoured applying the rules solely to the largest companies and their 'chain of activities', while the Parliament sought a more encompassing scope, hereby including financial services, and with requirements for companies to align with the 1.5 degree climate target.
Their positions were negotiated into a final text in trilogues, which led to a provisional political agreement on 14 December 2023. Under normal circumstances that would have meant that the text was ready to be adopted through a final vote in Council and Parliament. Usually, this vote is regarded as a formality given that the parties already have reached a consensus at the negotiation table.
Companies (somewhat) unwillingly framed as scapegoats
Into the new year, cracks in this consensus began to show as the German government´s liberal party Freie Demokratische Partei (FDP) came out stating that they were set to abstain from the final vote.
Germany, which had officially supported the EU law from the outset, raised concerns related to a potential heightening of the bureaucratic burden put on small- and medium-sized companies through a liability clause. The Government stated that this liability threshold was way more burdensome compared to the German Supply Chain Due Diligence Act, which entered into force in 2023 and indeed does not contain a liability regime. Italy followed suit with the same concerns.
To adopt a legislative initiative in the Council, a broad majority is required, meaning the support of 55 per cent of Member States, representing at least 65 per cent of the EU´s population. Germany accounts for 18,72 per cent of the EU’s population, and together with Italy, the resistance would have amounted to 32 per cent. With other countries, including Sweden, Finland, Czechia, and Estonia, also having raised concerns, it seemed likely that the majority of the Council was at risk.
On Member State's home turf, the stalled progress prompted businesses to voice support of the CSDDD including major food firms Ferrero, Mars Wrigley, and Mondelez, and 70 Nordic companies (among them Nokia, Novo Nordisk, Vattenfall, and Maersk). This demonstrated that rumoured burdens were not a worry for companies, contrary to governmental perceptions.
Unfortunately, this outcry did not seem effective as the Council declined in their vote on Friday 9 February 2024, leading the Germans to jump on the prospects of renegotiating the deal, whilst the Belgian Presidency to the Council (chairing these meetings until June) tried intensely to get the parties on board to finalise the process.
Chaos and trust issues
The Belgians managed to get the agreement back on the voting agenda for the ambassador working party meeting (CORPER) at the Council on Wednesday 28 February 2024.
In the vote, it became apparent that the budding discussion was indeed a full-on revolt as the needle swung against the Directive with abstentions and rejections from 12 other Member States (among them Finland and Sweden), as well as the suspected troublemakers. The lack of support was rumoured to be powered by a French U-turn, as they too adopted the German-Italian position. Political chaos ensued.
Lara Wolters, representing the socialist group in the Parliament and serving as its lead rapporteur on the Parliament's work on the Directive, openly accused a minority of large French and German industry groups of lobbying their governments in her press conference following the vote. This attack was contrary to the outspoken parties who had openly disregarded the Council´s revolt, showing that there indeed also were industry players who saw a new revision as advantageous.
Wolters also criticised Member States for leaving behind their commitments to people and the environment, showing ‘blatant disrespect for the European Parliament's role as a co-legislator’. This viewpoint received cross-party support and was seconded by Non-Governmental Organisations (NGOs) and European political party groups who also reacted. The Council finally reached a common consensus in March.
The revised Provisional Agreement showed a significant watering down of the original proposals' obligations was necessary to assure Member State governments and push the Directive through. The final text thus narrowed the scope by 70 per cent and adopted a limited ‘activity chain’ approach instead of an all-encompassing value chain approach as presented in i.e. the OECD Due Diligence Guidance for Responsible Business Conduct. Evidently, the revised document similarities to the Council's own General Approach, showing that the compromises reached in trilogues had been snubbed in a game of high-risk realpolitik with the Directive fighting the clock as the mandate drew to a close.
CSDDD (barely) dodges the bullet, what now?
The CSDDD being put in uncertain limbo risked the legitimacy and efficiency of the European Green Deal and could have been a step back in how to understand business impacts on society and the environment — essential for modern risk management and mitigating lawsuits.
As the revised provisional agreement of the CSDDD (barely) passed in the Plenary of the EU Parliament on 24 April, this legislative crisis seemed averted.
It remains to be seen how the Member States will implement the CSDDD. Being a directive, the final approval of the Council and Parliament begins the two-year transposition period. In this time the national legislators will have to incorporate the Directive into national law for the rules to become applicable. In a worst-case scenario, discrepancies of the revised Directive, such as. using the activity chain approach, may open for divergent positions on how the rules ought to look in national law, thus risking harmonisation and challenging the levelled playing field.
The dramatics of the CSDDD has revealed the extent to which EU law is a product of national realpolitik performed on a regional stage. Legal frameworks on corporate sustainability are indeed hot potatoes for (some) governments. With the EU elections approaching in June, the election fever among Brussels lawmakers is sure to intensify as they want to appeal to their voters and parties back home. As political landscapes evolve, one can question whether the political turmoil indicate a reshaping of the EU's role as a champion of progressive and sustainable business obligations. Can the EU still maintain its position as a leading star in corporate sustainability?