EU Corporate Sustainability Law Falls Short

The final text has sparked mixed reactions from the industry, with some criticising the reduced ambition of the directive.

The Corporate Sustainability Due Diligence Directive (CSDDD) was finally approved by the European parliament last week after months of tense negotiations, ending fears that the policy may never materialise.

But the version now set to become law is a much weaker piece of legislation than the one originally proposed two years ago, and as such, has drawn criticism from industry members.

The law aims to hold large European businesses accountable for environmental and human rights abuses across their entire supply chain, no longer permitting them to turn a blind eye to environmental and human rights abuses beyond the EU’s borders.

The European Commission released the first draft of the CSDDD in February 2022. The law was due to force big companies to identify, report and prevent the adverse impact of theirs and their business partners’ operations on human rights and the environment. It was also due to require them to adopt clear carbon emission reduction plans.

At the end of last year, the law’s passage through the EU’s two legislative bodies – Council and Parliament – looked guaranteed. But following pressure from some member states, the requirements were significantly scaled back, eventually resulting in the approval of a watered-down version by the council in March.

Under the final text approved by the parliament last Wednesday, far fewer companies will be subject to the rules than originally intended. In addition, the directive’s roll-out has been delayed and will not be fully implemented for five years, and the financial sector will be exempt from conducting due diligence on customers.

Mixed feelings

Supporters expressed some relief that the CSDDD was passed in time before this summer’s EU parliamentary elections – in which polls suggest right-wing parties may make gains – but were critical of its reduced requirements.

Aleksandra Palinska, Executive Director of sustainable finance industry body Eurosif, called its passage through parliament a “major political breakthrough”.

“However, we do regret the last-minute changes which reduced the ambition of the directive, including significant limitation of the scope, a complete removal of the provision on financial incentives for the promotion of transition plan implementation, and a lengthy phase-in period,” she said.

Palinska told ESG Investor that it was “very likely” the directive would not have passed if it had happened after the elections, when a more right-wing parliament would be likely to resist environmentally and socially progressive policy.

“If it didn’t get adopted now, given how controversial it’s been, it may never have been adopted,” she said. “That’s why it was so important to get it done.”

The CSDDD hit troubled waters when powerful actors in Europe’s business community mobilised against it. Germany, France and Italy notably argued that the law would put an onerous burden on some sectors and demanded amendments. After several weeks of tense discussions, the scope of the proposed law was significantly diminished, with the final version perceived by some as a shadow of its earlier self.

The scope of covered companies, for instance, now includes only those with a headcount of 1,000 or more, as opposed to 500 originally. Meanwhile, the turnover threshold trebled from €150 million to €450 million. In addition, the finance sector is now exempt from conducting due diligence on the businesses it invests in and lends to.

As a result of all these changes, the number of companies covered by the law has been slashed by as much as 70%, according to estimates.

Never enough

Despite these significant concessions, some business groups remain unhappy.

“Nobody disputes the aims of the directive,” said Vladimír Dlouhý, President of Eurochambres, an umbrella business association representing a cross-section of European industry. “But its implications are concerning for European businesses. It will not only affect the functioning of supply chains, but also hurt our global competitiveness.”

At the opposite end, environmental and human rights groups have said the watered-down law did not go far enough and granted too many concessions to business interests – at the expense of human rights and the environment. The World Wide Fund for Nature, for its part, deplored “severe gaps” that would hamper the law’s ability to deliver systemic change.

“To name a few, financial actors’ free pass to fuel harm, coverage of only a fraction of all environmental harms, and a ridiculously limited scope of companies are all issues that must be fixed in the coming years,” said Uku Lilleväli, Sustainable Finance Policy Officer at the WWF European Policy Office.

Lara Wolters, the MEP who led the CSDDD’s passage in parliament, called it a “massive step” and a “radical change”, but said she would like to see it expanded in the future.

“Would I have wanted to stick to the original scope of our directive? Yes of course,” she said in a press briefing last week. “But I think this is a step in the right direction that we can build on in the [coming] years.”

The law must now be approved by EU member states through the Council of the EU – a formality which is expected to happen next month well before the June elections.

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