Victorious But Not Unscarred: Corporate Sustainability Directive Finally Adopted in the EU

Introduction

This update follows on from our earlier piece about the inception and subsequent progress of the European Union’s (EU) corporate sustainability and due diligence directive (CSDDD) as of May 2023.

“People and planet prevailed over cynicism” declared Lara Wolters, the Dutch S&D (center-left) MEP who acted as rapporteur for the CSDDD, after the text passed in Council. After protracted and arduous negotiations and despite last-minute obstacles, the CSDD directive is about to be a reality, making the European Union a pioneer in promoting corporate accountability and sustainability to defend human rights and the planet.

On March 15, 2024, ambassadors of the EU member states finally voted to pass a “stripped down”, but not quite neutered, version of the CSDDD. While last-minute horse-trading weakened the law, it also ensured that over two years of negotiation on every detail of EU’s the corporate sustainability agenda didn’t go down the drain after the bloc’s three largest economy emitted new reservations at the eleventh hour.

In December 2023, the supporters of a stricter approach on corporate sustainability had thought that the biggest hurdle had been cleared when the Commission, Council, and Parliament reached a seemingly conclusive agreement after a 16-hour negotiations marathon. However, the Council’s vote, anticipated as a mere formality, quickly unraveled into a convoluted, challenge-laden path as France and Italy took advantage of Germany’s last-minute change of heart to introduce further restrictions into the text.

As negotiations reopened, the directive ran up against a hard deadline. The current parliamentary session ends in late April. Without a successful vote before then the issue would have been picked up after the June European elections, which would have reset the entire process, with a potentially less amenable legislature. The text voted through on March15 ensured that corporate sustainability is now a reality in the EU. The text should be adopted on April 24, by the European Parliament, in plenary session.

“Political games” at the Council

The conflicting interests within the European Council regarding the adoption of the CSDDD played out in a highly contentious manner. In late February, amidst repeated delays orchestrated by the Belgian Presidency in hopes of bolstering the directive’s chances of adoption, the text failed to garner a qualified majority vote within the Council. On that occasion, Lara Wolters, the Dutch S&D (center-left) MEP who acted as rapporteur for the text, expressed profound dismay at what she perceived as political maneuvering undermining the legislative process. She denounced the “political games” of certain member states and lamented the undue influence wielded by a minority of businesses, which consistently obstructed the directive’s progress.

Wolters pointed to the significant role played by employers’ unions from France, Italy, and Germany, such as MEDEF, Confindustria, and BDI, in orchestrating the directive’s numerous delays. She also highlighted the responsibility of Germany’s liberal FDP party, led by Finance Minister Christian Lindner who, swayed by business interests, abstained from that key February Council vote. Displeasure with Germany subsequently intensified when reports surfaced of a possible accord between Germany and Italy. Those reports alleged that Lindner had promised to help Rome block EU packaging waste rules in exchange for Italian support in blocking the supply chain rules.

Broad concerns about new burdens on the economy drove Italy’s stance more than specific demands. Although SMEs that predominantly compose the Italian economy were excluded from the legislation’s scope, Rome’s concerns persisted. Meanwhile, MEDEF, the largest employer federation in France, convinced Paris to support a drastic increase in employee thresholds from 500 to 5000 just before the February Council vote. Wolters condemned this proposal as an affront to democratic decision-making processes, highlighting its disregard for parliamentary mandates and signaling undue influence from French business over government officials.

Sticking points

The directive’s scope stood out as a pivotal issue, serving as the focal point of contention in the negotiations. France’s proposal to raise the employee threshold from 500 to 5000 sparked significant debate, as it would have effectively excluded 80% of the originally targeted businesses. It should be noted that, during trilogue discussions, France had already advocated for the exclusion of the financial sector from the directive’s scope.

The key issue was the possible burden that the CSDDD might impose on SMEs. This consideration influenced the voting behavior of several member states, including Italy and Austria, even as the directive did not directly target SMEs. These concerns were not entirely founded. In March 2024, Richard Gardiner, EU policy head at the World Benchmarking Alliance, emphasized that the directive only placed legal obligations on larger companies within the supply chain and argued this would in fact benefit SMEs. Protecting this SME-friendly aspect was always crucial to ensuring that the largest corporations would be held accountable for the consequences of their practices.

Be that as it may, according to Politico reports from March, the Belgian Presidency proposed significant amendments to address these concerns. The final text adopted some of those amendments and limited the directive’s applicability to companies with 1000 or more employees and an annual turnover of at least 450 million euros. This represented a departure from the earlier trilogue agreement, which set the threshold at 500 employees and 150 million euros in turnover without watering the CSDDD down as much as France would have wanted.

Furthermore, the final text retained the Belgian Presidency’s proposals to remove references to high-risk sectors, which were previously subject to stricter obligations. It also exempted product disposal from supply chain control obligations.

These amendments reflect attempts to strike a balance between corporate accountability and regulatory feasibility. However, while adjusting the directive’s thresholds may or may not have alleviated burdens on smaller businesses, it certainly risks diluting its effectiveness in holding larger corporations accountable. In particular, the removal of obligations related to high-risk sectors and product disposal will undermine the directive’s ability to address critical sustainability challenges across various industries.

Conclusion

The journey towards the adoption of the EU’s Corporate Sustainability Directive has been tumultuous, marked by intricate political maneuvers, conflicting interests, and contentious debates. The final stages of the process were especially fraught, with the teams of Italy’s PM Giorgia Meloni and France’s PM Gabriel Attal being personally involved in reviewing the final text. However, despite facing these numerous challenges and setbacks, the directive is now about to become EU law.

From the final adoption in late April, it will be up to the member states to implement the text into their domestic law. From 2027 onwards, companies will gradually have to comply with the law (depending on their number of employees and sales).

Moving forward, it will be essential for stakeholders to remain vigilant to ensure that large corporations uphold the directive’s original intent. Striking a delicate balance between regulatory ambition and practical feasibility will be crucial to realizing the directive’s potential in addressing critical sustainability challenges across various industries.

Ultimately, the successful adoption of the CSDDD demonstrates the EU’s commitment to advancing sustainable business practices and safeguarding environmental and social interests. As the directive takes effect, the EU intends it to pave the way for a more responsible and sustainable future for businesses and communities across the continent, and hopefully beyond.