EU’s Corporate Sustainability Due Diligence Directive – derailed or just delayed?

Despite the political agreement reached in December under the outgoing Spanish Council Presidency, the progress of the EU’s Corporate Sustainability Due Diligence Directive (“CS3D”) into law is looking extremely vulnerable. There is now only a short window of less than two weeks in which to get the directive back on track, leaving Europe’s framework for requiring greater human rights and environmental due diligence from businesses, as well as transition plans, hanging in the balance. 

A lack of political unity has led to multiple delays

On 9 February, the current Belgian Council Presidency had to postpone the first planned vote in the European Council on the CS3D technical text, which is based on the political high-level compromise agreed in the preceding trilogue negotiations between the European Commission, European Parliament and European Council. 

The delay was triggered by the junior partner in Germany’s coalition government, the Liberals, looking to block the new rules at the last minute, which would in effect force the entire German government to abstain in any vote. The lack of support from Germany triggered voices of opposition from Sweden, Estonia, Finland, Czech Republic and Slovakia. Once Italy joined the chorus of resistance it was clear that the requisite votes (representing at least 65% of the EU’s population) would not be attainable. 

Despite further efforts on behalf of the Belgian Presidency and the European Commission, the vote ended up being postponed several more times. Attempts were made to narrow the gaps, including by offering Germany’s Liberals concessions to restrict the scope of the CS3D so that it would be more narrow than the scope of the domestic supply chain due diligence legislation already in place in Germany.  Germany’s Liberals also attempted to strike a deal with Italy on the CS3D by offering to support them in their opposition to other EU regulations. A final nail in the coffin came as France made a late intervention, attempting to hike the thresholds for in-scope companies from 500 to 5,000 employees.  

With the lack of unity amongst the three biggest member states, the vote which finally took place on 28 February, was destined to fail.

The future of the CS3D remains uncertain

In theory, another vote on the CS3D could be scheduled, but time is ticking and the chance for a positive vote in a very tight timescale and against blustery political headwinds seems very low.  There are less than two weeks to find a solution. This is because of the time needed to allow the Directive to work its way through the European Parliamentary process and be put to a vote in this Parliament’s last plenary session starting on 22 April, before the EU elections between 6 and 9 June.

Should the CS3D not be agreed in this legislative period, the next European Commission and European Parliament will not be bound by the existing text. This leaves open the question of whether a revised and compromised CS3D - or something different - will be brought onto the agenda. The answer will depend, in part, on two key factors: (1) the composition of the new Parliament; and (2) the new European Commission’s key priorities, likely to be set from September 2024. Initial efforts to re-introduce the CS3D in a form similar to the current version could also be complicated by Hungary holding the next Council Presidency.

The CS3D is only part of the wider picture

It is important to put all of this into context.  The CS3D is only one part of a much larger, global effort to increase sustainability obligations on companies and responsibilities for their business partners, both inside and outside the EU, with regard to human rights, environmental rights, and transition plans. 

There is already increasing pressure through global standards for businesses to assess, address and report on their environmental and human rights impacts - and this is set to grow. The EU’s Corporate Sustainability Reporting Directive, for example, already requires extensive reporting on sustainability issues, and this necessarily requires companies to undertake due diligence and assurance in relation to sustainability disclosures. The EU’s proposed Forced Labour Regulation, and recently introduced Deforestation Regulation, also come to mind. 

It is also expected that the EU will look into creating more clarity with regard to the content of transition plans – following to some extent the example set by the UK with its Transition Plan Taskforce, which has recently published a robust framework for transition plan disclosures which seeks to establish more consistency in how companies go about reporting their transition plans. 

If the CS3D is derailed completely, or mutates into something quite different, whilst there will likely be cheers from various quarters of the EU and further afield (not least from companies already struggling under the weight of mountains of new legislation and regulation), it could be viewed as a missed opportunity to bring greater clarity and consistency around what is expected from responsible and sustainable businesses, and efforts to address the more harmful impacts associated with global value chains. It will not, however, make the issues go away, and it is unlikely to thwart the broader efforts that businesses, governments and NGOs are already making.