CSDDD ‘back to square one’ as Council blocks legislation

The EU Corporate Sustainability Due Diligence Directive (CSDDD) has failed to achieve backing from the European Council and now looks very unlikely to proceed before European elections in June, throwing its long-term future into doubt.

The CSDDD, which would place mandatory human rights and environmental due diligence and transition plan requirements on firms that fall under its scope, couldn’t get majority approval in the European Council, and the rules now look to be fading in their current form at least.

The Belgian Presidency of the Council released a statement, saying that “the final compromise text on the Corporate Sustainability Due Diligence Directive (CSDDD) was put forward for endorsement” today but “despite the efforts of the Presidency, the necessary support wasn’t found”.

A last-minute attempt by France to water down the rules to get them through failed, with Germany and Italy thought to have voted no.

“We now have to consider the state of play and will see if it’s possible to address the concerns put forward by member states, in consultation with the European Parliament,” said the Belgian presidency.

A final Council vote on the CSDDD was pulled in mid-February because Germany and Italy made clear that they would abstain and refused to send the rules onto the European Parliament for final approval.

The vote was rescheduled for 28 February but the compromised rules were still shot down.

This all followed difficult discussions over the rules towards the end of last year, with political agreement seemingly reached shortly before Christmas.

Julia Grothaus, litigation, arbitration and investigations partner at law firm Linklaters, told Commercial Risk Europe that the CSDDD is now “back to square one” and likely won’t be back on the table until after European elections this summer.

“After supposedly successful trilogue negotiations in December and heated discussions ever since, the major legislative project was blocked at Council level today for the time being,” said Grothaus. “The political compromise painstakingly reached shortly before Christmas failed to win majority support among the EU member states in today’s vote. Too many member states refused to approve the CSDDD, which has been criticised for being too much of a burden on companies, particularly small and medium-sized ones.”

“While the Belgian Presidency announced today that they would evaluate the options, it’s likely that the CSDDD will be substantially renegotiated between Council and Parliament after the EU elections in late spring. It therefore remains to be seen to what extent the project will push ahead in the new legislative period – and whether the EU will succeed in creating a level playing field for companies operating in the EU without charging them with considerable burdens,” she added.

Under the proposed directive, EU companies with more than 500 employees and a net worldwide turnover above €150m, as well as non-EU firms with net turnover of more than €300m generated in the territory, would be required to report on whether their supply chains use forced labour or cause environmental damage. Fines for breaching the rules could be high as 5% of a company’s global turnover.

Supporters of the directive say that it would ensure European firms and overseas-based companies with significant European operations meet the highest ethical and environmental standards.

Opponents say that the CSDDD would add another layer of reporting requirements, bureaucracy and liability for European businesses already struggling to compete on the global stage. They argue that the CSDDD is not necessary given other pending ESG-related initiatives such as the Corporate Sustainability Reporting Directive (CSRD).

Environmental groups were quick to slam the Council’s failure to approve the rules.

Steve Trent, CEO and founder of the Environmental Justice Foundation said: “The Council of the EU’s failure to greenlight the CSDDD is a colossal misstep. This crucial law has taken marathon negotiations between 27 member states, the European Parliament, and the European Commission, so to have it blocked at the 11th hour primarily by political point scoring by the German minority political party, the FDP, is shameful. German Foreign Minister Annalena Baerbock was right to point out that it is ‘a mistake to gamble away valuable trust with such manoeuvres in Brussels’.”

“The CSDDD would be a crucial tool to hold companies fairly to account for damages to the environment and human rights in their value chains. That makes this outcome a crushing loss for European consumers and businesses, and a major setback for people and our shared natural world,” he added.

Trent urged decision makers to find a new compromise within the short time that remains before the end of this parliamentary term.

Uku Lilleväli, sustainable finance policy officer at WWF European Policy Office, said the Council’s “last-minute sabotaging and postponement” of the new rules deal a real blow to the EU’s credibility as a legislator.

“It’s scandalous that, in the 21st century, certain European lawmakers wish to permit companies to ignore human rights and environmental integrity, all under the guise of short-term profits. Let’s be clear: the law wouldn’t burden companies with unnecessary red tape; instead, it would secure a level playing field and help firms navigate necessary transitions in an informed and responsible manner,” he continued.

Adding: “The surprising negative turn in the Council contradicts the demands of hundreds of companies, financial institutions, academics, civil society organisations, faith leaders and others, who have supported the due diligence law over the past two years.”

He said it is crucial that EU member states and the Belgian Presidency discuss their positions again and “secure approval in the Council as soon as possible, without derailing from the agreements already made in a years-long democratic process”.

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