The EU’s Corporate Sustainability Due Diligence Directive is flawed. But it is an opportunity too

The Directive’s reduced scope will blunt its impact. But there will be much to learn from its implementation.

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The EU Corporate Sustainability Due Diligence Directive looks finally set to become law, following the decision by the EU Council to approve the legislation on 15 March 2024.

Just a few weeks ago, its future hung in the balance. An unexpected move by Germany to abstain in a crucial Council vote, followed by Italy, led to the vote being pulled.

The publicly-stated reasons for these last-minute wobbles were concerns about increasing ‘red tape’ for businesses during challenging economic times. With the credibility of the EU’s responsible business agenda at stake, and with EU Parliamentary elections just around the corner, there was no time to lose in finding a compromise that might get the law over the line.

In the end, this was achieved largely through changes in timing and scope. The final negotiated version applies to companies with at least 1,000 employees and €450 million turnover.  

The new EU Directive seeks to turn this form of value chain governance into a binding and enforceable set of legal obligations for very large companies either based in or trading in the EU.  

This represents a considerable reduction in the number of companies that will need to comply. The idea of lower thresholds for companies in ‘high risk’ sectors has also been scrapped for now. The timetable for the phased roll-out of the regime has been extended, with full implementation at least seven years away.

What does the new law do?

‘Sustainability due diligence’ refers to the steps companies take to identify and address the human rights and environmental risks in their value chains. It has global and cross-stakeholder acceptance as an essential element of ‘responsible business’. 

International standards such as the UN Guiding Principles on Business and Human Rights, and OECD guidance, have helped to clarify what is expected of business actors at a practical level.

The new EU Directive seeks to turn this form of value chain governance into a binding and enforceable set of legal obligations for very large companies either based in or trading in the EU.  

These obligations, elaborated in some detail in the Directive itself, are to be enforced by regulatory bodies in the 27 member states, and through private lawsuits.

Mixed reactions

The furious reactions to the ‘gutting’ of the legislation – and the expressions of relief that a pared-back version is still likely to be passed – are testament to the strength of feeling among campaigners. 

With most companies outside the scope of the regime, the levelling effects will be somewhat blunted. 

Many argue that corporate greed and carelessness are root causes of abuses in supplier countries, and that sustainability due diligence laws are an essential component of a ‘smart mix’ of measures to fix this.

For industry groups and their proxies, the new law’s potential to ‘level the playing field’ for responsible business was viewed as a potential plus. But with most companies outside the scope of the regime, the levelling effects will be somewhat blunted. 

As for the companies that fall within the regime, the calculation seems to be, not that largest companies necessarily pose the biggest risks, but that those with the largest pockets are best able to cope with the new regulatory demands.  

While this may prove to be the case, many remain concerned about the risk of unintended consequences, especially for smaller businesses in less well-off supplier countries.

A significant achievement – but the real work starts now

The mismatch between territorial systems of government and the realities of global trade pose massive challenges for the regulation of value chains. The new EU law is an early attempt to confront these problems, through a new regulatory model that focuses on the coordinating roles of parent companies and brands. 

People at the sharp end of corporate abuses will not be helped if they do not have a meaningful voice in the system.

Getting this onto the statute books will be an achievement in itself. However, whether this makes a real difference to affected people and communities on the ground, and how soon, depends on what happens next.

Level playing fields and legal certainty will not be achieved if member states take wildly – or even mildly – different approaches to implementation. The desired level of harmonization, and the means for achieving this, are not yet clear. People at the sharp end of corporate abuses will not be helped if they do not have a meaningful voice in the system.

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The complementary measures needed to protect civic space, to ensure traceability of goods, and to promote cross-border regulatory cooperation, need much more thought. 

And it will be some time before we can tell whether the arrangements for delivering ‘remedy’ to affected people are a marked improvement on what already exists. Meanwhile, convoluted new tests for liability, and what they might mean in the real world, will give lawyers plenty to think about.  

A chance to learn

Although the legislation ended up more limited than originally promised, supporters of value chain due diligence laws (and sceptics too) should embrace the opportunity to learn lessons for the future.  

The next few years should provide a much better picture of which features deliver the best results, which need more work, where information is lacking, and where communication channels need improvement.

The European Parliament is expected to pass the revised Directive on 24 April 2024, completing the formal legislative process. 

After that, attention will shift towards the regulatory machinery needed in 27 member states, and the resources and networks needed to deliver a coherent and effective EU-wide regime.