EU fails to adopt CSDDD

“What happened today is very concerning” said Lora Wolters – the European Parliament’s rapporteur on the corporate sustainability due diligence directive (CSDDD). Wolters, a Dutch member of the European parliament was referring to the failure of the EU member states to agree on the  CSDDD adoption. 

The new rules could have put in place significant fines for businesses who failed to identify, prevent and address environmental impacts, not just within their own operations but across their value chain and is widely seen as a potential trigger for more stringent climate transition planning among corporations. 

In EU law, directives are legislative acts which the individual member states must achieve though the exact nature of the implementation is left to the states. 

The CSDDD's application would depend on scale and sector of operation. Initially, the rules would apply to large EU limited liability companies which employ over 500 people and generate more than €150 million in global turnover. Two years later, the scope of the law would expand to smaller companies (global turnover of over € 40 million) in “high impact sectors” - which includes most emissions intensive industries in extractive sectors.

Breaking of a pact

European policymakers had informally agreed to the new directive in December 2023. They even extended financial assistance to companies to implement the directive.

Negotiators in Brussels have debated and discussed the directive for over two years. The failure by MEPs to find common ground brings that process to an unfortunate halt.

“To walk back on commitments or come up with more demand shows a flagrant disregard for the European parliament and undermines the trust required to reach trilogue agreements”, said Wolters.

The future of the CSDDD is now likely to be determined after European Parliament elections in June. “Despite initial optimism, reports of opposition to the CSDDD from certain EU member states have materialised, casting doubt on its future. A critical question now looms over the trajectory of ESG regulation in the EU”, says Kendall Reid, director, ESG at S-RM – a risk consultancy.

The loss of a level playing field

For proponents of the law, the CSDDD was an opportunity to provide companies within the EU with a level playing field for environmental corporate governance and due diligence. It would also align the EU’s approach with international standards.

Large European firms such as Unilever, Ericsson and Novo Nordisk as well as asset owners AP Pension and AkademikerPension had extended their support for the CSDDD on the basis of these expectations.

The failure to adopt CSDDD implies an impending fragmentation of rules. “We can expect an increasingly fragmented approach across the EU internal market: companies operating in different countries will face different due diligence burdens and costs, in different EU member States”, says Nicolas Lockhart, partner at the law firm Sidley.

For now, political disagreement has halted the European sustainability due diligence reforms. In the short-term, the fragmentation of rules across the EU is a reality investors and companies will need to grapple with.