A last-minute bump in the road for the widely anticipated Corporate Sustainability Due Diligence Directive

News last week confirmed that the proposed Corporate Sustainability Due Diligence Directive (“CS3D”) will face further delay after it was removed from the agenda for the meeting of EU ambassadors after it became clear that it was not expected to reach a majority among EU countries.

A spokesperson for the Belgian government, which currently chairs the EU’s Council grouping of member states, confirmed the plan to delay the vote.

This appears to follow late interventions that would have led to both Germany and Italy abstaining from the vote on Friday 9 February 2024, meaning that the law would likely have fallen short of the necessary “qualified” majority of 15 EU countries representing at least 65% of the population.

With the vote delayed, it is unclear whether the necessary support can be obtained or whether CS3D will need to go back to the negotiating table.

What is CS3D?

The ESG team at Weightmans have closely followed and spoken extensively about the progress of CS3D, as well as current approaches to sustainability due diligence within supply chains. 

In brief, CS3D aims to hold large companies responsible for violations of environmental standards and human rights within their value chain by introducing substantive due diligence obligations regarding the actual and potential adverse impacts of a company’s own operations, their subsidiaries and their business partners in relation to the environment and human rights.

CS3D also aims to establish rules on penalties and civil liabilities for those deemed to have infringed their obligations and would have required companies to draft a plan that ensures their business model and strategy are compatible with the Paris Agreement on climate change.

I thought the text of CS3D had been agreed?

It had. A final draft of the proposed CS3D had been agreed by the European Council and European Parliament at the end of last month. This followed an 18 hour session on 14 December 2023, following which the resulting political agreement had been widely celebrated.

In order for the Directive to be passed however the final text of CS3D required a qualified majority in a vote in Council, meaning that 55% of member states representing at least 65% of the EU population vote in its favour.

What was supposed to be a routine vote by ambassadors to endorse the deal was cancelled, signalling that the required agreement amongst Members States of the EU is not in place and further discussions are need.

Why has the support for CS3D disappeared?

The situation remains fluid and discussions are ongoing.

Germany’s support for the Directive first appeared in doubt when comments made on 23 January 2024 by Finance Minister, Christian Linder (head of what is considered the ‘pro-business’ Free Democratic Party), openly criticised it by stating “Now is not the time for an additional supply chain directive”. This doubt appeared to be further confirmed when a letter, seen by Reuters, was sent by Linder and the Justice Minister Marco Buschmann addressed to business groups, stating that the Government planned to abstain from 9 February’s vote.

The Free Democratic Party’s criticism appears, in part, to be based upon a perceived failure to address the concerns of the economy but also cites specific concerns regarding the operation of CS3D.

It is worth bearing in mind that Germany has a unique insight into supply chain sustainability efforts following the introduction last year of the German Supply Chain Act which imposed strict requirements upon a number of German companies, along with foreign companies with German branches, in respect of human rights and environment related due diligence obligations in their supply chains. The actual implementation of due diligence obligations under the Supply Chain Act has faced difficulty, with key questions remaining about the interpretation of statutory requirements.

At the time, Germany’s abstention alone would have not been enough to block CS3D’s approval. However, the letter appears to have created a domino effect. It is reported that Italy, Austria and Finland also hold concerns in respect of CS3D.

What are the next steps?

So far, no new date for the vote has been set but it is expectedly shortly. The postponement must now be used to convince those member states who have doubts about CS3D.

If the final text does not gain the requisite majority support, it does not necessarily signal the end for CS3D but it will be back to the negotiating table for a Directive that has already been subject to lengthy negotiations.

Looking to the future

As you might expect, recent developments in respect of CS3D have prompted criticism from a number of commentators who feel strongly that this legislation will provide essential environmental and human rights protections within global value chains.

Whilst the future of CS3D remains subject to discussions, approaches to advancing sustainability standards within value chains through enhanced due diligence will no doubt continue at pace. The future of supply chain sustainability is not dependent upon CS3D.

Many of the requirements of CS3D are based upon well-established voluntary approaches to responsible business conduct, in particular, through sustainability due diligence. Our experience is that that the immense scale and pace of work taking place to implement these standards is not just driven by the need to ensure legal compliance. Whilst we expect CS3D to be a watershed moment for sustainability requirements within value chains, the direction of travel is clear.

For those interested in starting or accelerating their journey in respect of sustainability due diligence within their value chains we recommend:

• Reviewing your organisation’s commitment to supply chain sustainability within the context of its wider sustainability strategy. What is important to you?
• Map your supply chain and conduct a heat map of your sustainability risk (these need not be limited to those environmental and human rights impacts covered by CS3D and could extend beyond these, focussing upon what is important to you). This assessment should consider key risk facts such as; product/service provided, jurisdiction risk, sectoral risk, nature and history of relationship. This process is essential to determining a strategy for improved sustainability due diligence, recognising that resources are unlikely to be unlimited – due diligence is commensurate with risk.
• Look at how you engage with your value chain at present and think about the challenges/opportunities for increased collaboration in this space. There are a number of software and consultancy solutions that can contribute to your work in this space. However, it is important to consider what you want to achieved and how to achieve it.