Simplification Of Sustainability Regulation Gets Complicated

Forbes

a day ago

For those trying to keep score on the current state of corporate sustainability regulation in Europe, do not be surprised if the game goes into overtime. In the span of the past few weeks, French President Emmanual Macron and German Chancellor Friedrich Merz both called for an outright elimination of the Corporate Sustainability Due Diligence Directive (CSDDD), while Denmark's Minister of Industry, Business and Financial Affairs, Morten Bødskov, issued a call to strengthen the directive. Soon after, representatives from France and Germany walked-back Macron's and Merz's comments, with the German state secretary, Stefan Kornelius, suggesting instead that they wish to 'de-bureacratize' and 'streamline' the regulation.
Simplification breeds complexity
The CSDDD, which was first introduced by the European Commission in 2022, entered into force in 2024 and has since been put on hold as part of the Omnibus Simplification Package in 2025, established obligations for companies to identify, assess, prevent, mitigate, address and remedy actual and potential impacts on people and planet in their upstream supply chain and downstream activities. In short, it meant big companies would need to become more diligent than ever on scrutinizing their vendor and supplier relationships to make sure they were not running afoul of environmental or human rights issues in any of their operations.
In their arguments to repeal the directive, Macron and Merz have suggested that requiring companies in the European Union (EU) to provide this level of disclosure would put these European companies at a disadvantage versus their counterparts in countries like the United States and China. Speaking at the 'Choose France' International Business Summit, Macron explained that shelving the CSDDD was critical for Europe to 'synchronize with the U.S. and the rest of the world.'
This sentiment also seems to be at the core of the discussions taking place in the EU parliament over the scope of the Omnibus Simplification Package. The bloc's Legal Affairs Committee recently submitted a draft report outlining their proposals with a heavy emphasis on creating a favorable business environment for EU businesses.
So, while the simplification juggernaut will undoubtedly continue throughout the summer, where does that leave those companies craving clarity so they can get on with business? Does this mean that Europe is scaling back on sustainability reporting?
On the surface, it may sound like one of the big compliance challenges that was set to come into play for many European companies may soon go away and make life easier. But that's not the case. In fact, the exacerbation of this regulatory uncertainty will have the effect of making things even more complicated for businesses operating in Europe.
Say what you will about sweeping regulatory directives, but one advantage they do offer is some level of consistency. With the CSDDD, companies were facing some significant challenges getting their up-stream and down-stream supply chains into alignment, but on the positive side, they were doing it from a position of following a standard set of benchmarks for evaluating sustainability risk and a standard and comparable means of reporting that information to regulators, investors and other stakeholders. Now, with the future of the CSDDD in question, these same businesses face a piecemeal approach that will have them chasing down the details of different environmental and human rights regulations in each of the jurisdictions in which they operate.
For example, the Norwegian Transparency Act, the Uyghur Forced Labor Protection Act, the California Transparency in Supply Chains Act, the New York Fashion and Sustainability and Social Accountability Act and many others, are just a handful of examples of local, jurisdiction-specific supply chain regulations that contain many of the same provisions that are included in the CSDDD just focused on a more localized and sector based scale. While these may lack the EU-wide footprint that comes along with the CSDDD, they are just as relevant for most large businesses operating in Europe.
Meanwhile, in the background, the International Financial Reporting Standards (IFRS) Foundation's International Sustainability Standards Board (ISSB) has been quietly moving forward, gaining momentum as the de facto standard for corporate climate risk reporting by linking climate disclosures to financial reporting. In April 2024, the IFRS announced that its next areas of research would be biodiversity, ecosystems and ecosystem services and human capital. Could this be interpreted that human capital, including human rights reporting requirements, might be coming soon to a financial statement near you?
For businesses caught in the middle of this increasingly politicized time of corporate sustainability uncertainty, it is important not to be distracted by the grandstanding, lobbying and delays that have accompanied some of the biggest and most visible pieces of legislation. Instead of focusing on the supply chain due diligence reporting requirements which may be coming, business leaders need to understand where they are already in place, what they require of them and whether or not their businesses are compliant.
The challenge right now is to synchronize and systematize data collection and reporting such that meeting the current assortment of local, national and international requirements does not create an undue strain on the core business or leave that business open to risk of non-compliance. It is also important to recognize that multiple stakeholders will be watching. Even as the CSDDD is held up interminably by lobbying and negotiations, consumers, investors and business partners will still expect good corporate citizenship when it comes to rooting out environmental and human rights abuses in corporate supply chains.
Whether they are regulated globally or locally, human rights violations within supplier networks will never reflect well on parent companies. Investments made today in rooting out bad actors and questionable business practices will always pay dividends for big companies – regardless of the status of any single regulatory proposal.