How Europe's ambition to lead on corporate human rights ran into the sand

Reuters

4 days ago

July 21 - Just over a year ago, the European Union approved a directive that sought to usher in a new era of human rights protection across Europe.
The Corporate Sustainability Due Diligence Directive (CSDDD) was meant to give investors more visibility on the risks throughout the value chain of investee companies and make non-compliant companies accountable to member-states and to victims of human rights or environmental harm, even in their operations outside Europe.
It took five years of wrangling to agree the rules on corporate due diligence and in the end, just 5,400 companies – fewer than 1% of EU firms – and 900 international corporations that do significant business in the EU were expected to be impacted.
Since November last year, however, legislators have sought to unpick it, amid heavy lobbying from industry groupings, which argued that the rules meant European companies could not compete with rivals in China and the U.S., where President Donald Trump is rolling back regulation and imposing tariffs on foreign goods.
In February, the European Commission introduced the first in what would be a series of Omnibus packages, focused on sustainability and investment and billed as a recalibration of rules 'in a growth-friendly manner'.
The Commission said that if implemented, its Omnibus proposals would mean total savings in annual administrative costs of 6.3 billion euros and would mobilise a further 50 billion euros of public and private sector investment in support of policy priorities.
The wide-ranging proposals include giving companies an extra year, to 2028, to implement the CSDDD; limiting due diligence to direct – tier one – suppliers unless there is 'plausible information' to justify deeper investigation; and doing away with a harmonised civil liabilities regime, leaving member states to establish their own mechanisms and set their own penalties.
Since the first Omnibus package was published, the European Council and the EU Parliament have both made further proposals to reduce the number of companies in scope, and their reporting requirements. The European Council, for example, wants to raise the CSDDD threshold from 1,000 employees and a turnover of 450 million euros to 5,000 employees and 1.5 billion euro turnover. One of the EU Parliament's proposals is to do away with companies' obligation to draw up climate-transition plans.
As part of the Omnibus, the Commission also proposed reopening the Corporate Sustainability Reporting Standard (CSRD) under which companies would have to report on implementation of climate transition plans, and the EU Taxonomy. All three work together as a framework for investors providing meaningful information on risk. Both the European Council and EU Parliament have suggested further amendments to the scope and veracity of the CSRD.
The proposals reflect wide-ranging criticism from lobby groups. The French Banking Federation had argued that significant divergences between the scope and requirements of the CSDDD and CSRD risk increasing the regulatory burden and that the CSDDD put European companies at a disadvantage compared with international competition.
VCI, the trade group for the German chemicals industry, said that 'huge legal uncertainty and incalculable risk' associated with civil liability would likely lead to companies withdrawing from high-risk regions and markets.
Opposition has been voiced in the U.S. too, with a bill introduced in the Senate that seeks to protect U.S. firms from the reach of the due diligence law.
Pierre Garrault, senior policy adviser at the European Sustainable Investment Forum (Eurosif), says 'The Omnibus initiative now modifies potentially the core substance of these rules. But that's not what businesses and investors wanted. They wanted more guidance, more clarity and less duplication.'
And he suggests that the proposed changes in the Omnibus legislation could defeat the main purpose of the CSDDD because just a few companies from a few member states would be in scope.
'That creates a lot of fragmentation in the way that companies can report on sustainability matters and establish their own processes on due diligence when the main objective was to create that EU-wide standardisation, and that single European baseline.'
David Ollivier de Leth, a researcher at Netherlands-based Centre for Research on Multinationals (SOMO), shares those concerns.
'The whole point of this law is that you should look at the risks, and the risks are what should guide you, not the size of the company or (its) location.'
With businesses potentially now only having to address adverse human rights impacts beyond tier one suppliers if they have 'plausible information' to act on, campaigners are concerned that the Commission's changes would mean companies simply turn a blind eye to potential harms.
'I think it is fair speculation to say (that) it might even incentivise companies not to look for that plausible information because what if I get it, then I might be liable for what I've discovered,' suggests Marion Lupin, policy officer at the European Coalition for Corporate Justice.
While a big enough injustice might attract the attention of NGOs, she adds, 'you're very much outsourcing the risk-management to other stakeholders, whose job is not to survey value chains of multinationals. It's very problematic.'
Another Omnibus amendment restricts due diligence further by limiting the information corporations can ask for from suppliers with fewer than 500 employees, the so-called VSME standard, a voluntary reporting standard for small- and medium-sized companies developed by the Commission's technical adviser on sustainability reporting.
VSME allows companies to assert 'we don't know (about human rights risks in our supply chain), because we're not allowed to ask,' says SOMO's Ollivier de Leth.
Ollivier de Leth says SOMO's study of seven major EU supermarket supply chains demonstrates just how much the tier one limitation guts the purpose of the CSDDD. It found that most firms' tier one suppliers were based in EU countries deemed to be at low risk of human rights violations.
That is in contrast with the large proportion of more distant suppliers, which originate in countries with a high risk of human rights violations, such as deforestation and land rights abuses found in meat and soy chains, or child labour in cocoa supply chains.
Campaigners are also concerned about the demise of harmonised civil liability, which would have ensured that the conditions under which a company can be held liable are the same in every member state. Instead, a hotch-potch of national rules potentially creates a legal minefield, argues the ECCJ's Lupin.
Johannes Blankenbach, senior EU researcher at the Business and Human Rights Resource Centre, agrees: 'Harmonised civil liability is very important for remedy, and also as an incentive for a true level playing field among companies of quality due diligence beyond just ticking boxes.' Investing in thorough due diligence also protects companies themselves, he adds.
Before the advent of the CSDDD, only a few European countries had implemented due diligence obligations based on international standards framed by the OECD and U.N. Guiding Principles.
French law, for example, requires due diligence across the full value chain but is short on detail that can leave it open to interpretation in the courts, say campaigners.
Germany's legislation, meanwhile, focuses only on tier one suppliers. That limit followed extensive corporate lobbying, but Blankenbach argues that the way companies have chosen to apply Germany's legislation so far has created the very bureaucracy they sought to avoid, with 'firms performing indiscriminate compliance exercises with all their tier one suppliers, sometimes flooding them with relatively meaningless surveys'.
'It's a bitter irony to see that tier one focus replicated in the Omnibus,' he adds.
In April, legal charity ClientEarth and seven other campaign groups filed a complaint with the European Ombudsman, the EU's independent watchdog, accusing the Commission of 'maladministration' for bypassing proper impact assessment and excluding broad public participation in preparing the Omnibus package. Read more
They also accused the Commission of consulting industry lobbyists in closed-door meetings before publishing its proposals.
In July, the EU Ombudsman wrote to the Commission asking it to justify its decision-making process, and giving it until September to respond.
A Commission spokesperson told journalists that swift changes had been needed since the reporting requirements already applied to some companies.
"Businesses and member states urgently needed legal certainty to comply with the sustainability framework," the spokesperson said.
Some companies and investors are pushing back against the Omnibus. Over 200 have so far signed an open letter stating that 'regulatory simplification can be achieved without compromising on the substance of sustainability rules or their significant benefits for businesses across the EU'.
They include EDF, Vattenfall, Ingka Group and the Inter IKEA group, as well as pensions groups, insurers and asset managers – many of whom have already begun implementing and preparing for the due diligence legislation.
A spokesperson for Inter IKEA Group and Ingka Group told The Ethical Corporation that it's important the CSDDD doesn't 'turn into a compliance without impact'.
'We advocate for maintaining a risk-based approach beyond our direct suppliers and ensuring that companies can legally access the information needed to identify, prevent and mitigate adverse impacts throughout their value chains.'
How much weight those arguments have will become clear this autumn when the European Parliament finalises its position and negotiations between the Commission, European Council and EU Parliament begin.
Businesses and investors who are preparing for the new legislation urgently want clarity. Will it come at the expense of rights holders?