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Germany continually delays final approval of the European due diligence law, despite having a negotiated deal. Criticism and outrage in Brussels at the unusual prevarication. The bill from the sidelines of Labour Party MEP Lara Wolters should oblige European companies to prevent human rights violations and environmental damage within their value chain. An important step within the European Union, which is also welcomed by a large part of the European business community.
The bill for the Corporate Sustainability Due Diligence Directive (CSDDD) falls within the broader framework of 'International Corporate Social Responsibility' (IMVO), which expects companies to consider human rights, working conditions, the environment and climate in their business operations. At a time when the world's largest multinationals are not inferior to some countries' GDP in terms of turnover, it seems short-sighted and outdated to only require governments to respect human rights and not harm the environment and climate.
"Corporate responsibility goes further"
That is exactly what the bill seeks to achieve: it obliges large European companies to identify the risks in their value chain of human rights violations or environmental damage, and then prevent or mitigate them to the best of their ability. If they fail to meet this effort obligation, the CSDD creates the possibility of legal liability. The latter aspect in particular, the possible recourse to the courts, is new. In 2022, Labour Party MEP Lara Wolters tabled the bill to create 'due diligence legislation' for companies at European level as well. As Wolters explains over the phone: 'The time when companies can compete on human rights and climate should be over. They are part of society and thus have a responsibility beyond just their own employees'.
Sudden liberal counter-lobbying
Two years later, this culminated in the bill now on the table at the EU Council - where ministers from the 27 member states meet. Heavy-handed by proponents, considerably weakened by opponents, but the bill before us seemed to enjoy widespread support in Europe. Indeed, the European Parliament, the Commission and the Council all passed the bill several times at different stages of negotiations, until a final agreement between the three was reached. With that, the Council's final approval seemed really only a formality. In recent weeks, however, things turned out differently, with an unexpectedly tough lobby from Germany rearing its head. Germany's liberal governing party FDP suddenly turned fiercely against the bill.
"Germany is behaving like an angry toddler in the EU"
According to the FDP, the EU should especially not fall for even more regulatory pressure on companies. The party warns of an unreasonably high bureaucratic burden for companies and an uncertain risk of legal liability. It seems to fit a broader trend in which European political groups are becoming increasingly conservative in the run-up to the European elections. Succumbing to the looming pressure that European voters seem to be becoming a bit more conservative, several European parties are suddenly keen to be as critical as possible towards the EU anyway.
Germany's internal rules dictate that Germany only gives approval within the Council if the German government unanimously supports it. With that, the obstruction of two FDP ministers may prevent Germany from giving its approval for the law; in Germany, it leads to major tensions with Chancellor Scholz's Social Democratic ruling party SPD, and outside Europe to divisions and crooked faces. In reaction to the German turn, other European member states are also starting to backtrack; Italy, for instance, says it will only agree if Germany does the same. Wolters compares Germany versus the NOS with an enraged toddler, once again showing himself to be an untrustworthy partner at European level.
Due diligence for companies
The importance of the arrival of the new law may be clear. David Ollivier de Leth, working at MVO Platform, which works for better IMVO legislation within the Netherlands, said: 'There is currently a big problem with the way production is done in the world. Too often this is still accompanied by abuses in the production chain, such as miserable working conditions, child labour, expropriation of land or destruction of the environment and climate. There is currently no legal obligation for companies to do something about these abuses in their value chain. This means that producing these goods including all the attendant abuses is actually still the norm.'
"Abuses in the production chain are actually the norm right now"
The introduction of CSDDD legislation should change this standard. The CSDDD calls for a duty of care ('due diligence' in English) for companies. This requires companies to pre-emptively identify the risks throughout their value chain of human rights violations and environmental and climate damage, and then obliges them to do everything reasonably within their power to reduce these risks. Wolters also calls it the 'anti-circumvention law'.
This regulates the business practices of European companies both within and outside European borders. For instance, the 2013 Rana Plaza factory disaster in Bangladesh was a driver of calls for legally binding IMVO legislation. The collapse of the garment factory that made clothes for Western clothing brands was seen as the epitome of abuses in the global south in favour of profits for the west. But examples abound: think of the Spanish tomato picking business in which tens of thousands of African migrant workers are being exploited and whose tomatoes end up in German and Dutch supermarkets, the batteries in our phones that are made with cobalt from Congo-where child labour is not uncommon-and with lithium from Argentina, where mining harms the environment affects. These are all abuses that the advent of the CSDD aims to prevent.
At the international level, there do already exist two legal frameworks whereby such a 'corporate social responsibility' obligation is placed on companies: the OECD Directive and the UN Guiding Principles on Business and Human Rights; both contain ambitious human rights and climate guidelines for companies. However, they have the flaw of not being legally enforceable. In legal language: the OECD guidelines and UN Guiding Principles are soft law, the CSDDD becomes hard law. This means that standards from the OECD Guidelines and UN Guiding Principles cannot be enforced in court, whereas under the CSDDD, companies can be held legally accountable in court if they fail to comply with their duty of care. This is a crucial difference; without legal teeth, CSR standards still remain too many vague objectives for companies, to which little is actually done in practice.
"There were a lot of myths about the bill"
The law
Wolters' original bill sought to practically adopt the OECD guidelines and implement them at the European level, but as hard law. The OECD guidelines are a lot more comprehensive than the final European bill. But four years of European negotiations weakened the bill considerably. According to Wolters, there were many myths about the bill. For instance, companies were afraid they would have to constantly play policeman within their value chain. This is not true, "they have to do what is reasonably possible," Wolters said. She continues: 'For example, the chief executive of Boskalis was afraid he would have to go straight to jail if any wrongdoing occurred after the CSDD came into force'. To meet the fears of these fables, the final bill is less forceful than team Wolters' original approach was. Nevertheless, Wolters calls the CSDDD a potentially major milestone for how action is taken within Europe.
But what exactly must companies that fall within the CSDDD's frameworks do and what are they responsible for? The CSDDD requires companies to map risks of human rights violations and environmental degradation across their value chain, both upstream (everything that happens to the product before it reaches the company) as downstream (everything that happens to the product after this). The bill contains a long list of human rights and environmental provisions that companies must do everything reasonably possible to avoid violating in their value chain. If they fail to do so, they are obliged to mitigate the damage. If companies have not done everything within reason to prevent or mitigate harm, then companies can only be held liable for 'direct harm', meaning the harm it has caused itself, or in which the company is directly involved.
This only applies to damage to human rights and the environment. For climate damage, companies cannot in principle be held directly liable under the CSDDD. Unless the climate damage directly harms human rights or the environment. On climate, the CSDD only says that companies are obliged to draw up a climate plan in line with the Paris Climate Agreement. However, for visible non-compliance with this climate effort, directors can be held accountable in their performance bonus under this law. In short, according to Ollivier de Leth, the CSDDD law does not automatically ensure legal liability for any kind of damage to the environment or human rights, but it does regulate that companies can no longer say 'we won't do anything about this'.
Tiger with or tiger without teeth?
Several civil society organisations have expressed their dissatisfaction with the eventually watered-down bill. Earlier, Wolters warned that the bill should definitely not become a toothless tiger. According to Oxfam Novib the bill covers only 1 to 2% of companies in the EU. In its report The importance of a broad European duty of care. Although the clothing and textile industry has been identified as a high-risk sector (with a reduced CSDD threshold), 98.9% of all clothing and textile companies in the EU fall outside the law, according to the report. Yet these companies together account for 55.9% of the entire European sector. In short, the companies outside the CSDDD have a large share of the entire value chain of the garment and textile industry. The report highlights that abuses occur throughout the sector and that the lack of transparency often increases as companies become smaller.
Nevertheless, it is unproductive to merely criticise the bill now before the Council. First of all, it should be seen as a first and major step towards allowing companies to be held liable for wrongdoings in their value chain. According to Milieudefensie lawyer Janneke Bazelmans, the duty of care that, according to the CSDD, rests on large companies ensures that smaller companies, too, have to provide more transparency in their way of producing, because only then can the large companies make a fully conclusive risk analysis of their value chain. 'It is about a necessary systemic change of the big companies, they have to change, because then the rest will go too,' Bazelmans said. In this regard, Bazelmans stresses the importance of overarching IMVO legislation, such as the CSDD, alongside the climate lawsuits being brought against large companies, including by organisations such as Friends of the Earth. Indeed, IMVO legislation creates a clear web of applicable rules. This is in contrast to various human rights and climate lawsuits against companies, where the underlying rules are always unclear to companies anyway and where it is uncertain whether the outcome also applies to companies that were not parties to the lawsuit.
"Around the European elections, it's more about politics and less about substance"
The call for clarity is the reasons for a large group of European companies to support the European Duty of Care Act. Companies such as ALDI, Nestlé, Adidas and ABN-AMRO have a 2020 statement out in which they call on the EU to pursue the bill. This is because the European law creates a level playing field for European companies; the companies themselves state they are already taking steps to implement the guidelines from the OECD and the UN Guiding Principles, but express their desire for more companies to map their impact on human rights and the environment. With this in mind, the German Liberals' obstruction becomes all the more striking. After all, how often does it happen that something good can be done for companies as well as for human rights and climate? To conclude in Wolters' words, 'In the run-up to the European elections, Europe is more about politics and profiling and less about substance'.
