Is the EU Corporate Sustainability Due Diligence Directive too much, too soon?

The EU Council goes to vote this week on groundbreaking CSDDD regulations, enforcing  business  to  conduct risk-based human rights and environmental assessments. But as Ruth Knox writes, the bloc now risks litigation overload. 

After weeks of delay, despite having reached a provisional agreement in December, the EU Council’s Corporate Sustainability Due Diligence Directive (CSDDD) finally passed in March. The decision marks a real landmark outcome for human rights regulation, especially in the face of concessions and eleventh-hour opposition from a number of member states. 

It has been unclear for many years whether the human rights agenda in Europe would change substantially, but the growth of regulatory requirements necessitating enhanced due diligence has prevailed. 

Originally heralded as the first law to attempt widespread behavioural change in the private sector on business and human rights, the CSDDD will require companies to undertake risk-based human rights and environmental due diligence to identify and assess actual and potential adverse impacts. Companies will also have an obligation to prevent, mitigate, and remedy such impacts in their own operations and value chains, as well as periodically monitor the effectiveness of measures taken. 

What concessions have been made to the legislation? 

In this form, however, it is evident that the EU has yet again tried too much, too soon, this time on social regulation. With multiple businesses already up to their ears in Corporate Sustainability Regulatory Directive (CSRD) compliance projects, among others, this regulatory project was always going to struggle in 2024 with its ambitious breadth and the stringency of proposed obligations. 

As a result, it’s not surprising to see concessions made by the Belgian presidency to the final legislative form of the directive, which significantly reduces the scope by over 60% through raising eligibility thresholds. The concessions also seek to protect agricultural producers with less than €300 million turnover, and reduces activities subject to due diligence, such as product disposal, recycling, and landfill. 

Therefore, while many in the industry are pleased to see the directive jump over its next hurdle, other campaigners question the effectiveness of legislation in the current, moderated form. 

How does this compare to international efforts to implement more comprehensive ESG frameworks? 

Even with the reduced scope, the EU directive is still a country mile ahead of the rest of the world on all aspects of sustainability regulation. With this win, however, the EU must seize the opportunity to create well-defined, commercially relevant and considered guidance on the multiple different elements of this regime in due course, in full consultation with industry stakeholders, including but not limited to those operating in the solar panel manufacturing sector.

The project should also be used as a productive learning point, to adapt and refine existing regulatory regimes like the CSRD and Sustainability Finance Disclosures Regulation (SFDR) to make them more user-friendly, economically efficient and ESG-effective.

The question now remains whether this regulation will bear out in practice – after so many significant setbacks, it has been finalised relatively quickly and thus risks being less than robust when implemented. The EU must also take care that the shape of the directive does not duplicate the confusion prompted by the SFDR’s minimum safeguard diligence obligations, and instead should adapt to ensure that new and future guidelines are practical and streamlined when executed. 

Likewise, companies (including EU alternative investment fund managers) and their in-house compliance teams now face a number of hurdles in implementation, and it will be very interesting to see the final form of the new diligence obligations, and the shape of any liability mechanism. 

Ultimately, the EU vote on the CSDDD text is undoubtedly a step in the right direction, but with a final vote looming on this week, the final form of the directive will be unclear until 24th April. At that point, the big question is where EU ESG regulation goes from here. But, with EU elections coming in June, we may be waiting some time for the answer. 

Ruth Knox is Global Co-Chair of the ESG & Sustainable Finance practice at Paul Hastings