Facing what appeared to be an imminent failure due to rising concerns over civil liability for businesses, the European Council delayed Friday’s vote on the Corporate Sustainability Due Diligence Directive. The final draft of the CS3D, released on January 30, initially appeared poised for easy approval. However, that support quickly eroded throughout the day on February 7, following Germany’s indication they will abstain from the vote. The delay indicates that there are last-minute efforts to revive the proposal, but the likelihood of success is minimal. It is speculated that a vote may occur as soon as February 14.
As the name implies, the CS3D, also called the CSDDD, establishes a corporate due diligence standard on sustainability issues for businesses operating in the EU. In this case, sustainability most directly applies to environmental concerns, climate change, and human rights.
The new due diligence requirements apply not only to the direct actions of the company, but also to their subsidiaries and supply chain. EU based companies, as well as non-EU companies that conduct a set level of business in the EU, could become liable for the actions of their suppliers.
The proposed due diligence standard adopts a risk-based approach, in which companies must identify risks where they are most severe or most likely to occur, then prioritize the order of mitigation based on severity and likelihood. Failure to act will result in regulatory liability from member states, as well as opening them up to civil litigation from those who are impacted.
The civil litigation was a particular sticking point for Finland, who viewed the proposal to create class action litigation as incompatible with their existing judicial system. Class action lawsuits are a relatively new, and largely unused aspect of the Finnish legal system. The Finnish Act on Class Actions entered into force in October 2007. However, the first class action lawsuit was not filed until 2019.
German objections to the CS3D are not surprising, as Germany has recently been the source of significant push-back relating to sustainability regulations. German political leaders have increasingly voiced concerns that the EU is overregulating in the area, leading to an excessive burden on businesses, especially small and medium-sized enterprises.
Interestingly, while the opposition to sustainability requirements is the strongest from Germany, it is also the home of one of its most vocal advocates. European Parliament member Axel Voss serves as rapporteur for multiple EU sustainability directives including the Corporate Sustainability Reporting Directive and the CS3D. EU press releases on these topics generally feature quotes from Voss. He is also a frequent defender of the projects in other forums.
For EU legislation like the CS3D, three proposals are passed, then negotiated to the final agreement. The proposals come from the European Commission, the European Parliament, and the European Council through individually passed legislation. Those differences in the proposals are then negotiated by representatives of each body to reach a final draft proposal that is then brought back to the original three for final approval. Once approved, member states have two years to enact it into state law.
The current final draft of the CS3D cannot be amended by the voting bodies. The vote is either to approve or reject. Meaning there are no deals to be made to alter the existing text. If the Council votes to reject, the proposal will be sent back for further negotiations.
The delay could be more than a temporary setback for the CS3D. The 2024 European Parliament election is scheduled for the beginning of June. Sustainability advocates are concerned that the composure of the body may change on this issue, removing majority support for the CS3D and other sustainability directives.