A key piece of EU legislation setting mandatory obligations for companies to address their negative impacts on human rights and the environment was dealt a significant blow today, failing to achieve final approval by the European Council, following objections from countries including Germany and Italy, despite a provisional agreement on the regulation reached earlier by the Council with the EU Parliament.

The setback to the corporate sustainability due diligence directive (CSDDD), follows a four-year process to advance the regulation, beginning with studies by the European Commission in 2020  on directors’ duties and sustainable corporate governance and on due diligence requirements in the supply chain, leading to the Commission’s proposed CSDDD draft in February 2022, setting out obligations for companies to identify, assess, prevent, mitigate, address and remedy impacts on people and planet – ranging from child labor and slavery to pollution and emissions, deforestation and damage to ecosystems – in their upstream supply chain and some downstream activities such as distribution and recycling.

While the Council adopted its position on the directive in late 2022 and reached an agreement on the CSDDD with Parliament in December 2023, a vote on its approval in Council was postponed last month after Germany threatened to not support the regulation on concerns of the bureaucratic and potential legal impact it would have on companies, and thrown into further doubt when Italy reportedly also subsequently pulled its support.

While a last-ditch attempt was made to approve the directive in Council today, these efforts were reportedly derailed further by a last minute effort by France to significantly scale back the scope of the new rules to apply only to companies with more than 5,000 employees, instead of the proposed 500 employee threshold, effectively removing roughly 80% of businesses from the CSDDD obligations.

After attempting to reach approval, the Belgian Presidency of the Council released a statement, saying:

“The final compromise text on the Corporate Sustainability Due Diligence Directive (CSDDD) was put forward for endorsement by Ambassadors at Coreper.

“Despite the efforts of the Presidency, the necessary support (QMV) wasn’t found.

“We now have to consider the state of play and will see if it’s possible to address the concerns put forward by member states, in consultation with the European Parliament.”

Key aspects of the CSDDD included requirements for companies to integrate due diligence on impacts into their policies and risk management systems, including descriptions of their approach, processes and code of conduct, in addition to obligating companies to adopt climate transition plans plan ensuring that their business models and strategy are aligned with the Paris Agreement goal to limit global warming to 1.5°C.

The CSDDD also included requirements for companies to engage with those affected by their business activities, with obligations including the introduction of a complaints mechanism, as well as establishing a system of supervision and sanctions, with member states setting up supervisory authorities to monitor compliance with the obligations, and to impose penalties including “naming and shaming,” and fines of as much as 5% of annual global revenue.

Sustainability-focused group expressed their disappointment with the failure to approve the directive. In a statement released following the Belgian Presidency’s announcement, Uku Lilleväli, Sustainable Finance Policy Officer at WWF European Policy Office, said:

“It’s scandalous that, in the 21st century, certain European lawmakers wish to permit companies to ignore human rights and environmental integrity, all under the guise of short-term profits. Let’s be clear: the law wouldn’t burden companies with unnecessary red tape; instead, it would secure a level playing field and help firms navigate necessary transitions in an informed and responsible manner.”

Isabella Ritter, EU Policy Officer at ShareAction, said:

“Those who blocked this legislation today have shown indifference to exploitation of workers and environmental degradation. They let internal political struggles take priority over the well-being of the planet and its people, which is unacceptable. The global community is watching, and the EU’s credibility and leadership is on the line.

“It’s now a race against time for the Belgian Presidency to work with EU leaders to end the impasse and find a way to ensure that this crucial legislation is approved.”