What is next for the European Supply Chain Legislation?
The clock is ticking; without CPR performed by European policymakers, the EU's supply chain legislation (the Corporate Sustainability Due Diligence Directive or CSDDD/CS3D) will die of its sudden heart attack. After two years of negotiations between the European Parliament, the Council (representing Member States), and the EU Commission, a provisional political agreement was reached on the 14th of December 2023. However, last minute the German government, pushed by its junior coalition partner the liberals (FDP), has retracted its support for the compromise. And what happened after is only comparable with a domino effect: the push-back led to the formation of a blocking minority in the Council, composed of Germany, Italy, Finland, and Sweden. The call for a revision of the provisional agreement was recently joined by France, who pushed for a modification of the scope of the Directive.
Consequently, during the past months, the Belgian Presidency has tried to unblock the situation in the Council by modifying the agreement to address the concerns of the different Member States. The Dutch Member of the European Parliament (MEP) Lara Wolters (S&D), who is leading the negotiations on behalf of the European Parliament, expressed her frustration about this sudden turn of events:
“to walk back on commitments or come up with more demands shows a flagrant disregard for the European Parliament as a co-legislator […] and it undermines the trust to reach trilogue agreements. […] The failure of the Member States to improve this agreement is an outrage to me”.
MEP Lara Wolters is certainly not the only one who is upset. Over the past weeks’ businesses, civil society, policymakers, activists, and journalists have urged the Council and foremost Germany to compromise or cynically commented on the state of the German coalition led by Chancellor Olaf Scholz.
But how did we get here, and what is next for due diligence legislation in Europe? To explore this question, one must understand the first seeds of the European Due Diligence Legislation, look into the development of the negotiations of the CS3D and dive into the reasons for the German last-minute U-turn.
Corporate Due Diligence - from voluntary initiatives to mandatory minimum expectations.
In the early 2010s, there was a growing recognition of the imperative to hold companies accountable for the adverse environmental and human rights impacts within their supply chains. This triggered a proliferation of voluntary initiatives. Notably, the OECD published due diligence guidance for conflict minerals, marking a significant step forward. The tragic Rana Plaza accident prompted the EU to launch its Garment Flagship initiative, a pivotal moment that catalyzed voluntary sector initiatives among Member States for the textiles sector. Examples include the German Textilbündnis and the Dutch "Agreement on Sustainable Garments and Textiles". These initiatives were designed to promote and incentivize the adoption of robust due diligence practices within the textile industry, aiming to address systemic challenges and drive positive change.
However, despite the strides made by these voluntary initiatives, they failed to instigate a comprehensive transformation across all business sectors, as would have been accomplished by a binding legal framework. Consequently, certain Member States began crafting their own due diligence legislation in response to this gap. France, in particular, has emerged as a leader in European discussions with its pioneering Duty of Vigilance Act, setting a precedent for other European institutions and Member States to emulate.
Negotiating a European Approach to Due Diligence
In February 2022, the EU Commission presented the long-awaited proposal for a “Corporate Sustainability Due Diligence Directive” (CS3D). The Directive aimed to move from voluntary due diligence schemes to introducing a mandatory legal framework of human rights and environmental due diligence obligations for companies operating in the European Union. The ambition of the Directive is to oblige companies under the scope and registered or operating within the EU to identify, end, prevent, mitigate, and account for adverse human rights and environmental impacts in their value chains.
However, the Commission's original proposal was massively criticized for its lack of clarity (for example, regarding its definitions) and the room for interpretation it left to Member States. Industry, civil society, and many policymakers were disappointed by this initial draft. Which required much rewording from the EU Parliament and Council of the European Union. Discussions in the two institutions focused on redefining the scope of the Directive. Further specifying the value chain activities covered by the Directive gained the most attention in the negotiations. Initially, the Commission suggested applying the Directive to the entire value chain. However, the term "chain of activities" was introduced after negotiations. This includes all upstream activities, while downstream activities are limited to disposal and waste management.
Another significant topic of discussion is the definition of the Commission's proposed term “established business relationship”, determining the relationships requiring due diligence. The Council has also prioritised clarifying this aspect. The final text suggests restricting it to “business partner” encompassing legal entities with a commercial agreement or service provision (“direct business partner”) or entities that perform business operations related to the company (“indirect business partner”).
Discussions have also focused extensively on determining which types of companies fall within the scope of the Directive based on the number of employees and overall turnover, including identifying which high-risk sectors should be prioritized by the Directive. However, this is one of the elements still under discussion among EU Member States, with some even proposing to remove the consideration of high-risk sectors from the final text and to include a gradual approach to implementation in which the scope is widened.
The Repercussions of the German U-turn
We need to examine the political context in Germany to understand the German government's U-turn on the CS3D negotiations.
Since 2021, a coalition between the social democrats (SPD), the Greens (die Grünen) and the liberals (FDP) has been ruling in Germany under the leadership of Chancellor Olaf Scholz (SPD). In recent years, several disputes between the coalition partners, ranging from delivering weapons in support of Ukraine, installing more efficient heating systems with renewable energy in buildings (“Heizungsgesetz”), and financial support for families with lower incomes, have been shaking the initial harmony of the trio. In the absence of a proactive chancellor Scholz, Christian Linder, party lead of the liberals and federal finance minister, has played a crucial role in blocking many initiatives proposed by his fellow partners. This has created massive trenches within the coalition.
While the coalition partners are in a clinch with one another, the far right is on the rise in Germany. The AfD (“Alternative for Germany”) is currently polling as Germany's second-largest party with 19%. Which in turn puts the coalition partners under even more pressure to please their clientele. The situation for the liberals looks specifically grim, with the election polls around 3-5%, which would, depending on the results, barely get them into the German Parliament (a minimum of 5% of votes is needed). Desperate times call for desperate measures…
In mid-January, Christian Lindner and his fellow party member Marco Buschmann (Federal minister of Justice) sent a letter that halted the EU negotiations. Arguing that the CS3D would harm German and European businesses' competitiveness due to the bureaucratic burden it would create. Specifically, SMEs would pay the price of the CS3D. Interestingly, the German Supply Chain Act (“Lieferkettengesetz”), which has been enacted since 2023, did not come up in the discussions around competitiveness. The sudden U-turn of the liberals has to be interpreted as an attempt to please their clientele (typically, business-friendly economic liberals) and to attract potential voters.
Despite the mediation efforts of his coalition colleague Hubertus Heil (SPD), the FDP stood firmly on its position, arguing for broad industry support. In a cascading chain reaction, after Germany stated that it would abstain from the vote in the Council, Italy, Sweden, and Finland retracted their support for the compromise that was found earlier.
What’s next?
The ongoing deadlock in the formal approval of the final text of the CS3D now has a new deadline set for the 15th of March. However, given the significance of the Directive and the unusual circumstances, this date may be extended to continue efforts to approve the text before the end of the current EU mandate. The urgency of reaching an agreement before the end of the mandate is palpable, as election polls indicate a clear tilt to the far right within the European Parliament. Moreover, the incoming Hungarian Presidency of the Council, which will take the baton from Belgium in September 2024, will likely de-prioritise the text and further water down the CS3D’s provisions.
On the 5th of March, the Belgian Presidency presented a new compromise text, currently being used to persuade the blocking minority in the Council for approval. Meanwhile, the Parliament still needs to approve the final text in both the Committee on Legal Affairs (JURI) and during the plenary session. The last plenary session before the European elections is scheduled for the week of the 22nd of April. Whether or not the CS3D progresses, several legislative texts related to the Directive continue independently toward implementation. An example is the Corporate Sustainability Reporting Directive, which will include data points covering social elements, the Regulation on Forced Labour that has just concluded its trilogues, or the implementation of the Deforestation Regulation, intrinsically linked to due diligence obligations.
PS. A recent poll of the German population, FDP party members, businesses, and civil society found that the large majority favors the CS3D. Meanwhile, the German liberals are still losing votes.
AUTHORS
Marina Prados Espínola
For this blog, Marina shared her extensive experience working on supply chain legislation in the EU for various sectors, from food to textiles. Based in Brussels, Marina supports the “Policy Hub—Circularity for Apparel and Footwear” on behalf of 2B Policy. After work, you will find Marina walking her dog Elko or in the movies. Her favorite director is Wes Anderson.
Bente Bauer
Bente leveraged her German roots to provide additional context to the German political developments. Listening to the “Deutschlandfunk” every morning she stays up to date being based in Amsterdam. Bente co-founded 2B Policy with Baptiste in 2020. She advises 2B Policy’s clients on various fronts, among others, in mapping the EU policy landscape, helping clients to understand its impacts on the business, developing public affairs strategies, and supporting compliance strategies. You will often find Bente on her race bike exploring the Dutch “low-lands”.
