In February 2022 the Commission published the proposal on Corporate Sustainability Due Diligence (CSDD). With this, companies would bear even legal responsibility for everything that happens during the entire value chain. They would have to constantly check upwards and downwards to see whether all their partners (and their partners’ partners) comply with a set of human and social rights, as well as environmental sustainability standards, both inside and outside the European Union.
Similar national laws already exist in some Member States, such as Germany and France, or are already subject of political debates, as in Austria, Belgium, and the Netherlands. The Commission’s intention was to ‘level the playing field,’ i.e., to put equal administrative and financial burdens also on companies’ shoulders in those member states where such norms had not even appeared on the horizon yet. And lest we forget: Europe already suffers comparative disadvantages vis-à-vis the U.S.A. and China, given the present regulatory burdens, the uneven subsidy policy, the burden of green transition, and the sky-rocketing energy prices.
The Commission came forward with the proposal—despite the fact that the Regulatory Scrutiny Board, its own supervisory body, had already given two negative opinions on it.
Then the European Parliament—as it is always extremely keen to go for even more obligations—has just aggravated the situation. The version adopted by the Legal Affairs Committee at the end of April would further deteriorate the EU companies’ competitiveness.
Let’s see what the text looks like on which the plenary is supposed to vote on June 1st.
First, the scope of the directive would be much wider than the Commission had foreseen. Even SMEs (i.e., companies with less than 250 employees) would face these obligations, should they be included in a value chain as partners of big companies. SMEs simply do not have the workforce, nor the financial resources, to comply with so many reporting and monitoring requirements.
Another significant change compared to the Commission’s original proposal is that it would strengthen companies’ direct and indirect responsibilities. Firms and their subsidiaries would have to address adverse effects throughout their entire value chain, not just those produced by companies with which they have an “established business relationship.”
Furthermore, if the company finds out that somewhere in the value chain someone has not complied with the necessary rules and standards, the European company would be required to end business relations with that specific company. How this contributes to the amelioration of human rights and environmental standards globally is not clear.
The EP wants companies to repair the damage caused to victims, as well as put an end to this damaging activity. Moreover, the number of stakeholders is expanded to include, in some cases, associations or trade unions as representatives of victims. All of them would be entitled to denounce ‘suspicious activities’ without any limit—thus giving them immense opportunities to dominate and control the companies’ activities.
Not respecting the rules would imply civil liability, sanctions, as well as imposing extra responsibilities and obligations on directors, which would interfere with their role.
All this would put a dramatic administrative and financial burden on companies’ shoulders. Law and consultancy firms would be the only winners, because only very few firms could set up their own units to cope with denouncements and the consequent legal procedures.
Moreover, legal uncertainty with this directive would be extremely high. Who decides whether there was real damage caused, whether the company could have prevented the damage, whether there was profit drawn from it? Where do the limits lie between reasonable, proportional controls and NGOs’ expectations?
Thus, the EP is sitting backwards on the horse and seems not to understand what the primary role of business is: to produce growth and jobs.
The original idea of the proposal is noble. I acknowledge the good intention behind it, but solving human and social rights, as well as environmental problems, does not belong to the field of competence of companies. We should not delegate governments’ responsibilities to them. Firms are not, and should not act as, one another’s policemen—and should not be made liable for their partners’ activities. This proposal disproportionately interferes with the internal working of companies, i.e., by introducing directors’ duties and civil liabilities. The EU and its member states need to take their fair share from dialogue with partner countries and not expect companies to do that for them.
Maybe it is not too late to wake up and save the EU economy from another unbearable burden with the worst possible timing: in the middle of a war, inflation, growing tensions, and crisis. The European business community in its Joint Statement in January 2023 called for “realism, proportionality, and workability for this framework to truly enable and guide businesses in taking necessary steps towards more sustainable supply chains.” We should listen to this smart advice.
For instance, monitoring only the direct business partners’ compliance with human rights and environmental standards would be feasible. Exempting EU companies and all SMEs, and making due diligence voluntary for them, would make the proposal much more proportional.
The CSDD will be one of the pieces of EU legislation of the last 20 years with the greatest impact on companies for its scope and number of obligations that go well beyond simple reporting. Let’s not forget: European companies are already overloaded with thousands of pages of new rules to comply with, given that the EU had already produced almost 150 pieces of legislation in the last 5 years that directly impact businesses. The cost of all that is, of course, at their expense. In the meantime, we have seen very little realised from earlier promises. Have the “one in, one out” rule or the “think small first” principle ever been put into practice? When will the Commission finally publish the long awaited SME relief package?
Stop further deteriorating the European business environment. Have faith in our own companies, in their abilities to come up with good examples, and in the strength of their voluntary commitment. Bureaucracy, denunciation, and sanctions never bear fruit.
Another Obstacle to EU’s Competitiveness?
In February 2022 the Commission published the proposal on Corporate Sustainability Due Diligence (CSDD). With this, companies would bear even legal responsibility for everything that happens during the entire value chain. They would have to constantly check upwards and downwards to see whether all their partners (and their partners’ partners) comply with a set of human and social rights, as well as environmental sustainability standards, both inside and outside the European Union.
Similar national laws already exist in some Member States, such as Germany and France, or are already subject of political debates, as in Austria, Belgium, and the Netherlands. The Commission’s intention was to ‘level the playing field,’ i.e., to put equal administrative and financial burdens also on companies’ shoulders in those member states where such norms had not even appeared on the horizon yet. And lest we forget: Europe already suffers comparative disadvantages vis-à-vis the U.S.A. and China, given the present regulatory burdens, the uneven subsidy policy, the burden of green transition, and the sky-rocketing energy prices.
The Commission came forward with the proposal—despite the fact that the Regulatory Scrutiny Board, its own supervisory body, had already given two negative opinions on it.
Then the European Parliament—as it is always extremely keen to go for even more obligations—has just aggravated the situation. The version adopted by the Legal Affairs Committee at the end of April would further deteriorate the EU companies’ competitiveness.
Let’s see what the text looks like on which the plenary is supposed to vote on June 1st.
First, the scope of the directive would be much wider than the Commission had foreseen. Even SMEs (i.e., companies with less than 250 employees) would face these obligations, should they be included in a value chain as partners of big companies. SMEs simply do not have the workforce, nor the financial resources, to comply with so many reporting and monitoring requirements.
Another significant change compared to the Commission’s original proposal is that it would strengthen companies’ direct and indirect responsibilities. Firms and their subsidiaries would have to address adverse effects throughout their entire value chain, not just those produced by companies with which they have an “established business relationship.”
Furthermore, if the company finds out that somewhere in the value chain someone has not complied with the necessary rules and standards, the European company would be required to end business relations with that specific company. How this contributes to the amelioration of human rights and environmental standards globally is not clear.
The EP wants companies to repair the damage caused to victims, as well as put an end to this damaging activity. Moreover, the number of stakeholders is expanded to include, in some cases, associations or trade unions as representatives of victims. All of them would be entitled to denounce ‘suspicious activities’ without any limit—thus giving them immense opportunities to dominate and control the companies’ activities.
Not respecting the rules would imply civil liability, sanctions, as well as imposing extra responsibilities and obligations on directors, which would interfere with their role.
All this would put a dramatic administrative and financial burden on companies’ shoulders. Law and consultancy firms would be the only winners, because only very few firms could set up their own units to cope with denouncements and the consequent legal procedures.
Moreover, legal uncertainty with this directive would be extremely high. Who decides whether there was real damage caused, whether the company could have prevented the damage, whether there was profit drawn from it? Where do the limits lie between reasonable, proportional controls and NGOs’ expectations?
Thus, the EP is sitting backwards on the horse and seems not to understand what the primary role of business is: to produce growth and jobs.
The original idea of the proposal is noble. I acknowledge the good intention behind it, but solving human and social rights, as well as environmental problems, does not belong to the field of competence of companies. We should not delegate governments’ responsibilities to them. Firms are not, and should not act as, one another’s policemen—and should not be made liable for their partners’ activities. This proposal disproportionately interferes with the internal working of companies, i.e., by introducing directors’ duties and civil liabilities. The EU and its member states need to take their fair share from dialogue with partner countries and not expect companies to do that for them.
Maybe it is not too late to wake up and save the EU economy from another unbearable burden with the worst possible timing: in the middle of a war, inflation, growing tensions, and crisis. The European business community in its Joint Statement in January 2023 called for “realism, proportionality, and workability for this framework to truly enable and guide businesses in taking necessary steps towards more sustainable supply chains.” We should listen to this smart advice.
For instance, monitoring only the direct business partners’ compliance with human rights and environmental standards would be feasible. Exempting EU companies and all SMEs, and making due diligence voluntary for them, would make the proposal much more proportional.
The CSDD will be one of the pieces of EU legislation of the last 20 years with the greatest impact on companies for its scope and number of obligations that go well beyond simple reporting. Let’s not forget: European companies are already overloaded with thousands of pages of new rules to comply with, given that the EU had already produced almost 150 pieces of legislation in the last 5 years that directly impact businesses. The cost of all that is, of course, at their expense. In the meantime, we have seen very little realised from earlier promises. Have the “one in, one out” rule or the “think small first” principle ever been put into practice? When will the Commission finally publish the long awaited SME relief package?
Stop further deteriorating the European business environment. Have faith in our own companies, in their abilities to come up with good examples, and in the strength of their voluntary commitment. Bureaucracy, denunciation, and sanctions never bear fruit.
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