What does a failed majority consisting of 13 abstentions, 13 in favour, and one vote against mean for the EU's proposed Corporate Sustainability Due Diligence Directive? At such times of uncertainty, it is easy to adopt a pessimistic view, but is this really the way forward? Does this mean that after four years of extensive work to reach an agreed text, the EU will throw the baby out with the bathwater? A broader context is needed to understand why this may not be the case.
The UN coined this decade as the 'Decade of Action' for accelerating sustainable solutions to the world's biggest challenges. The idea is the world would come together to mobilise everyone, everywhere, to demand urgency and ambition and to supercharge ideas to solutions. In short, it is time to deliver on the inter-connected Sustainable Development Goals (SDG) agenda for 2030 as agreed by world leaders, including those of the European Union.
Over the past several years, we have witnessed a massive and growing tide of environmental, social and governance-related (ESG) regulation. After a longstanding tradition of voluntary frameworks and standards for disclosing sustainability-related information, we have now seen greater convergence and consolidation of these. This brings with it the benefit of generating more coherent, consistent and decision-useful information for companies and investors alike. This has been helped by the creation of the International Sustainability Standards Board (ISSB) and the adoption of its general and climate-related S1 and S2 standards. This has also been driven by business need for certainty and clarity to create a level playing field and cohesive business environment. Sustainability-related requirements need to transcend national boundaries as do the sustainability issues they aim to address. Decision-makers and a wide variety of stakeholders benefit from common approaches which afford clarity and certainty.
In parallel, we have witnessed a heightened trend in moving towards mandatory ESG legislation. This has taken place not only within the UK and Europe, but worldwide. One has to look no further than the example of the set of recommendations of the Task-Force on Climate-related Financial Disclosures (TCFD) as a case in point. It began as a voluntary initiative which has now been placed on a mandatory footing with companies in at least 14 jurisdictions subject to TCFD requirements issued by governments, regulatory authorities or stock exchanges. The most recent TCFD status report of 2023 illustrates how mandatory legislation is clearly a driver of action. And in the case of supply chain due diligence, Germany and France have recognised the value of mandatory legislation on due diligence having already put in place their own respective legislation (i.e. the French Vigilance Law and the German Supply Chain Due Diligence Act). If we look further afield, the United States also has its Transparency Act.
That takes us back to the recent major hiccups in attempting to pass the EU Corporate Sustainability Due Diligence Directive (CS3D). The evidence is clear that in order to activate the step change needed to deliver responsible business conduct, then unified mandatory regulation is the way forward. Consistency and clarity are needed to help businesses prevent and minimise adverse impacts on human rights and the environment by their operations, those of their subsidiaries' operations and in the chain of activities of their business partners.
It is also acknowledged that that the OECD Guidelines on Responsible Business Conduct (most recently updated in 2023) have been in place for over three decades which is complemented by the 2018 due diligence guidance. In many respects, the CS3D is not novel; it is codifying into law the due diligence process outlined the OECD Guidelines. It also affords a tangible way of implementing in practice the UN Guiding Principles of Business and Human Rights and addressing prioritised adverse environmental impacts.
It is evident these principles of integrity have been embraced by the global business community. 21,136 companies and SMEs worldwide are members of the United Nations Global Compact and have committed to implement their 10 principles which have environmental sustainability and respect for human rights at their centre.
The current piecemeal approach to supply chain due diligence across Europe, with some Member States doing their own thing and others doing nothing or seeking to bring in their own laws creates far greater uncertainty for business than the unified alternative of CS3D. The current situation poses an impediment not an enabler for business.
Many leading businesses across Europe and beyond have publicly supported mandatory due diligence on human rights and environmental impacts. Businesses want to act with integrity and deliver on their commitments to ensuring environmental sustainability and respect of human rights. If there ever was a time for a unified and mandatory approach to due diligence it is now, in this decade of action, not inaction. Now is the time for supercharging ideas to solutions.
For more information on CS3D, Sustainable Business and ESG, please get in touch with our experts below.
