There was no shortage of disappointment and discourse from all sides during the recent negotiations on the EU’s Corporate Sustainability Due Diligence Directive (CSDDD). Opinions were plentiful, diverse and passionate, and the gloves certainly came off in the final round.
The debate played out in the columns of Responsible Investor (for example, here and here) and on LinkedIn among the authors of this piece, demonstrating how the legislation has sparked a fervent debate – even among friends and colleagues – and underscoring the complexities of aligning corporate practices with sustainability goals through legislation.
All three of us came to the discussion with a different geographical lens. As most will already know, Eccles is neck-deep in the anti-ESG war that continues to rage in the US, very much bringing the US context to the discussion.
Gardiner is a seasoned Brussels operative, immersed in the nuance of European legislation. Webster, having spent the majority of her career in asset management in Asia, brings an emerging markets lens and experience on how extraterritorial reach passes down value chains and influences finance.
Together, we watched a highly unusual political process unfold, seeing tectonic shifts in how the business happens in the EU. Where once consensus would be found sooner, an unexpected vacuum was created by the lack of a readily emerging clear majority. However, at the eleventh hour, thankfully, consensus was finally reached.
The result is that the CSDDD is now moving towards the final political approval stage.
We agree that the directive appears to have landed at a unique compromise of ambition versus pragmatism. However, we would add the caveat that the intended positive impact of the law will depend on how well it is enforced, how directly companies address their core responsibilities, and how non-EU based firms respond to their inclusion.
Corporate accountability
The final result has rightly been applauded as a key step in the right direction for greater corporate accountability. But it is just that, a step, not a silver bullet.
Presuming there is full political sign-off on the law this year, it will still take another three years before it fully comes into force in 2027. Before then, there are a number of challenges and hurdles to overcome to make sure the CSDDD has the positive impact we all hope it will.
Setting minimum legal standards and initially applying them to large companies that have the resources and expertise to meet them through the CSDDD makes perfect sense. It will build a common understanding of what good supply chain due diligence looks like and help prepare the rest of the market.
But such standards are only going to be as strong as their enforcement and the spirit in which business adopts them.
While the CSDDD mandates that each EU member state appoint a supervisor to police the application of the directive, even suggesting the creation of a “supervisory network”, for the vast majority of member states this will be the first time they appoint such a supervisor.
A significant investment of time and money will be needed to train staff and put in place systems to track and respond to harms in company supply chains.
Governments will also need to develop and build the means of alerting them to issues and problems. Currently, the majority of issues are raised by civil society or via the press, which will need formalising to ensure correct follow-up procedures and investigation.
The value-creation potential of the CSDDD will also depend on the approach companies take to its implementation.
Every effort must be made to support those companies that embrace the spirit of the CSDDD and leverage it to unlock new opportunities, drive innovation and productivity, and ultimately build resilience against future structural supply shocks from changing policy, client and employee demands.
The worst outcome of the legislation would be one where companies ignore their responsibility to engage with the risks in their supply chains, and simply draw up a list of “good” and “bad” suppliers to protect themselves from any wrongdoing.
Protecting smaller players
There has also been much debate on how to ensure responsibilities are not simply pushed down supply chains, with specific wording in the legislation aimed at preventing this. But this intention must be made a reality.
Too often, small-scale suppliers and smallholders have been left to carry the regulatory burden imposed on the largest economic actors.
Serious attention must be paid to how companies in the scope of the CSDDD take on board this new responsibility. Communication channels must remain open for suppliers to voice concerns that they are being pressured to simply “comply” when they should be “engaged with”.
Finally, the CSDDD will indirectly have extraterritorial reach, as is the case with the EU’s new Corporate Sustainability Reporting Directive (CSRD), which should be a welcome step towards harmonisation rather than criticised as overreach.
The CSDDD can have a positive spillover effect, but only if governments in other large markets like the US understand that it is not designed to punish those who contribute to supply chain harms, but rather to provide a blueprint for collectively addressing them.
There is a general agreement that the legislation will have a positive impact and add business value if it is well applied and properly enforced.
However, to ensure the CSDDD lives up to its potential, governments and regulators must now create an enabling environment for companies to thrive within its framework. This includes providing guidance, support and incentives for companies to adopt sustainable business practices.
Overall, the CSDDD should not be viewed as a barrier but as a long-term bridge to a sustainable and profitable future.
Throughout the world, companies are fond of saying that a commitment to sustainability is core to their strategy and value creation. The CSDDD challenges them to make sure their deeds match their words.
The next three years of preparation will be crucial to how that unfolds.
Robert G Eccles is a visiting professor of management practice at Saïd Business School, Oxford University, and the founding chairman of the Sustainability Accounting Standards Board
Richard Gardiner is head of EU public policy at the World Benchmarking Alliance
Andrea Webster is head of financial system transformation at the World Benchmarking Alliance
