Legal advisers are taking stock after yesterday’s failure by the European Council to approve landmark EU legislation that would have increased companies’ liability for the impact of their activities on human rights and the environment.

The Corporate Sustainability Due Diligence Directive (CSDDD) is widely regarded as the EU’s most ambitious bid yet to secure improvements in the corporate social responsibility credentials of businesses operating in the bloc.

But the measures – which extended to businesses’ supply chains and would have created a new civil liability regime – are now on hold after key states including Germany and Italy withdrew their support despite a provisional agreement having been achieved in December. 

A statement issued by the Belgian presidency of the council yesterday said “the necessary support wasn’t found”, adding: “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.”

The stated ambition of the directive is to “foster sustainable and responsible corporate behaviour and to anchor human rights and environmental considerations in companies’ operations and corporate governance” by ensuring that “businesses address adverse impacts of their actions, including in their value chains inside and outside Europe”.

London-based Debevoise & Plimpton partner Samantha J. Rowe, who specialises in arbitration and public international law, said resistance to the directive, particularly from Germany and Italy, focused on “concerns about excessive bureaucracy and the burden that would be placed on business”. She also noted that France “attempted to reduce the number of companies to which the directive would apply”.

“This set-back to the directive is not fatal, though,” she added. “Work will now be put in by the European institutions to address the concerns of the member states, and to agree to a new text for the directive that will be satisfactory for all stakeholders.”

Measures contained in the directive include a requirement for companies to integrate human rights and environmental due diligence into their policies and take measures to prevent or mitigate any “adverse impacts”.

It was also expected that companies would be required to adopt climate change mitigation plans that reflected the Paris Agreement’s goal of limiting global warming to 1.5 °C.

Sidley public international law partner Nicolas Lockhart, who is based in Geneva, said the legislation “is now off the table until after the European Parliament’s elections in June this year”.  

But he pointed out that Germany and France already had similar laws and anticipated other countries following suit. 

“So, we can expect an increasingly fragmented approach across the EU internal market: companies operating in different countries will face different due diligence burdens and costs, in different EU member states,” he added.

“This fragmented approach will create more pressure for an EU-wide solution that levels the competitive playing field for all businesses operating in the EU.”

Earlier this week, Pinsent Masons launched a net-zero programme for its small and medium-sized enterprise (SME) suppliers intended to help them reduce greenhouse gas emissions through science-based targets.

Work is underway compiling the second edition of the Global Legal Post Law Over Borders ESG comparative guide, which is edited by Debevoise & Plimpton’s ESG senior adviser Ulysses Smith. Email [email protected] for further details.