European Due Diligence Legislation in the Doldrums

The European Union’s efforts to introduce European due diligence legislation faces significant hurdles as key member states Germany, Italy, and France, retract their initial support. Despite achieving a political consensus in December 2023, the Corporate Sustainability Due Diligence Directive (CSDDD) is at a critical juncture, awaiting final approval from both member states and European lawmakers.

The directive aims to mandate companies to actively police, monitor and prevent human rights and environmental abuses within their supply chains. However, recent concerns from Germany about the directive’s impact on businesses have led to a domino effect, with other countries expressing doubts, thereby undermining the proposal’s support base. France’s push to narrow the scope of the directive by targeting fewer companies, combined with Italy’s opposition, further complicates the situation.

Although the Netherlands stands in support, the Belgian Presidency of the Council will once again have to review the situation. This development introduces further delays to a process already constrained by time, as the legislative machine in Brussels approaches a standstill with the upcoming European elections in June.

Germany Throws a Spanner in the Works

Germany’s political landscape faced turbulence recently as a significant rift emerged within its coalition government. The Free Democratic Party (FDP), the smallest member of the three-party coalition, announced its withdrawal of support due to concerns about the directive’s perceived negative impact on business interests. Targeting the likes of businesses and right-winged voters, this decision is part of the FDP’s efforts to maintain its relevance in the upcoming European and German regional elections this year, as well as the general election next year.

This development has not only revealed (again) divisions within the German coalition but also escalated tensions among EU lawmakers, public officials, national governments, civil society organizations, and certain businesses, sparking controversy in Brussels. Lara Wolters (S&D – PvdA), the EU Parliament’s lead negotiator, likened the FDP’s actions to those of an “angry toddler”. With Chancellor Olaf Scholz’s coalition deadlocked on the issue, Germany indicated its intention to abstain from a critical vote.

Running Like Wildfire

Germany’s renewed position raised fears that other reluctant countries, particularly Italy, would follow Germany’s decision to abstain or reject the legislation. Italy eventually decided to follow Germany’s lead, while France proposed at the last minute to raise the threshold for companies covered by the legislation.

Concern is growing within several sectors about the uncertainty of the due diligence legislation. Many sectors fear that the stringent rules could undermine European competitiveness. On the other hand, proponents urge the swift implementation of the CSDDD, arguing that it would provide uniform standards and avoid the confusion and complexity of a fragmented regulatory landscape. Moreover, the important human rights considerations associated with this decision should not be overlooked.

This shift from Germany occurs in a broader trend within the European Union, where the political wind turns more towards the right-winged parties. With the elections ahead, already final negotiations of legislation are influenced by this move. Centrist-right group EPP fears a victory of the more extreme right-winged groups I&D and ECR, which leads to a shift in their voting behavior to attract voters.

The deadlock on the CSDDD thus comes at a time when the European legislative calendar is crowded, with the European Parliament recess and the upcoming elections in June in sight. It is therefore unclear whether an agreement will be reached before the European elections, as the last plenary session will be in April, when the law is due to be finalized. Negotiations could resume after the European elections, although the European Parliament is expected to undergo a shift to the right, which could lead to the watering down or even complete halt of the legislation.

Now, Dutch Due Diligence Legislation?

The development of the Netherlands’ own due diligence legislation, as outlined in the 2021 coalition agreement, has stalled due to the (outgoing) cabinet’s preference for an EU-wide approach to ensure a level-playing-field. Furthermore, an initiative bill by a coalition of smaller parties – ChristenUnie (Christian Party), SP (Socialist Party), GroenLinks-PvdA (alliance between the Greens and the Labour Party), Volt (Pan-European Political Movement), and D66 (Liberal Democrats) – has been left unaddressed as of September 2023. However, with the EU directive currently in a state of uncertainty, there could be a resurgence in discussions about the need and viability of implementing national legislation. Yet, the political climate following the Dutch House of Representatives elections in November 2023, with a shift towards the right, casts doubt on the bill’s support. While recent EU developments might reignite interest in this issue within Dutch politics, the chances of national legislation being enacted in the near term appear slim.