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Adoption of EU corporate sustainability & responsibility directive stalled

Heddi Lutterus.
Heddi Lutterus. Source: ERR

After Germany, Finland, and Estonia officially opposed the new sustainable and responsible business practices directive, the adoption of the legislation has stalled. The EU committee responsible for the agenda of EU Council ministerial meetings (COREPER) postponed further consideration of the directive until February 14.

Heddi Lutterus, undersecretary for legal policy at the Ministry of Justice, said the committee (COREPER) postponed the debate on the new EU directive (CSDDD), which promotes sustainable and responsible corporate behavior in larger companies and their supply chains, at the request of the Belgian Presidency in order to try to amend the text, or find more signatories before the next debate. "No further information has been received so far," she added.

So far, only Germany, Finland and Estonia have said they do not support the regulation in its current form. Lutterus could not say whether other countries had joined the list of critics. "But the fact that the initiative was taken off the agenda today suggests that there are other countries that are hesitant," Lutterus said.

However, she said that the Belgian Presidency would do its best to ensure that the directive still goes ahead: "It is certainly in Belgium's interest to get some kind of solution before the parliamentary elections come," Lutterus said.

Estonia has two concerns regarding the directive. First, according to Lutterus, it is unclear what exactly the obligations will be that could be imposed on Estonian companies after the EU directive is transposed into Estonian law.

"The directive lists several international human rights conventions; for example, the company should act diligently, respect human rights, and protect the environment, but as it stands, these obligations are very abstract. So what does the company actually have to do? This has not been made clear in the negotiations so far," Lutterus said.

"This also raises another concern. If it is not clear what that duty is, then the civil liability that would arise from a breach of that duty will also remain very vague and could lead to burdensome litigation. Both for companies and for the judicial system," she said.

But it is also unclear to what extent the adoption and implementation of the directive will affect businesses.

The text of the directive states that sustainability due diligence requirements may apply to businesses with a yearly revenue of €150 million and at least 500 employees. So it is estimated that 13,000 European companies and 4,000 companies from third countries that are active in Europe would be affected.

Under the new rules, these companies will have to pay more attention to environmental, social and governance concerns, and companies that fail to comply could be punished with fines of up to 5 percent of their turnover.

In addition, large companies would have to ensure that their supply chains, both suppliers and resellers, are fully compliant as well.

Lutterus said that no one is clear about the amount of red tape that will have to be added when the directive is implemented. "If you think about the fact that this large company will also have to set up a system strategy within its own organization on how it will identify these potential human rights or environmental violations, how to prevent them, and how to investigate and resolve them in case of complaints, then it will definitely be an administrative burden," Lutterus said.

"But how big it will be is anyone's guess. Nobody has ever had a system like this before," she added.

"It is not clear what an entrepreneur should actually do to behave in a responsible way," she summarized.

About 10 companies in Estonia are expected to be directly affected, but the impact through supply chains could be much wider. "Because it extends through the supply chain to smaller companies partnering with larger ones, it's a large circle of manufacturing, logistics, and marketing that is affected," she said.

The European Union has been at the forefront of promoting sustainable and responsible business practices.

The EU Corporate Sustainability Due Diligence Directive (CSDDD) aims to promote sustainable and responsible business practices, by fostering sustainable and responsible corporate behavior throughout global supply chains, ensuring that businesses actively contribute to sustainable development. As such it seeks to minimize the adverse impacts of business operations on human rights and the environment.

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Editor: Huko Aaspõllu, Kristina Kersa

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