On March 15, the Council of the European Union finally agreed to approve a proposal for the EU’s Corporate Sustainability Due Diligence Directive (CS3D) after 17 out of the bloc’s 27-member states agreed to support a weakened version the law. The CS3D obliges companies to identify, assess, address, mitigate, and prevent negative social and environmental impacts throughout their upstream supply chain and in some downstream activities like distribution and recycling. It is also the first EU legislation that would mandate companies to adopt climate transition plans, with large companies facing requirements to align business strategies with the Paris climate agreement.
Major revisions water down the Directive
The revised version of the law that was ultimately passed by the Council of the European Union contains several major changes to the initial text of the CS3D including increasing the threshold for companies affected by the law and the removal of high-risk qualifiers that would have applied the law to smaller companies operating in industries and geographies of concern. The changes to the text were the result of concessions made by Belgium, which leads the EU’s rotating presidency, to larger member states of the EU including Germany, France, and Italy – all of which had refused to back the law when it was first put up for a vote on February 28.
The initial failure of the vote was surprising given that the Council of the European Union had adopted a formal position with the European Parliament to approve the original version of the CS3D in December 2023 and marked a significant departure from typical protocol regarding regulatory agreements in the EU, where final approvals have historically been a formality.
The opposition to the initial text of CS3D originated with Germany, which pulled its support for the directive in mid-February after one party in the country’s governing coalition voiced concerns that the scope of the law would make local businesses less competitive. France was primarily concerned with the size of businesses to which the regulation should be applied, arguing that the minimum employee threshold for company size should be increased from 500 to 5,000 while Italy had also made its support for the CS3D conditional upon company size and concessions over a new EU law on packaging waste.
The revised scope of the C3SD is expected to ease compliance requirements for many large companies that would have otherwise been covered under the earlier version of the law. Data from the Centre for Research on Multinational Corporations reveals that the scope of the revised CS3D will only cover around 5,400 companies within the EU, down from around 16,400 companies under the initial version of the law. The increase in employee size numbers also appears to have been done to gain support from Italy and France, which saw the number of companies bound under the CS3D in their countries fall by 67% and 57% respectively.
Forced Labor Regulation also passes Council vote
In addition to the CS3D, the Council of the European Union also agreed to adopt a related regulation on Prohibiting Products made with Forced Labor (FLR) on March 13. The FLR, which was first proposed in September 2022, is a regulation designed to prohibit the manufacture, import, or export of products made with forced or child labor in the EU common market and will apply to all companies irrespective of size. The law appears to have garnered significantly less opposition from EU member states than the CS3D, with only Germany, Latvia, and Hungary reportedly abstaining from the vote.
Under the FLR, the European Commission is tasked to establish a database of forced labor risks amongst products and areas, from which investigations into suspected forced labor will be prioritized. The Commission will be responsible for leading investigations occurring outside of EU territory, while member states will be entrusted with leading investigations of violations within their own territory.
Following any findings of forced labor, the authority that has led an investigation will be responsible for deciding whether impacted products should be banned, withdrawn, or disposed of. The agreement also stipulates that if a component of an overall product is in violation of the regulation, orders to dispose will only apply to the concerned component. If the European Parliament formally approves the agreed-upon legislation, companies found to have forced labor in their supply chain may face fines in addition to these potential seizures of products.
Burden of proof falls on EU authorities, unlike UFLPA
Despite the progress that the FLR has made within the EU, critics of the agreement have thrown into doubt how effective it will be in identifying forced labor outside of the bloc as the burden of proof falls not on companies, but rather on EU or national authorities. This distinction is a sharp difference to the United States’ Uyghur Forced Labor Prevent Act (UFLPA), which forces importers of flagged shipments to demonstrate that goods were not produced with forced labor via comprehensive supply chain mapping. However, proponents of the FLR have noted that the regulation is greatly strengthened by the concurrent passage of the CS3D. The FLR – particularly the element allowing for product import bans – is key in acting as the enforcement instrument in forced labor cases, while it is largely thought that the CS3D will provide insight into the root causes of forced labor incidents amongst suppliers.
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