Introduction: Global Value Chains, Climate Change and Law
The 20-4 majority vote in the EU Parliament’s Committee on Legal Affairs – JURI – in favor of the Directive was the result of arduous efforts in February and March to respond to Germany’s and eventually other EU member states’ withdrawal of support for the Directive. Anyone interested in the legal regulation of what has come to be called ‘modern slavery law’ over the past one and a half decades held their breath in the early months of 2024 as a long worked-on Directive to hold multinationals accountable for child, slave and other forms of forced labour threatened to wither away in lobby-driven backroom deals between Brussels, Berlin, Rome and other EU capitals. With the vote being stalled twice on February 9th and March 8th, 2024, as Germany led other governments to withdraw their support for the Corporate Sustainability Due Diligence Directive, the CSDDD remained in a stomach-turning limbo – and that at a time of intensifying corporate backlash against political and legal interventions with regards to sustainability, EDI – equality, diversity, inclusion – and all things ‘ESG.’
After a hard-fought-over compromise was reached on March 15th, 2024 in the European Council, the vote within JURI on March 19, 2024 paves the way for a final vote on the Directive in the European Parliament. The final version agreed upon on March 15th and now passed by JURI applies but to a fraction of the formerly targeted scope of companies across the EU and it does not include accountability provisions with regard to companies’ negative climate impact: While the original CSDDD had aimed at companies operating within the EU with over 500 employees and exceeding 150 million Euro revenue, the watered-down version is limited to those companies with more than 1,000 employees and a minimum of 450 million annual turnover.
The political climate in which such regulations as the most recent EU Directive are being fought over, is a particularly charged one. Given the significance of global warming and the increasingly urgent pleas from scientists and broad ranges of stakeholders to acknowledge the existential importance of climate change mitigation and to take radical steps, literally everyone can ‘feel the heat.’ Unsurprisingly, climate change mitigation has become a policy concern in just about any area of regulation, reaching far beyond what was once perceived to be the ambit of ‘environmental law.’ With that, many of the foundations of global economic growth as well as the centuries-long pursued practices in sourcing and producing materials at immense human and ecological cost have come under intense scrutiny. Global value chains and their deep roots in inegalitarian, exploitative and unsustainable practices across the world and predominantly in the Global South are intimately tied into a transformative critique of economic practices in the Anthropocene and are therefore touching on highly sensitive interests. Politically, at a time of great economic and political uncertainty, ‘anti-ESG’ lobbies find support in both conservative and pro-business leaders who tend to (still) prioritize short-term returns over investing in meaningful and impactful transformation, often in fear of voter backlash in a context of high inflation and shrinking economic prospects. Their impact can be substantive and distinctly shape political outcomes and, as is evident in the United States today, shift the political and institutional landscape.
The Directive’s Significance in Battling Human and Environmental Rights Violations
As in other high-profile, ambitious and transformative regulatory initiatives – as during the EU’s efforts to adopt a Takeover Directive in 2003 – which require intergovernmental agreement and respective stakeholder support, the CSDDD was only passed after substantial amendments had been made. Preventing it from failing altogether was due to the intensive diplomatic leadership by the Belgian presidency of the EU Council and advocacy efforts across human rights and business stakeholder groups.
As for the hope that the Directive would advance transnational efforts to compel businesses to assume an accountable role in mitigating climate change, some progress was made, even if the original ambitions were not met. In its adopted version, the CSDDD still requires – in Art. 15 CSDDD – that companies draw up and implement a “transition plan for climate change mitigation.” The transition plan is a further noteworthy element of the Directive as it exemplifies the comparatively rapid evolution of transposing a demand made by environmental advocacy groups into a regulatory obligation – acknowledging, of course, the role that the Hague District Court’s Milieudefensie judgment against Royal Dutch Shell played here in increasing the pressure.
The recent development is even more important when considering the reasons for the ambitious Directive in the first place: as keen observers noted already in 2022, the proposed CSDDD addressed “adverse human rights and environmental impacts” that were “keyed to violations of a thick list of human rights and environmental obligations laid out in international conventions and declarations, irrespective of whether they are ratified or recognized in the jurisdiction in which the alleged violation takes place.” The obligation for companies to comply with labor and human rights as well as climate change-related norms under international conventions irrespective of these having been ratified points to an important paradigm shift from national, jurisdictional to transnational regulation. This shift is prompted by the discrepancy between the actual border-crossing reach of impact- and harmful business activity and the idea of states regulating behavior within their jurisdiction.
The CSDDD forms part of an emerging regulatory framework aimed at governing global value chains – nationally, at EU level and across a range of intersecting public and private norms. While the direct addressees of the EU Directive are companies operating in the EU, its regulations do in fact have extraterritorial effect for non-EU parent companies of EU-based subsidiaries if the parent crosses the employee/revenue threshold, for non-EU companies within the global value chain of a threshold-crossing European corporation and, finally, for non-EU companies whose subsidiaries fall within the gambit of the Directive. This emerging transnational global value chain law has far-reaching implications for human rights as well as corporate law doctrine relating to individual and organizational accountability due to standards of due diligence, oversight and compliance are being increasingly concretized to encapsulate organizational processes and conduct with regard to labor and environmental concerns.
Concretely, under the CSDDD, firms can be fined for up to 5% of their net worldwide annual turnover for failure to comply with their due diligence obligations and be required to fully compensate their victims. A further obligation under the Directive is the creation and administration of complaints mechanisms to allow for a more robust engagement with individuals and communities adversely affected by companies’ actions.
Reflecting the increasing interconnectedness of public and private governance responsibility, member states are required to designate a supervisory authority in charge of monitoring, investigating and imposing penalties on companies that do not comply. As for foreign companies operating in the EU, these are required to designate their authorised representative based in the member state in which they operate, who in turn will communicate with supervisory authorities about due diligence compliance on their behalf. The Commission will establish a “European Network of Supervisory Authorities” to support cooperation among supervisory bodies.
The Transnational Regulatory Context of Modern Slavery Law
A brief recap of modern slavery law’s evolution helps putting the CSDDD in perspective.
The Directive’s immediate precursor was Germany’s Supply Chain Due Diligence Act (LkSG - Lieferkettensorgfaltspflichtengesetz) of 2021 (in force since January 2023). The LkSG grew out of the acknowledgment that only a fraction of German companies – between 13% and 17% – were making efforts to scrutinize the human rights impacts of their global networks. Berlin lawmakers’ response was to develop a more robust regulatory regime, specifically obliging the management boards of companies, which are incorporated in Germany and have at least 3,000 employees (and, as of 1 January 2024, 1,000), to assume responsibility for conducting effective HRDD. Expanding this responsibility to a wide range of human rights-relevant labor rights (i.e. pertaining to child-, forced- and slave labor), collective labor rights and equality rights, and safeguards (i.e. against withholding adequate remuneration, harm to the environment or the use of private and unsupervised security forces to inflict harm) the LkSG also endorses a broad interpretation of a corporation’s supply chain that includes its direct and indirect suppliers. The LkSG’s focus is on companies’ due diligence mechanisms, including an annual reporting obligation and penalty fees for non-compliance of up to 2% of annual revenue. However, as for creating a novel legislative basis for civil liability, the law regrettably fell short: under the LkSG, individuals may not initiate remedial action themselves but can only empower a domestic union or NGO to pursue claims in their name. Some 15 months or so into the LkSG’s entry into force, its success or failure is not self-evident. Its current form reflects, at least in part, some of the push-back from within business lobbies who emphasized the “monstrous” bureaucratic burdens and costs for medium-size companies and other “anti-competitive” consequences.
The regulation of global value chains has become a pressing worldwide concern. Germany’s LkSG must certainly be seen in a wider context, shaped by a growing number of national legislations. This trend is usually traced back to California’s (largely ineffective) Transparency in Global Supply Chains Act in 2010 around which corporations quickly found ways of circumventing the Act’s poorly designed instruments. Of greater significance has been the UK’s 2015 Modern Slavery Act, especially in light of recent efforts of incorporating stricter reporting rules and criminal sanctions into the law. In 2017, France’s loi de vigilance was the first to introduce a civil liability for corporations whose non-compliance with their vigilance plan caused damage. 2019 followed The Netherlands’ Child Labor Due Diligence Law, and in 2023 Canada’s federal Trudeau government, after previous efforts never had made it past initial discussion stages, adopted its own Modern Slavery Law, Bill S-211. As critically noted, Canada’s Act is largely limited to a number of annual reporting duties with regard to the organization’s actions to “prevent and reduce the risk that forced or child labour” is used at any step of the production of goods made in Canada or imported into Canada (s. 11(1) of the Act).
Each of these and other emerging national laws is but a piece in a global jurisdiction-crossing puzzle to curb, prevent or eradicate rights abuses across value chains. Many of the labor, human and environmental rights related norms pertaining to global value chains remain ‘soft law’. Arguably, however, its teeth will be sharpened by regulatory instruments such as the CSDDD which incorporates standards from different transnational bodies of norms, including the Ruggie Principles or the OECD Guidelines. This is why the just adopted EU-wide regulation, pertaining to concrete obligations and accountability triggers for any company operating in the EU violating human and, especially, children’s rights, attracted such attention. The CSDDD, in its final, adopted form, does impose actionable civil liability for a now dramatically reduced number of corporations that fail to comply with the Directive’s requirements. But in comparison to the original proposal and the agreement reached between Council and Commission on December 14th, 2023, the final version no longer stipulates accountability for “high impact” companies in sensitive industries such as textiles, garments, shoes, agriculture, fishing, food or resource extraction. A further element crossed out for the adopted version was the obligation of larger companies to develop a plan outlining their compliance with the 2015 Paris Agreement on Climate Change.
Looking Ahead
The avoidance of failure in finally passing the CSDDD during the EU Parliament’s current mandate was widely noted as a success. Meanwhile, the intensive backroom bargaining which led to the distinctive amendments casts a shadow on what was at the start an initiative as much ambitious as it was inspiring. Its adoption goes some way towards providing a level playing field and regulatory coherence within the EU. But, given the CSDDD’s reduced scope of application now, it is not self-evident which level of consistency across diverging national laws the Directive will establish going forward. If it were to serve as foundation on which to pursue effective sector-specific due diligence regulation, then it would have certainly been desirable to be more substantive in its passed form.
National modern slavery laws as much as the EU’s CSDDD of March 2024 are landmark moments by which the current generation’s commitment to critically assess the viability of growth- and greed-based capitalism will be judged in the future. They must be seen as historical opportunities to militate against the resurgence of political nationalism, xenophobia, self-centeredness and the imminent threat of planetary destruction.
Peer Zumbansen holds the inaugural professorship for Business Law at McGill University, Faculty of Law, Montréal, Canada. With Miriam Saage-Maaß, Michael Bader and Palvasha Shahab, he published the ECCHR-supported volume, “Transnational Legal Activism in Global Supply Chains” (Springer 2021 – open access: https://link.springer.com/chapter/10.1007/978-3-030-73835-8_3)