Italy and Germany block EU agreement on business ethics just before the finish line

Brussels – Just before the finish line, the EU directive on corporate sustainability due diligence is being called back to the pits. The final step, scheduled for today (Feb. 9) with a vote for formal adoption of the regulation by member countries, was skipped due to obstruction by Germany and, as we learn from diplomatic sources, Italy.

The new rules, proposed by the European Commission in February 2022, completed the long EU process with an agreement last Dec. 14 in the interinstitutional trialogues. But the backtrack announced by Berlin, which has to maintain a complicated balancing act in the governing coalition between the Greens, Socialists, and Liberals, has opened the scenario of a possible blocking minority in the planned qualified majority vote at the Committee of Permanent Representatives (COREPER) to adopt the legislative texts.

It only takes four member countries not voting in favour of a directive to return to the previous step,
which is parliamentary negotiations. The Belgian presidency of the EU Council, having ascertained that Italy also intended, by abstaining, to join Germany (as well as other countries such as Austria and Finland), preferred not to proceed with the vote and postpone it to a later date, taking the time to attempt further convincing.

This is not the first time that a text approved at the trialogues has skipped the litmus test in the council: it had also happened with the regulation on motor vehicle emissions, also blocked by Berlin, and again at the input of the FDP Liberals. The German Greens “would have voted in favour,” but “we are forced to abstain because of our internal government rules,” German State Secretary for Economics and Climate Sven Giegold had admitted in the morning.

The directive: mitigating impacts on human rights and the environment “from upstream to downstream”

The directive, as it emerged from interinstitutional negotiations, would have established a set of obligations for companies operating in the EU to mitigate their negative impact on human rights and the environment. Child labour, slavery, labour exploitation, pollution, deforestation, excessive water consumption, or damage to ecosystems: all companies with more than 500 employees and a worldwide turnover of more than 150 million euros would no longer have been able to turn a blind eye to non-compliance with ethical and environmental constraints across the supply chain. Indeed, companies would have had to “identify, assess, prevent, mitigate, and remedy their negative impacts and those of their upstream and downstream partners”: production, supply, transport and storage, design, and distribution.

The same rules would have applied to medium-sized enterprises (with more than 250 employees and a turnover of more than 40 million euros) in the sectors of production and wholesale trade in textiles, clothing, and footwear; agriculture, forestry, and fishing; food production and trade in agricultural raw materials; mining and wholesale trade in mineral resources or manufacture of related products; and construction.

The European Parliament had provided some benefits for companies with more than 1,000 employees that fully implemented the directive. To motivate companies, compliance with due diligence requirements would have been part of the criteria for awarding public contracts and concessions, while all member countries would have had to designate a supervisory authority to monitor compliance, i.e., bodies with the power to initiate investigations and impose penalties on non-compliant companies, with fines of up to 5 per cent of their worldwide net sales.

Major European industrial associations, such as the BDI in Germany, MEDEF in France, and Confindustria in Italy had come out strongly against the text. Stefan Pan, Confindustria delegate for Europe and Vice-President of Business Europe, before today’s meeting appealed to the Italian government to abstain “so that negotiations can be restarted.” The directive, “cumbersome and unmanageable,” would have placed huge bureaucratic burdens “on businesses and European competitiveness.” On the other hand, the European Confederation of Trade Unions (ETUC) had called today’s vote a “crucial moment” to ensure “a level playing field for business, guaranteeing respect for human rights and the environment within supply chains.”