Landmark EU legislation hangs in the balance

Welcome back. The ExxonMobil vs Follow This dispute rumbles on, with the US oil major pursuing legal action against the Dutch non-profit group over the latter’s attempt to use a shareholder resolution to drive climate action at Exxon.

As the FT’s Attracta Mooney reports, Follow This has now filed a motion to dismiss Exxon’s suit, accusing it of “intimidation and bullying”. The oil company’s real target here is the Securities and Exchange Commission: Exxon thinks the SEC has been taking too permissive a stance on allowing activist groups to file disruptive resolutions. If it proceeds, this case could set a very important precedent.

In today’s newsletter we focus on a similarly intense controversy on the other side of the Atlantic, over the EU’s attempt to hold companies accountable for their international supply chains. Many readers will have their own views on this subject: let us know them at moralmoneyreply@ft.com.

What does a responsible approach to artificial intelligence look like in business and finance? That will be the focus of our next Moral Money Forum deep-dive report — and, as always, we want to hear from readers. Please have your say by completing this short survey.

The sputtering push for accountability in global supply chains

In September 2012, the Ali Enterprises clothing factory in the Pakistani port city of Karachi caught fire. Workers found escape routes blocked, windows barred and fire extinguishers inoperable. Over 250 of them burned or suffocated to death.

In the months after the disaster, victims’ families organised in search of justice. In 2015, they brought a lawsuit in Dortmund against KiK, the German discount retailer that was the factory’s biggest customer. That case was thrown out by the court four years later.

Such lawsuits might turn out very differently under a new EU directive currently being thrashed out in Brussels, which would hold companies accountable for human rights abuses by their international suppliers. Yet serious political divisions over this legislation have highlighted wider tensions in the European sustainability project — and cast doubt on whether this particular act will be passed at all.

The legislation in question is the Corporate Sustainability Due Diligence Directive (CSDDD). First proposed by the European Commission in 2022, it would require companies to identify any environmental and social harms in their supply chains, and act to address them. Crucially, it would assert civil legal liability for companies that fail to take appropriate action.

In December, EU officials celebrated a provisional agreement on the basics of the CSDDD after negotiations that ran late into the night. The directive seemed set for final approval in the following months (although financial companies were not initially to be made subject to the directive’s full requirements, in a compromise that frustrated many).

Those celebrations now look decidedly premature. Last Friday, a decision by member state governments on whether to endorse the CSDDD was postponed after it became clear that it lacked sufficient support. The question was then put on the agenda for another meeting today — only to be pushed back again, with consensus still not forthcoming.

To a large extent, this is a story about a German governing coalition undergoing severe strain amid mounting concern over the country’s sluggish economy. Calling the CSDDD a bureaucratic danger to German business, justice minister Marco Buschmann and finance minister Christian Lindner have been openly lobbying against it — including through a letter from Buschmann to other EU member governments. This has sparked tension with CSDDD supporters in Berlin, including labour minister Hubertus Heil and development minister Svenja Schulze, who told the Süddeutsche Zeitung: “Politics should not be based on the few black sheep who declare the fight against child labour to be a bureaucratic monster.”

This internal division pushed Germany’s government to abstain from the decision on the CSDDD — a move that has thrown the directive’s prospects into uncertainty, given that it needs at this stage to be backed by governments representing 65 per cent of the EU population. (It also needs to be passed by the European parliament, and then transposed by member states into national law.)

But this is not just about Germany. The Italian government has also reportedly been getting cold feet on this legislation. More broadly, green-sceptic right-wing parties have been gaining strength across much of the EU ahead of its parliamentary election in June.

If the CSDDD does not pass before then, the project might be killed off in a more right-leaning parliament. If, on the other hand, a problematic piece of legislation is seen to have been rushed through before an election, the perceived legitimacy of the EU’s larger green regulation platform will take a hit.

But are the CSDDD’s critics right to call it problematic? The letter from Buschmann outlines several concerns that have also been raised by German business lobby groups.

He criticises as overly broad the scope of the directive, which will apply to companies with at least 500 employees and worldwide revenue exceeding €150mn ($161mn); and companies in specified “high-impact” sectors with at least 250 employees and revenue exceeding €40mn. This will saddle many mid-sized companies with excessive bureaucracy that will undermine economic performance, he claims. (Here is a really interesting academic paper on this question: the authors argue for a supplier certification system that would reduce the compliance burden on individual companies.)

Perhaps Buschmann’s strongest argument is on unwelcome side effects from the legislation, with companies likely to cut ties altogether with some suppliers in developing countries, to the potential detriment of the people in those nations. The draft directive states that companies should do this only as a last resort — but it may well look like the most attractive, low-risk option to many companies.

On the question of legal liability, however, the CSDDD’s opponents are on shakier ground. Buschmann’s letter warns that there is still too much uncertainty around this element of the directive — largely stemming from the possibility that companies could be held responsible for indirect suppliers far down their supply chain whom they may never have heard of.

Yet the draft directive makes clear that a company will be held liable only if it “intentionally or negligently failed to prevent and mitigate potential adverse impacts or to bring actual impacts to an end and minimise their extent”. Just as with any other area of corporate law, it will be up to the courts to apply a reasonable standard of expected behaviour.

The broader principle, that a company should bear a certain level of legal responsibility for any abuses perpetrated in the making of its products, is by now hard for a reasonable person to dismiss. For decades, companies (and their customers) have reaped the economic benefits of outsourcing manufacturing to countries with weaker labour and environmental standards. A basic level of accountability to the people in those supply chains seems only fair. (Simon Mundy)

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