Political leaders sabotaging corporate sustainability 

EU member-state governments have flinched at the challenge of enforcing responsible business conduct.

Last week, European Union governments reached a fragile deal on the proposed directive on corporate sustainability. The initial aim of this measure was ambitious—to prevent abuse and provide a remedy to victims for harms such as forced labour or oil spills.  

The Council of the EU did close some of the gaps in the European Commission’s proposal. But it signed off on a draft law whose loopholes will allow many powerful companies to evade responsibility for clearcut wrongdoing and undermine the potential to enforce responsible business conduct.

‘Chain of activities’

After much hard negotiation about how far obligations should reach into the value chains of companies, the vague concept of a ‘chain of activities’ emerged. This does not extend to the full spectrum of downstream activities: there will be waivers for companies that sell such products and services as pesticides, other chemicals, security equipment and surveillance technologies. Nor will businesses have to worry at all about how their products or services are used—that includes the finance sector. 

Companies will thus still be able to sell dangerous digital tools, such as Pegasus, to repressive governments, without carrying out human-rights due diligence—they will not be held accountable for the harm to journalists or activists caused by their spyware. Firms could continue to supply to business partners which were implicated in international crimes or work with distributors violating workers’ rights.

European ministers last week also excluded some fundamental human-rights protections from the proposed law, including children’s rights and rights related to the elimination of discrimination against women. This ignores international standards—while overlooking national due-diligence laws in France, Germany and the Netherlands—and would allow appalling human-rights abuses to be swept under the rug.

Not only is it essential that the directive cover all human rights. The definition of what constitutes an ‘adverse human rights impact’ should not come with conditions that exponentially increase legal uncertainty for affected communities, courts and companies alike.  

For example, as the text stands, damage caused by companies alongside state authorities could continue with impunity. Such abuse is rampant in countries with authoritarian regimes, high corruption and/or armed conflict, where corporations should instead be hypervigilant. Companies enabling and profiting from violations of international humanitarian law, such as Israeli settlements in the occupied territories, must be held accountable.

Huge step backwards

The environmental science meanwhile remains unchanged: we need to do everything in our power to limit global heating to 1.5C above pre-industrial levels and avoid dangerous ecological tipping points. Yet just weeks after talking a big game at COP27, the member-state representatives failed to align environmental requirements with international standards, such as the Paris Agreement, and did not include climate due diligence in the envisaged rules.

Instead, they weakened the already meagre provisions on the environment. If this were to be sustained, companies would not be accountable to courts even if they destroyed entire ecosystems—think of the decades of oil discharges in the Niger delta by a subsidiary of Shell. 

This would be a huge step backwards from existing jurisprudence. In last year’s landmark case against Shell, Dutch judges spelt out that companies have an individual responsibility to combat climate change, because of its severe impacts on human rights.  

Climate change is not only already bringing famine and rising sea levels. Following the severe flooding in Pakistan, a million people are projected to lose their jobs in the garment sector alone. These job losses will exacerbate appalling conditions for those still in work. 

Governments need to get serious about setting a minimum level of acceptable business conduct if we are to have any chance of withstanding the havoc of the climate, nature, energy and health crises. Today’s transition costs are miniscule compared with those of doing nothing.

Countries such as Germany tried to exempt companies from legal liability under the directive if they joined industry initiatives or relied on third-party audits. Leaving aside the well-documented ineffectiveness of social auditors and certifiers in identifying impacts and preventing harm, this would have shifted attention away from what is needed to address the root causes of corporate abuse. The suggestion was rightly rejected but it set negotiators on the path of curtailing liability.  

The current proposal, on the other hand, does nothing to pull down the legal barriers faced by claimants in taking cases against companies, such as high costs, short time limits and limited access to evidence. This makes it more difficult for workers and communities in situations of vulnerability to have their day in court for forced labour or unsafe working conditions. For some governments, business interests come first, protecting people and the planet a distant second.

Race to the bottom

In speech after speech last week, European ministers said they wanted companies to have a level playing-field, so they could rely on common rules. Yet even within that corporate perspective they opted to entrench a ‘race to the bottom’ by leaving inclusion of finance at the discretion of each member state. Financiers, who should be obliged to channel capital towards more sustainable activities, will be able to continue bankrolling fossil fuels, deforestation and human-rights violations without scrutiny.  

Only a few financial institutions and services would be required to carry out human-rights and environmental due-diligence checks over the chains of their clients. This near-exclusion was the result of an intense push by a handful of member states, led by France. France presents itself as a champion of due diligence—it was the first country to adopt a national law in 2017—but it is sabotaging it in Brussels, linked to its ambition to make Paris Europe’s top financial hub in a post-‘Brexit’ world.

If the proposal—supported by Spain, Italy and Slovakia—succeeds in the trilogue negotiations next year, including the European Parliament, many financial companies would face an odd reality: they would need to do due diligence when buying paper for their copy machines, but not when financing a company responsible for a deadly dam collapse such as that in Brumadinho. 

Lowest-common-denominator politics prevailed in Brussels last week, leaving everyone in the council chamber, as the Czech presidency put it, ‘equally unhappy’. But it would be workers, consumers and communities who would get the short end of the stick. 

Governments that understand that the economy of the 21st century can’t be built on exploitation and destruction will need to push harder to protect human rights, the environment and the climate. The European Parliament will also need to raise the bar.