Europe’s plans to hold companies accountable for human-rights and environmental harm in their supply chains has officially taken a more business-centric turn.
After months of wrangling, the European Parliament agreed Thursday to significantly water down a landmark duo of sustainability rules known as the Corporate Sustainability Due Diligence Directive (CSDDD),and Corporate Sustainability Reporting Directive (CSRD).
In a vote that passed with 382 in favour and 249 against, lawmakers approved scaled-back versions of the rules, adopting a position that would exempt many companies from compliance and strip out key elements ahead of negotiations to finalise the regulations with European governments.
For the fashion industry, one of the sectors most exposed to global sourcing risks, the decision signals a fundamental change in how, and how much, the EU expects big companies to manage and report on environmental and labour risks in their supply chains.
What are CSRD and CSDDD?
The acronym-heavy regulations represent ambitious flagship legislation intended to make big companies address their environmental impact and take responsibility for issues that occur deep in their supply chains.
Under CSRD, companies would be required to publish granular data on their environmental, social, and governance performance, including emissions, labour standards, and supply-chain risks, following a standardised sustainability reporting framework.
Meanwhile, CSDDD focused on making brands accountable for environmental and labour abuses in their supply chains. It was designed to make companies monitor, identify and address environmental and social risks across their value chain with failure to do so resulting in hefty fines of up to 5 percent of net global turnover.
Both regulations were meant to be a done deal, but new political pressures prompted policymakers to revisit them with a focus on simplification this year.
What’s changed and why?
The changes to the EU’s sustainability regulations reflect a rightward shift in politics over the last two years. Green rules have become a bogeyman for business-friendly politicians, who argue they tie up European companies in red tape and reduce the region’s competitiveness.
Trade negotiations with the US have brought additional pressure to deregulate with the Trump administration leaning on European leaders to abandon the laws. In October, America and Qatar wrote a joint letter to EU heads of state, warning that the sustainability regulations could threaten their ability to supply natural gas to the bloc.
After months of negotiation over how much to scale back green-reporting in the name of simplification, today’s vote concluded that the scope of companies required to comply will be sharply reduced. Reporting standards under CSRD will be simplified and reduced and large companies won’t be able to request additional information from smaller counterparties.
Requirements to conduct due diligence across the entire value chain have also been weakened. Instead of covering the full sourcing gamut, from raw materials to finished goods, obligations now largely focus on direct contractors. Penalties for non-compliance would be set at the national, rather than the EU level.
For fashion, where the majority of environmental and labour risks sit further upstream, this change leaves some of the industry’s most problematic areas of operation beyond the directive’s immediate reach.
Climate-transition planning, once a headline feature, has similarly been diluted. Several provisions that would have required companies to adopt concrete climate plans and integrate them into corporate strategy have been pared back or removed.
Why is this important for fashion?
The fashion industry’s complex, opaque supply chains are a long-standing challenge in efforts to tackle the sector’s environmental and social issues. Big brands typically don’t own the companies that manufacture their products and often have little idea where the materials they use come from. This arms-length relationship has enabled companies to sidestep accountability for years, according to sustainability advocates.
CSRD and CSDDD were considered a major win by environmental and labour campaigners, shifting the balance of industry action from voluntary initiatives to regulatory requirements.
But the new position approved by Europe’s parliament would mean far fewer brands are covered by the legislation and the requirements are much less severe.
The changes aren’t set in stone. Europe’s Parliament still needs to negotiate a final text with EU governments, something it hopes to do before the end of the year. Some brands, including H&M Group and Brazilian beauty giant Natura, have called on Europe to preserve the substance of its regulatory ambitions.
Meanwhile, other regulations mean the industry can’t wholly abandon efforts to clean up its supply chains. Nonetheless, the signal from regulators this week is that the pressure is off.