Today, around midday, MEPs will vote on a text setting out their position on the reduction of pesticides. It is one of the most controversial of the six Green Deal texts on the agenda for this week’s plenary session.
This text – known in Brussels jargon as the SUR – was defended at the time by former EU Climate Commissioner and Green Deal chief, Frans Timmermans. He argued that healthy soil enables better absorption of greenhouse gas emissions. He has since left the European political stage for the national arena. And as luck would have it, Dutch voters are also called to the polls today – to vote for or against what Timmermans represents. Like the vote on the use of pesticides in the European Parliament, the outcome of the national election is uncertain.
The link between these two votes is the increasing political importance of farmers, which began with the Homeric battle over the text to the NRL. In the coming months before the European elections, this trend is likely to consolidate further.
It is still unclear to observers whether SUR will be adopted today. Even within the individual parliamentary groups, there is no consensus on the issue. Although the political debate surrounding the text on reducing the use of pesticides was not as heated as that on the nature restoration law, the issue of pesticide reduction is explosive. For example, the definition of sensitive ecological areas.
Unlike in the case of restoration, however, the EPP has not tried to scupper the text this time, as explained in the corridors of Parliament in Strasbourg. This is because the new proposal is linked to another text that is also negotiated: the one on new genomic techniques, known by the acronym NGT, which is viewed positively by the Conservatives. In other words, a yes to the reduction of pesticides, especially on the part of the Conservatives, would open the doors even wider to these new technologies.
If Parliament votes yes, the Council must then adopt the general approach. This is expected to be the case on December 11. Only then can the trilogue negotiations begin. Therefore, things have to move quickly so that the negotiations can be concluded before the end of the mandate. This requires political willpower. A particular challenge given the upcoming European elections.
Have an enjoyable read.
The debate on future EU reform is gathering pace. Two weeks after the EU Commission’s recommendation to start accession talks with Ukraine and Moldova, the European Parliament wants to make a big move today in Strasbourg and call for a reform convention. The majority of member states reject such a convention. In contrast, they are focusing on the ability to act.
So far, there is only agreement that the EU should be reformed in its entirety. The aim is to make the Union “fit for 35”, i.e. to prepare it for up to 35 members, according to EU Council President Charles Michel. Without far-reaching changes to voting rights, the EU budget or agricultural policy, the enlarged EU would not only face an acute lack of money but also an inability to act.
But what could these changes look like and how should they be implemented? The upcoming Belgian EU Council Presidency should provide an answer. The country will take over the presidency on January 1. A “roadmap” for EU reform is to be drawn up, said Belgium’s Permanent Representative to the EU, Ambassador Willem van de Voorde, at a Europa-Union event in Brussels. Additionally, a framework program for the next EU Commission should be in place by the end of June 2024.
Intensive discussions have already begun behind the scenes. EU Council President Michel received the heads of state and government from Germany, Belgium, Austria, Hungary, Greece, Cyprus and Lithuania for talks in the Berlin Chancellery on November 13 to discuss the EU’s further development. Reform was also on the agenda at the last General Council in Brussels.
The Europe ministers discussed proposals from a Franco-German group of experts, as well as the planned Belgian “roadmap”. “We need a roadmap for reforms. EU enlargement and EU reforms must go hand in hand,” explained German Minister of State for Europe Anna Lührmann (Greens). The focus must be on the ability to act, she emphasized.
In addition to the perennial issues of the rule of law and “QMV” (“Qualified Majority Voting”, i.e. the abolition of the right of veto), the Council is discussing the question of how the Community budget could be adjusted for up to 35 member states. The future of cohesion and agricultural policy is also an issue. The discussions are based on the Granada Declaration. In it, the 27 committed to enlargement at the beginning of October.
“Enlargement is a geostrategic investment in peace, security, stability and prosperity”, declared the heads of state and government. However, both the EU and the future member states must be willing. The candidate countries should step up their reform efforts. At the same time, the Union must ensure the necessary internal foundations and reforms.
There was no talk of deepening the EU in Granada, nor of democratization or more citizen participation. The 2022 Conference on the Future of the EU and the 49 reform proposals drawn up by citizens’ panels were not even mentioned. This is now calling the European Parliament into action.
MEPs want to call for a convention to amend the EU treaties in a resolution on Wednesday. This is based on a report by the Constitutional Committee, to which four Germans contributed: Sven Simon (CDU), Gabriele Bischoff (SPD), Daniel Freund (Greens) and Helmut Scholz (Left). “The parliamentary report is intended as a formal request to the Council to initiate a reform convention and treaty amendments,” CDU expert Simon told Table.Media. According to Article 48 of the EU Treaty, this is not only possible but also necessary.
Simon was critical of the German government’s approach. It was an “incomprehensible mistake” that the traffic light government was basing its reform plans primarily on a Franco-German expert paper. The recommendations contained therein fell far short of the requirements. It was not only about the Union’s ability to act but also about strengthening the European Parliament and democracy.
“We want to reaffirm the top candidate principle and avoid the mistakes of 2019. In future, the Commission President should therefore be elected on the proposal of Parliament,” said Simon. “The candidate must be supported by a majority of MEPs. We want to set the procedure in an interinstitutional agreement with the Council before the election.”
Green MEP Freund expressed a similar view. The Commission should be elected more by the Parliament and thus by the voters and be called a “government.” Instead of 27 Commissioners, there should only be 14 in future, proposed to the Parliament by the President. “We are on the verge of a historic step for Europe. Treaty changes will make European democracy stronger and more resilient,” said Freund.
Parliament is also calling for a right of initiative for EU laws and the opportunity to co-decide on the next seven-year budget as an equal legislator. Like the Council, it is also in favor of extending qualified majority voting. So far, however, this is the only major common ground between the institutions. There is a threat of dispute over all other issues of EU reform.
Hardly any other legislative process is currently being watched with as much excitement as the European Corporate Sustainability Due Diligence Directive (CSDDD). The next political trilogue, the high-level meeting of negotiators from the EU Parliament, Council and Commission, takes place today, Wednesday. After the meetings in June, July and September, this is the fourth trilogue. However, a final agreement is not expected, as positions are still too far apart on too many issues.
The EU Commission presented the draft for the corresponding law in February 2022. This contains environmental and human rights due diligence obligations and obliges large companies to draw up climate transition plans. The German Supply Chain Due Diligence Act (LkSG), which has been in force since January 1, 2023, and the French “loi de vigilance” from 2017 serve as models.
According to information from Table.Media, the negotiators could agree on the scope of application in today’s trilogue, which would probably remain very close to the Commission’s proposal. According to the draft, this scope should include EU and foreign companies with more than 500 employees and more than €150 million net turnover per year. For companies in high-risk sectors (including the textile, agricultural and raw materials sectors), the directive would apply to 250 employees and more than €40 million.
This represents a significant expansion compared to the German and French laws, which apply to companies with 3,000 and 5,000 employees respectively. In Germany, companies with 1,000 employees or more will be subject to the law from 2024. This will have little impact on many other member states, as the companies based there are smaller.
According to a source in Parliament, Article 25 of the Commission’s draft, which provides for additional due diligence obligations for company directors, will be deleted in today’s trilogue. In addition, the definition of due diligence obligations and the annexes, as well as the provisions on the possible termination of contracts with partners in the event of negative impacts (Articles 7 and 8) are also on the agenda. The definition of the value chain will also be discussed; however, no agreement is expected from the parliamentary side.
No solution is expected for a whole range of issues, some of which will probably not even be addressed today. According to an internal compromise proposal, the Spanish Council Presidency wants to find solutions that are “practicable, guarantee legal certainty and do not cause excessive costs for companies and administrations.“
Among other things, this includes the still unresolved question of whether the financial sector should be included in the scope of the application. While the Parliament and the Commission are calling for corresponding due diligence obligations for financial institutions, the Council is opposed to this. Under pressure from France, the member states had already decided on a special role for the financial sector in their general approach. According to this, it should be up to each Member State to decide whether or not financial services are covered by the law. The Parliament is calling for the due diligence obligations to be applied to the downstream part of the value chain of financial companies and for the main markets of the financial sector (investments, banks, insurance companies) to be included.
Due to “the delicate balance reached in the Council on this issue and the difficulties in finding a compromise with the Parliament’s position,” the Council Presidency is now proposing to exclude the financial sector completely from the scope of application for the time being and to postpone the extension to this sector to a later phase. To this end, a review clause is to be added to the legislative text; the Council, Parliament and Commission are to agree on an interinstitutional political declaration.
Contrary to the position of his parliamentary colleagues, Axel Voss (EPP), shadow rapporteur for the CSDDD in the EU Parliament, expressed understanding for this exception in an interview with Table.Media. “The general approach of the supply chain law cannot be applied one-to-one to the financial sector, as this would lead to great uncertainty. That’s why this sector would actually need more specific regulations.”
The European Central Bank (ECB), for its part, supports the inclusion of the sector. Frank Elderson, member of the ECB’s Executive Board, said at a conference last week that uniform regulation across all sectors is crucial if private finance is to effectively support the green transition in the real economy. Including the financial sector in the scope of the CSDDD could help banks and other financial institutions to “systematically integrate sustainability aspects into their decision-making and risk management.” This would also create more certainty concerning the sector’s obligations and process risks.
The Council’s position has been met with harsh criticism from civil society: “Banks and investors have a free ticket to profit from human rights and environmental damage,” said Aurélie Skrobik, Corporate Responsibility Officer at the human rights organization Global Witness. “Abuse will remain part of the banks’ business model unless the EU agrees on a strong law that forces the financial sector to become cleaner.”
The definition of environmental impacts in the legal text also remains a contentious issue. While the Parliament is calling for a focus on specific categories such as climate impact, biodiversity or air and water pollution, the proposals from the Commission and Council are more limited here: companies should only identify impacts and take action against them if they violate international agreements. The Council Presidency is proposing the inclusion of further agreements as a compromise.
Environmental NGOs fear that even ambitious due diligence obligations will fail to have an impact from an environmental perspective if the Council and Commission get their way and companies only have to identify environmental impacts to a limited extent. This is because international environmental agreements are a very fragmented area of international law, explains Ceren Yildiz from BUND. “Many issues of environmental destruction remain completely untouched. For example, there is no global pact on the protection of forests; the plastics agreement is only currently being negotiated.”
The German Supply Chain Due Diligence Act (LkSG) served as a model for the Council and Commission’s approach, which refers to international treaties such as the Stockholm and Basel Conventions, which restrict the use of pollutants and the export of waste, respectively, for the verification of environmental impacts. Climate impacts are not mentioned at all. In the Council, the German government has advocated the inclusion of further environmental agreements in the definition, thereby expanding it – however, it rejects the so-called environmental categories proposed by the EU Parliament and has also spoken out against an obligation to implement companies’ climate plans (Article 15).
However, the Spanish Council Presidency is now offering to make concessions and is proposing a funding obligation with precise specifications on the content of the climate plans and a link to the remuneration of the company board. This should create a stronger incentive to implement the plan.
Meanwhile, the Federal Ministry of Economics and the Federal Ministry of Labor are discussing a simplification for reports under the German LkSG: according to the news agency Reuters, companies are to be given more time for their reports. Table.Media had initially published a Reuters report on Monday that an agreement had already been reached, but Reuters corrected this late on Monday evening. The Federal Ministry of Justice is currently working on a draft bill at a technical level; corresponding legal amendments are being discussed with the BMWK and the BMAS, Reuters reported late on Monday evening. Coordination on these proposals in the federal government has not begun.
The existence of many economic sectors in Europe depends on access to cheap green hydrogen. The revised Renewable Energy Directive (RED III), which came into force on Monday, sets fixed quotas for industry and transport. In this overview, you can read about the resulting obligations, whether they are compatible with the German government’s National Hydrogen Strategy and whether there is any green hydrogen left for other uses.
European quotas for 2030 from RED III for green hydrogen and its derivatives (in EU jargon “liquid or gaseous renewable transport fuels of non-biogenic origin” or RFNBO for short):
Separate shares for e-fuels apply for individual modes of transport in 2030:
There are still surprisingly few figures on what these EU requirements mean for Germany in absolute terms. Upon request, the BDI cannot say how many tons of green hydrogen the industry will need by 2030 to meet the requirements of the Renewable Energy Directive. In spring, the think tank Agora Industrie intends to present a study that will provide answers. Frontier Economics recently presented an initial estimate on behalf of Eon.
The industry needs 23 terawatt hours of green hydrogen for the EU quota and the transport sector six to nine terawatt hours, depending on whether they are met with hydrogen or derivatives. However, when asked, Frontier stated it had counted on a quota of one percent in the transport sector. The double eligibility was therefore apparently disregarded.
At first glance, the targets of the National Hydrogen Strategy would appear to cover the EU targets. In its new National Hydrogen Strategy, the German government has set itself a target of 95 to 130 terawatt hours of hydrogen for 2030. In addition to the current consumption of 55 terawatt hours, it has calculated an additional demand of 40 to 75 terawatt hours. However, this does not yet guarantee that the European targets will be met.
On the one hand, the German government also wants low-carbon hydrogen from natural gas to count towards its targets, which is not permitted under RED III. Secondly, it is questionable whether the national targets will be achieved.
“Overall, we believe that the H2 targets are very ambitious but fundamentally achievable,” says Johanna Reichenbach from Frontier Economics. However, the extent to which significant funding can still be provided from the federal budget is “very open” following the recent ruling by the Federal Constitutional Court on the Climate and Transformation Fund Act. “In this respect, achieving the target has certainly become less likely for the time being,” says Reichenbach.
At the beginning of the week, several companies at the European level put pressure on the EU to provide additional funding for the hydrogen economy. Existing funds were not sufficient to compensate for the lack of private investment, wrote the heads of German companies Sunfire, BayWa r.e. and Enapter, among others, in a joint statement.
However, Commission President Ursula von der Leyen did not announce any new funding on Monday, but rather the second call for tenders from the European Hydrogen Bank, which will be launched in the spring. In addition, one of the world’s largest production plants for green hydrogen and ammonia wil be built in the Brazilian state of Piaui with ten gigawatts of EU funding, which is to land at a terminal on the Croatian island of Krk. For comparison: ten gigawatts corresponds to the German government’s target for the total output of domestic electrolyszers in 2030.
However, the implementation of RED III into national law is at least as much of a concern for German industry as the financing issue. According to the BDI, this will be a focus of the association’s work in the coming months. Several points are in dispute:
The national regulations will be implemented through amendments to immission control legislation. According to reports, the German government intends to tackle the amendment to the Federal Immission Control Act (BImSchG) at the beginning of next year. The criteria for green hydrogen from the delegated act will be implemented in the 37th BImSchV, for which there are already drafts but no decision yet.
The EU is on the verge of a historic political success. It could set global standards in the area of business and human rights, as the USA did in 1977 with the Foreign Corrupt Practices Act to combat corruption. However, it is essential that the EU does not significantly water down its ambitious drafts for an EU supply chain law (Corporate Due Diligence Directive, CSDDD) in the final stages. Lobbyists have already weakened both the Commission’s draft and the Council’s draft. In addition, the lobby has requested further changes to the proposed regulatory framework for human rights protection in supply chains.
US Treasury Secretary Janet Yellen is urging the EU to exempt companies headquartered outside the EU from the obligations. In addition, the Chairman of the International Sustainability Standards Board, Emmanuel Faber, is calling on Europe to restrict the related law on sustainability reporting so that companies no longer have to report all risks to people and the environment. If Yellen and Faber get their way, the consequences would be fatal, as the EU system for business and human rights would only protect the shareholders and hand US companies doing business in Europe a free ticket.
The EU directive on corporate sustainability reporting, adopted a year ago, forces all companies operating in Europe – including some 4,000 headquartered outside the EU – to report publicly on all material sustainability risks. To Faber’s dismay, Europe has introduced a new “double materiality” approach. This requires companies to report on any sustainability risk that is material either to the company’s shareholders or to people and the planet. Faber, on the other hand, prefers the old approach of “financial materiality.” According to this approach, companies only have to report sustainability risks if they jeopardize the financial value of the company for its shareholders.
A look at the past shows that this is precisely what hinders progress through ESG. This is demonstrated by a new report by the NYU Stern Center for Business and Human Rights on the impact of financial materiality. According to the report, an approach based on the old method prevents the system of investments based on environmental, social and governance (ESG) criteria from having an impact.
This is because most current ESG frameworks assess how environmental or social risks can harm companies, rather than how companies can harm the world. This is counterproductive because companies often harm the environment or society without harming their shareholders. Thus, companies can behave in ways that harm the environment when it is profitable to do so – and when the legal or reputational consequences are non-existent or manageable. Immorality in business can be profitable, legal and scandal-free. Some misconduct is even so profitable that it can be financially rational for a company to accept scandals and legal sanctions. Companies that engage in harmful behavior may attempt to shield themselves from accountability by lobbying and litigating to weaken the regulatory framework, relocating to countries with little regulation, or outsourcing operations where labor and human rights abuses may occur.
Therefore, linking ESG to financial materiality can reward companies that avoid the legal consequences. Their reputation does not necessarily have to suffer either: Where the media and civil society are weak, scandals rarely come to light. And even when scandals do come to light, many customers and employees are unaware of or uninterested in ethical issues. A need for new regulatory mechanisms such as the EU Supply Chain Act arises when companies are not disciplined by existing legal or market pressures to account for the costs they impose on people and the environment.
Corporate reporting alone is not such an accountability mechanism. The theory behind sustainability reporting is to provide investors with the data they need to discipline companies. Unfortunately, the NYU report concludes that many ESG funds are failing in their role as effective monitors. In fact, ESG ratings are so incoherent that companies do not know what behavior they are encouraging or discouraging. Some leading US ESG funds are virtually indistinguishable from market indices and contain large proportions of problematic stocks. For ESG investors to be effective, the NYU report suggests some reforms.
Because most ESG investors fail when it comes to voluntarily making sense of sustainability data, a mandatory approach to ESG is needed. The EU Supply Chain Act would force companies to take a huge step beyond last year’s Sustainability Reporting Directive: They would not only have to report on environmental and social risks but also address them in their global value chain through effective measures. A strong supply chain law would therefore force companies to finally make meaningful use of sustainability data. This would have revolutionary potential for improving natural and social livelihoods – if done right.
The law must be globally applicable because the need for protection in the value chains is global. If the law is not also applied to companies that supply goods or services to the EU, there would be an incentive for companies to relocate their headquarters to a country with weak regulation. This would not only harm the cause in itself but also Europe economically.
This important regulatory task falls to Europe, as the US will at best impose patchy corporate reporting in this area and hope that ESG investors will do their job. The EU is the only player that can enforce global human rights protection in value chains in 2023, just as the US was the only player that could enforce global anti-corruption in 1977.
As was the case with the fight against corruption, current EU supply chain regulation could create a self-reinforcing virtuous circle. An effective EU Supply Chain Act would incentivize global companies to adhere to high ESG standards to gain access to the EU market. At the same time, it could put pressure on other countries to introduce similar regulations to remain attractive to multinational companies that have to comply with European regulations. The “Brussels effect” of the marketplace principle would provide a significant incentive for companies and states worldwide to protect human rights and the environment more strongly in order not to lose access to one of the largest domestic markets in the world. Something similar can be observed with EU regulation in the digital sector. Brussels could thus initiate a “race to the top”, which could lead to a fairer global economy. The EU should not miss this opportunity.
Michael Goldhaber is a Senior Research Scholar at the NYU Stern Center for Business and Human Rights and author of the report “Making ESG Real: A Return to Values-Driven Investing.“
Stéphane Brabant is a lawyer in Paris and Senior Partner at Trinity International AARPI in Paris, specializing in business and human rights.
Daniel Schönfelder works as European Legal Advisor for the Responsible Contracting Project and is involved in the implementation of the German Supply Chain Act as a lawyer for a large corporation.
Today, around midday, MEPs will vote on a text setting out their position on the reduction of pesticides. It is one of the most controversial of the six Green Deal texts on the agenda for this week’s plenary session.
This text – known in Brussels jargon as the SUR – was defended at the time by former EU Climate Commissioner and Green Deal chief, Frans Timmermans. He argued that healthy soil enables better absorption of greenhouse gas emissions. He has since left the European political stage for the national arena. And as luck would have it, Dutch voters are also called to the polls today – to vote for or against what Timmermans represents. Like the vote on the use of pesticides in the European Parliament, the outcome of the national election is uncertain.
The link between these two votes is the increasing political importance of farmers, which began with the Homeric battle over the text to the NRL. In the coming months before the European elections, this trend is likely to consolidate further.
It is still unclear to observers whether SUR will be adopted today. Even within the individual parliamentary groups, there is no consensus on the issue. Although the political debate surrounding the text on reducing the use of pesticides was not as heated as that on the nature restoration law, the issue of pesticide reduction is explosive. For example, the definition of sensitive ecological areas.
Unlike in the case of restoration, however, the EPP has not tried to scupper the text this time, as explained in the corridors of Parliament in Strasbourg. This is because the new proposal is linked to another text that is also negotiated: the one on new genomic techniques, known by the acronym NGT, which is viewed positively by the Conservatives. In other words, a yes to the reduction of pesticides, especially on the part of the Conservatives, would open the doors even wider to these new technologies.
If Parliament votes yes, the Council must then adopt the general approach. This is expected to be the case on December 11. Only then can the trilogue negotiations begin. Therefore, things have to move quickly so that the negotiations can be concluded before the end of the mandate. This requires political willpower. A particular challenge given the upcoming European elections.
Have an enjoyable read.
The debate on future EU reform is gathering pace. Two weeks after the EU Commission’s recommendation to start accession talks with Ukraine and Moldova, the European Parliament wants to make a big move today in Strasbourg and call for a reform convention. The majority of member states reject such a convention. In contrast, they are focusing on the ability to act.
So far, there is only agreement that the EU should be reformed in its entirety. The aim is to make the Union “fit for 35”, i.e. to prepare it for up to 35 members, according to EU Council President Charles Michel. Without far-reaching changes to voting rights, the EU budget or agricultural policy, the enlarged EU would not only face an acute lack of money but also an inability to act.
But what could these changes look like and how should they be implemented? The upcoming Belgian EU Council Presidency should provide an answer. The country will take over the presidency on January 1. A “roadmap” for EU reform is to be drawn up, said Belgium’s Permanent Representative to the EU, Ambassador Willem van de Voorde, at a Europa-Union event in Brussels. Additionally, a framework program for the next EU Commission should be in place by the end of June 2024.
Intensive discussions have already begun behind the scenes. EU Council President Michel received the heads of state and government from Germany, Belgium, Austria, Hungary, Greece, Cyprus and Lithuania for talks in the Berlin Chancellery on November 13 to discuss the EU’s further development. Reform was also on the agenda at the last General Council in Brussels.
The Europe ministers discussed proposals from a Franco-German group of experts, as well as the planned Belgian “roadmap”. “We need a roadmap for reforms. EU enlargement and EU reforms must go hand in hand,” explained German Minister of State for Europe Anna Lührmann (Greens). The focus must be on the ability to act, she emphasized.
In addition to the perennial issues of the rule of law and “QMV” (“Qualified Majority Voting”, i.e. the abolition of the right of veto), the Council is discussing the question of how the Community budget could be adjusted for up to 35 member states. The future of cohesion and agricultural policy is also an issue. The discussions are based on the Granada Declaration. In it, the 27 committed to enlargement at the beginning of October.
“Enlargement is a geostrategic investment in peace, security, stability and prosperity”, declared the heads of state and government. However, both the EU and the future member states must be willing. The candidate countries should step up their reform efforts. At the same time, the Union must ensure the necessary internal foundations and reforms.
There was no talk of deepening the EU in Granada, nor of democratization or more citizen participation. The 2022 Conference on the Future of the EU and the 49 reform proposals drawn up by citizens’ panels were not even mentioned. This is now calling the European Parliament into action.
MEPs want to call for a convention to amend the EU treaties in a resolution on Wednesday. This is based on a report by the Constitutional Committee, to which four Germans contributed: Sven Simon (CDU), Gabriele Bischoff (SPD), Daniel Freund (Greens) and Helmut Scholz (Left). “The parliamentary report is intended as a formal request to the Council to initiate a reform convention and treaty amendments,” CDU expert Simon told Table.Media. According to Article 48 of the EU Treaty, this is not only possible but also necessary.
Simon was critical of the German government’s approach. It was an “incomprehensible mistake” that the traffic light government was basing its reform plans primarily on a Franco-German expert paper. The recommendations contained therein fell far short of the requirements. It was not only about the Union’s ability to act but also about strengthening the European Parliament and democracy.
“We want to reaffirm the top candidate principle and avoid the mistakes of 2019. In future, the Commission President should therefore be elected on the proposal of Parliament,” said Simon. “The candidate must be supported by a majority of MEPs. We want to set the procedure in an interinstitutional agreement with the Council before the election.”
Green MEP Freund expressed a similar view. The Commission should be elected more by the Parliament and thus by the voters and be called a “government.” Instead of 27 Commissioners, there should only be 14 in future, proposed to the Parliament by the President. “We are on the verge of a historic step for Europe. Treaty changes will make European democracy stronger and more resilient,” said Freund.
Parliament is also calling for a right of initiative for EU laws and the opportunity to co-decide on the next seven-year budget as an equal legislator. Like the Council, it is also in favor of extending qualified majority voting. So far, however, this is the only major common ground between the institutions. There is a threat of dispute over all other issues of EU reform.
Hardly any other legislative process is currently being watched with as much excitement as the European Corporate Sustainability Due Diligence Directive (CSDDD). The next political trilogue, the high-level meeting of negotiators from the EU Parliament, Council and Commission, takes place today, Wednesday. After the meetings in June, July and September, this is the fourth trilogue. However, a final agreement is not expected, as positions are still too far apart on too many issues.
The EU Commission presented the draft for the corresponding law in February 2022. This contains environmental and human rights due diligence obligations and obliges large companies to draw up climate transition plans. The German Supply Chain Due Diligence Act (LkSG), which has been in force since January 1, 2023, and the French “loi de vigilance” from 2017 serve as models.
According to information from Table.Media, the negotiators could agree on the scope of application in today’s trilogue, which would probably remain very close to the Commission’s proposal. According to the draft, this scope should include EU and foreign companies with more than 500 employees and more than €150 million net turnover per year. For companies in high-risk sectors (including the textile, agricultural and raw materials sectors), the directive would apply to 250 employees and more than €40 million.
This represents a significant expansion compared to the German and French laws, which apply to companies with 3,000 and 5,000 employees respectively. In Germany, companies with 1,000 employees or more will be subject to the law from 2024. This will have little impact on many other member states, as the companies based there are smaller.
According to a source in Parliament, Article 25 of the Commission’s draft, which provides for additional due diligence obligations for company directors, will be deleted in today’s trilogue. In addition, the definition of due diligence obligations and the annexes, as well as the provisions on the possible termination of contracts with partners in the event of negative impacts (Articles 7 and 8) are also on the agenda. The definition of the value chain will also be discussed; however, no agreement is expected from the parliamentary side.
No solution is expected for a whole range of issues, some of which will probably not even be addressed today. According to an internal compromise proposal, the Spanish Council Presidency wants to find solutions that are “practicable, guarantee legal certainty and do not cause excessive costs for companies and administrations.“
Among other things, this includes the still unresolved question of whether the financial sector should be included in the scope of the application. While the Parliament and the Commission are calling for corresponding due diligence obligations for financial institutions, the Council is opposed to this. Under pressure from France, the member states had already decided on a special role for the financial sector in their general approach. According to this, it should be up to each Member State to decide whether or not financial services are covered by the law. The Parliament is calling for the due diligence obligations to be applied to the downstream part of the value chain of financial companies and for the main markets of the financial sector (investments, banks, insurance companies) to be included.
Due to “the delicate balance reached in the Council on this issue and the difficulties in finding a compromise with the Parliament’s position,” the Council Presidency is now proposing to exclude the financial sector completely from the scope of application for the time being and to postpone the extension to this sector to a later phase. To this end, a review clause is to be added to the legislative text; the Council, Parliament and Commission are to agree on an interinstitutional political declaration.
Contrary to the position of his parliamentary colleagues, Axel Voss (EPP), shadow rapporteur for the CSDDD in the EU Parliament, expressed understanding for this exception in an interview with Table.Media. “The general approach of the supply chain law cannot be applied one-to-one to the financial sector, as this would lead to great uncertainty. That’s why this sector would actually need more specific regulations.”
The European Central Bank (ECB), for its part, supports the inclusion of the sector. Frank Elderson, member of the ECB’s Executive Board, said at a conference last week that uniform regulation across all sectors is crucial if private finance is to effectively support the green transition in the real economy. Including the financial sector in the scope of the CSDDD could help banks and other financial institutions to “systematically integrate sustainability aspects into their decision-making and risk management.” This would also create more certainty concerning the sector’s obligations and process risks.
The Council’s position has been met with harsh criticism from civil society: “Banks and investors have a free ticket to profit from human rights and environmental damage,” said Aurélie Skrobik, Corporate Responsibility Officer at the human rights organization Global Witness. “Abuse will remain part of the banks’ business model unless the EU agrees on a strong law that forces the financial sector to become cleaner.”
The definition of environmental impacts in the legal text also remains a contentious issue. While the Parliament is calling for a focus on specific categories such as climate impact, biodiversity or air and water pollution, the proposals from the Commission and Council are more limited here: companies should only identify impacts and take action against them if they violate international agreements. The Council Presidency is proposing the inclusion of further agreements as a compromise.
Environmental NGOs fear that even ambitious due diligence obligations will fail to have an impact from an environmental perspective if the Council and Commission get their way and companies only have to identify environmental impacts to a limited extent. This is because international environmental agreements are a very fragmented area of international law, explains Ceren Yildiz from BUND. “Many issues of environmental destruction remain completely untouched. For example, there is no global pact on the protection of forests; the plastics agreement is only currently being negotiated.”
The German Supply Chain Due Diligence Act (LkSG) served as a model for the Council and Commission’s approach, which refers to international treaties such as the Stockholm and Basel Conventions, which restrict the use of pollutants and the export of waste, respectively, for the verification of environmental impacts. Climate impacts are not mentioned at all. In the Council, the German government has advocated the inclusion of further environmental agreements in the definition, thereby expanding it – however, it rejects the so-called environmental categories proposed by the EU Parliament and has also spoken out against an obligation to implement companies’ climate plans (Article 15).
However, the Spanish Council Presidency is now offering to make concessions and is proposing a funding obligation with precise specifications on the content of the climate plans and a link to the remuneration of the company board. This should create a stronger incentive to implement the plan.
Meanwhile, the Federal Ministry of Economics and the Federal Ministry of Labor are discussing a simplification for reports under the German LkSG: according to the news agency Reuters, companies are to be given more time for their reports. Table.Media had initially published a Reuters report on Monday that an agreement had already been reached, but Reuters corrected this late on Monday evening. The Federal Ministry of Justice is currently working on a draft bill at a technical level; corresponding legal amendments are being discussed with the BMWK and the BMAS, Reuters reported late on Monday evening. Coordination on these proposals in the federal government has not begun.
The existence of many economic sectors in Europe depends on access to cheap green hydrogen. The revised Renewable Energy Directive (RED III), which came into force on Monday, sets fixed quotas for industry and transport. In this overview, you can read about the resulting obligations, whether they are compatible with the German government’s National Hydrogen Strategy and whether there is any green hydrogen left for other uses.
European quotas for 2030 from RED III for green hydrogen and its derivatives (in EU jargon “liquid or gaseous renewable transport fuels of non-biogenic origin” or RFNBO for short):
Separate shares for e-fuels apply for individual modes of transport in 2030:
There are still surprisingly few figures on what these EU requirements mean for Germany in absolute terms. Upon request, the BDI cannot say how many tons of green hydrogen the industry will need by 2030 to meet the requirements of the Renewable Energy Directive. In spring, the think tank Agora Industrie intends to present a study that will provide answers. Frontier Economics recently presented an initial estimate on behalf of Eon.
The industry needs 23 terawatt hours of green hydrogen for the EU quota and the transport sector six to nine terawatt hours, depending on whether they are met with hydrogen or derivatives. However, when asked, Frontier stated it had counted on a quota of one percent in the transport sector. The double eligibility was therefore apparently disregarded.
At first glance, the targets of the National Hydrogen Strategy would appear to cover the EU targets. In its new National Hydrogen Strategy, the German government has set itself a target of 95 to 130 terawatt hours of hydrogen for 2030. In addition to the current consumption of 55 terawatt hours, it has calculated an additional demand of 40 to 75 terawatt hours. However, this does not yet guarantee that the European targets will be met.
On the one hand, the German government also wants low-carbon hydrogen from natural gas to count towards its targets, which is not permitted under RED III. Secondly, it is questionable whether the national targets will be achieved.
“Overall, we believe that the H2 targets are very ambitious but fundamentally achievable,” says Johanna Reichenbach from Frontier Economics. However, the extent to which significant funding can still be provided from the federal budget is “very open” following the recent ruling by the Federal Constitutional Court on the Climate and Transformation Fund Act. “In this respect, achieving the target has certainly become less likely for the time being,” says Reichenbach.
At the beginning of the week, several companies at the European level put pressure on the EU to provide additional funding for the hydrogen economy. Existing funds were not sufficient to compensate for the lack of private investment, wrote the heads of German companies Sunfire, BayWa r.e. and Enapter, among others, in a joint statement.
However, Commission President Ursula von der Leyen did not announce any new funding on Monday, but rather the second call for tenders from the European Hydrogen Bank, which will be launched in the spring. In addition, one of the world’s largest production plants for green hydrogen and ammonia wil be built in the Brazilian state of Piaui with ten gigawatts of EU funding, which is to land at a terminal on the Croatian island of Krk. For comparison: ten gigawatts corresponds to the German government’s target for the total output of domestic electrolyszers in 2030.
However, the implementation of RED III into national law is at least as much of a concern for German industry as the financing issue. According to the BDI, this will be a focus of the association’s work in the coming months. Several points are in dispute:
The national regulations will be implemented through amendments to immission control legislation. According to reports, the German government intends to tackle the amendment to the Federal Immission Control Act (BImSchG) at the beginning of next year. The criteria for green hydrogen from the delegated act will be implemented in the 37th BImSchV, for which there are already drafts but no decision yet.
The EU is on the verge of a historic political success. It could set global standards in the area of business and human rights, as the USA did in 1977 with the Foreign Corrupt Practices Act to combat corruption. However, it is essential that the EU does not significantly water down its ambitious drafts for an EU supply chain law (Corporate Due Diligence Directive, CSDDD) in the final stages. Lobbyists have already weakened both the Commission’s draft and the Council’s draft. In addition, the lobby has requested further changes to the proposed regulatory framework for human rights protection in supply chains.
US Treasury Secretary Janet Yellen is urging the EU to exempt companies headquartered outside the EU from the obligations. In addition, the Chairman of the International Sustainability Standards Board, Emmanuel Faber, is calling on Europe to restrict the related law on sustainability reporting so that companies no longer have to report all risks to people and the environment. If Yellen and Faber get their way, the consequences would be fatal, as the EU system for business and human rights would only protect the shareholders and hand US companies doing business in Europe a free ticket.
The EU directive on corporate sustainability reporting, adopted a year ago, forces all companies operating in Europe – including some 4,000 headquartered outside the EU – to report publicly on all material sustainability risks. To Faber’s dismay, Europe has introduced a new “double materiality” approach. This requires companies to report on any sustainability risk that is material either to the company’s shareholders or to people and the planet. Faber, on the other hand, prefers the old approach of “financial materiality.” According to this approach, companies only have to report sustainability risks if they jeopardize the financial value of the company for its shareholders.
A look at the past shows that this is precisely what hinders progress through ESG. This is demonstrated by a new report by the NYU Stern Center for Business and Human Rights on the impact of financial materiality. According to the report, an approach based on the old method prevents the system of investments based on environmental, social and governance (ESG) criteria from having an impact.
This is because most current ESG frameworks assess how environmental or social risks can harm companies, rather than how companies can harm the world. This is counterproductive because companies often harm the environment or society without harming their shareholders. Thus, companies can behave in ways that harm the environment when it is profitable to do so – and when the legal or reputational consequences are non-existent or manageable. Immorality in business can be profitable, legal and scandal-free. Some misconduct is even so profitable that it can be financially rational for a company to accept scandals and legal sanctions. Companies that engage in harmful behavior may attempt to shield themselves from accountability by lobbying and litigating to weaken the regulatory framework, relocating to countries with little regulation, or outsourcing operations where labor and human rights abuses may occur.
Therefore, linking ESG to financial materiality can reward companies that avoid the legal consequences. Their reputation does not necessarily have to suffer either: Where the media and civil society are weak, scandals rarely come to light. And even when scandals do come to light, many customers and employees are unaware of or uninterested in ethical issues. A need for new regulatory mechanisms such as the EU Supply Chain Act arises when companies are not disciplined by existing legal or market pressures to account for the costs they impose on people and the environment.
Corporate reporting alone is not such an accountability mechanism. The theory behind sustainability reporting is to provide investors with the data they need to discipline companies. Unfortunately, the NYU report concludes that many ESG funds are failing in their role as effective monitors. In fact, ESG ratings are so incoherent that companies do not know what behavior they are encouraging or discouraging. Some leading US ESG funds are virtually indistinguishable from market indices and contain large proportions of problematic stocks. For ESG investors to be effective, the NYU report suggests some reforms.
Because most ESG investors fail when it comes to voluntarily making sense of sustainability data, a mandatory approach to ESG is needed. The EU Supply Chain Act would force companies to take a huge step beyond last year’s Sustainability Reporting Directive: They would not only have to report on environmental and social risks but also address them in their global value chain through effective measures. A strong supply chain law would therefore force companies to finally make meaningful use of sustainability data. This would have revolutionary potential for improving natural and social livelihoods – if done right.
The law must be globally applicable because the need for protection in the value chains is global. If the law is not also applied to companies that supply goods or services to the EU, there would be an incentive for companies to relocate their headquarters to a country with weak regulation. This would not only harm the cause in itself but also Europe economically.
This important regulatory task falls to Europe, as the US will at best impose patchy corporate reporting in this area and hope that ESG investors will do their job. The EU is the only player that can enforce global human rights protection in value chains in 2023, just as the US was the only player that could enforce global anti-corruption in 1977.
As was the case with the fight against corruption, current EU supply chain regulation could create a self-reinforcing virtuous circle. An effective EU Supply Chain Act would incentivize global companies to adhere to high ESG standards to gain access to the EU market. At the same time, it could put pressure on other countries to introduce similar regulations to remain attractive to multinational companies that have to comply with European regulations. The “Brussels effect” of the marketplace principle would provide a significant incentive for companies and states worldwide to protect human rights and the environment more strongly in order not to lose access to one of the largest domestic markets in the world. Something similar can be observed with EU regulation in the digital sector. Brussels could thus initiate a “race to the top”, which could lead to a fairer global economy. The EU should not miss this opportunity.
Michael Goldhaber is a Senior Research Scholar at the NYU Stern Center for Business and Human Rights and author of the report “Making ESG Real: A Return to Values-Driven Investing.“
Stéphane Brabant is a lawyer in Paris and Senior Partner at Trinity International AARPI in Paris, specializing in business and human rights.
Daniel Schönfelder works as European Legal Advisor for the Responsible Contracting Project and is involved in the implementation of the German Supply Chain Act as a lawyer for a large corporation.
