The CSDDD within and outside the EU

Last Updated on Thursday, 18 January, 2024 at 9:35 pm by Andre Camilleri

Last week I wrote an article about the extension of the EU ETS to the maritime sector. I explained the political argument, the weight of the negotiations in Council, as well as the penholders and the actors behind the agreement. However, today, I want to touch upon the topic of the Corporate Sustainable Due Diligence Directive, better known within the EU’s circles as the CS triple D.

In December, the co-legislators, meaning the Council and the European Parliament, reached a provisional political agreement on the directive. The purpose of the directive is to further enhance the protection of the environment as well as human rights, both within the EU and externally. The idea is to impose strict obligations on large corporations relating to their actual and likely adverse impacts on human rights and the environment, which includes, inter alia, the operations of such large companies, their subsidiaries and other business partners. In a nutshell, the directive covers the upstream business partners of a company and to a certain extent the downstream actions including the dissemination or recycling of products.

From now onwards, we have to ascertain that due diligence is carried out on the actions of large corporations within and outside the EU. Let’s say there is a large corporation that is not respecting human rights, then it is encouraged that such company is excluded from the European market. Additionally, there are sectors that are designated as very high and high-risk sectors, with a high adverse impact on the environment and human rights. There is an entire list of sectors covered by the directive, among others, the extraction of mineral resources irrespective of their origination such as gas and petroleum, food, forestry, fisheries and textiles that are deemed as having a high adverse impact on the environment. The idea is also to extend the regulations to push companies to change their business models, which is compatible with the transition to a sustainable economy. Also, the EU is pressing to limit the global warming to 1.5°C in line with the Paris Agreement.

This means that besides the Taxonomy Regulation, the SFDR, the CSRD and other regulations covering the EU ETS, the CSDDD will definitely regulate what comes in the EU. Technically, the EU is trying to democratise the financial and banking system. However, the level of checks is becoming a little arduous, and autocratic. True, it is a beautiful philosophical concept to reduce emissions, decarbonise the European economy and promote a healthier environment. Unquestionably, we have to pass through a hard transition process though to attain what is found in the whole set of regulations and directives. Economically, is not going to be easy from a European perspective. In the short run, many actors within different sectors, will be left injured. From a competitiveness point of view, it might affect the EU relative to Asia, the BRICS as well as the US. However, in the long run, if such a philosophical concept is implemented, Europe would have achieved its strategic autonomy when it comes to the energy sector if technology advances, and other means of cleaner energy are introduced. Surely, the idea to decarbonise the European economy and twist other country’s arms to follow suit is going to take a long time, as they entail shifting economic trade patterns.

Politically, I am not comfortable with the way things are unfolding. Notwithstanding that I am an advocate of transparency, and disclosures, the way such directives are being implemented might give access to authorities who can use the information in a tyrant way that affects and harms citizens. True, we have the GDPR in place. However, it is not enough. The level of detail and the information being requested is so granular and accurate that citizens feel observed. The way it is being engineered, and the introduction of the different levels of checks, is tantamount to China’s system. The trade off here is to reach a balance between the calculation of the carbon emissions, the modus operandi of companies and the level of detail expected to be reported by them, thereby allowing the sovereignty of consumers and producers.

Personally, I have never seen anything with such level of detail. To a certain extent the level of information being requested is becoming even more observable than that of China. The way it is being implemented is contrary to the EU’s foundations, that of promoting freedom within the rule of law system. Let’s say that the EU’s raison d’etre and that of such directives is the promotion of human rights and the exclusion of companies that breach human rights. Certainly, the EU as a global actor and defender of human rights, cannot ask such level of details unless they practise what they preach. Indeed, we must ask different questions. We need to ask and see what the EU will be doing about those countries that they are dependent on, especially raw materials and fossil fuels.

Will the EU exclude other countries that breach human rights and which are clearly dependent on their gas supplies? Will the EU exclude Azerbaijan for supplying them gas? Will they be adhering to the same level of checks and details to exclude countries that are breaching human rights, just like a large corporation is excluded from the European market? Are we going to exclude sovereign bonds within the EU, of those countries, known for breaching human rights? And are we going to screen countries that are adversely impacting the environment with their chosen investments, just like a large corporation is adversely impacting the environment at the expense of profits? And if the EU is setting the standards, will the IMF follow the same course? And if a country needs a bailout, will such checks be implemented, as well?

There are even large corporations with a turnover much bigger than the Maltese economy. So, while we have to ask large corporation to adhere to EU rules, we must also ask their governments to comply. We must ensure that whatever we are regulating we do not overregulate to the point of turning the EU into an autocratic continent with such level of details. Otherwise, we are going to create a travesty of the EU’s democratic principles and systems. We need to see how it is going to be implemented once it is introduced and published in the official journal of the EU, as I am already seeing a lot of overlapping with other directives, including the CSRD.

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