Deregulation of green reporting rules – how business fooled us all

Business got what it wanted — the gutting of the Corporate Sustainability Due Diligence Directive (CSDDD) will be examined by the European Parliament and EU ministers. The deregulation package called Omnibus will probably be adopted and corporate obligations will be significantly weakened.  

How the proposal was handled, and its lack of substantive justification, causes outrage, but what escapes many commentators is that the corporations have managed to deceive us all.

First, they have convinced the European Commission that they are unable to meet the CSDDD requirements, while they claim to meet more far-reaching standards, such as the OECD Guidelines and the UN Guiding Principles, called “minimum safeguards”.

In a nutshell, under the EU Taxonomy, companies must report whether they operate following the above-mentioned principles. Both outline what responsible business conduct entails and expect companies to identify, prevent, mitigate, and account for how they address actual and potential adverse impacts on people and the environment. They are far-reaching, and certainly, one cannot meet their requirements "by accident."

For example, the OECD Guidelines expect companies to take responsibility for their whole value chain – from the source of the first raw material to supermarket shelves.

At the same time, the CSDDD requires companies to take care of their supply chains (calling it “a chain of activity” because as we know the EU is all about avoiding confusion) only “when relevant” and insofar as their business partners are related to the production of goods or the provision of services of the company.

Additionally, the CSDDD only partly includes harms related to what happens after the product leaves the company, excluding many risks tied to sales or design, and giving especially light obligations to sectors like finance or consulting.

Regarding human rights and environmental impacts covered by the OECD Guidelines, the scope is open-ended, meaning that virtually all internationally recognised human rights and harmful environmental impacts should be considered by companies while performing due diligence.

In contrast, the CSDDD covers only the impact linked to one of the international agreements explicitly listed in Annexes to the directive.

This means that, unlike the OECD Guidelines, the CSDDD leaves out many rights and environmental harm that result from irresponsible business activity. Most notably, the Paris Agreement is not on the list. 

These examples are intended to convey two key messages: the OECD Guidelines, hence "minimum safeguards," require a lot of work to be implemented, and they go beyond the CSDDD. In that light, it should be assumed that it would be more difficult to comply with the guidelines than with the CSDDD, right? Well, apparently not.

Companies have succeeded in lobbying for deregulation at the expense of all of us. However, this does not mean that civil society should give up

Based on the research conducted by Morningstar Sustainalytics 90 percent of companies report compliance with the minimum safeguards.

At the same time, companies call obligations stemming from the CSDDD “extensive”, “not workable in practice” and causing an overwhelming amount of new financial and administrative burden on companies”.

Putting aside that this overwhelming new financial burden is equal to just 0.13 percent of the total dividends paid out to shareholders in 2023 (dividends, not profits), the two statements cannot be true. About 90 percent of companies cannot comply with minimum safeguards and at the same time believe that less far-reaching CSDDD will crush European companies and their competitiveness.

Either the companies, the overwhelming majority of them, are lying about meeting the minimum safeguards, or the CSDDD is not a regulation they cannot meet, as they already report doing much more. 

The deregulation package proposed by EU commission president Ursula von der Leyen will further dilute the CSDDD, stripping the directive of any meaning. Observing the atmosphere in the European Parliament and the Council, this is likely to succeed.

So what can be done about it? There is a high probability that companies lie in their operations reports. These reports are subject to oversight, and lying about minimum safeguards is the same as lying about financial data. The legal path that seems possible, therefore, is to call on the auditors to look into the matter in depth, as well as potential breach notices under commercial law. 

Companies have succeeded in lobbying for deregulation at the expense of all of us. However, this does not mean that civil society should give up. The best sanitiser is light. So let's not let companies lie in the dark.