The Corporate Sustainability Due Diligence Directive (CSDDD) directive, which was only enacted in June 2024, is already facing amendment by the European Parliament to narrow its scope. Despite its noble social, human rights, and environmental intentions, it has sparked controversy due to the scale of the obligations it seeks to impose and its extra-territorial effect.
But few have highlighted the CSDDD’s massive impact on economic security, which poses a real threat to the union at the same time as its ambitions make its goals undeliverable.
European industry is already struggling with American tariffs and a flood of Chinese imports. With an uncertain geopolitical climate, high energy costs, and sluggish economic growth, the bloc cannot afford to also impose wide-ranging obligations on EU and non-EU businesses trying to sustain and build independent and robust supply chains.
The directive adopts a very broad approach to compliance requirements and applies them to a large number of firms inside and outside the Union. In a clear example of extraterritorial overreach, non-EU firms are forced to comply with the CSDDD even in respect of their supply chains outside the EU, and must then apply the directive’s obligations to their non-EU suppliers in non-EU states. In effect, the EU is exporting its rules, without consultation with third states, and is seeking to impose its interpretation and standards in risk assessment in the human rights and environmental fields across the globe.
A non-EU company meeting the directive’s size threshold that has a supply chain extending to the bloc would need to ensure worldwide compliance with the directive. The effect will be to threaten EU security by reducing its capacity to diversify supplies, making it more susceptible to economic leverage by hostile powers.
The directive’s extensive obligations, controlling even non-EU-based supply chains, could prompt EU companies to withdraw from foreign markets and co-operation agreements with foreign firms. Large foreign enterprises could also be disincentivized from providing goods and services to the bloc.
The US and Qatar expressed their concerns at the rule’s extraterritorial reach in a joint letter in October, and warned Brussels it would affect liquified natural gas (LNG) exports to the continent. Antagonizing its two principal LNG suppliers poses risks to EU energy supplies at a time when it is already struggling to reduce reliance on Russia and cut high costs.
The EU’s experience with Russian gas showed the strategic vulnerability of economic dependence on a single supplier, leaving it exposed to disruption, price manipulation, and political pressure. When Gazprom cut supplies to the bloc, prices spiraled, and European governments had to spend hundreds of billions of dollars from 2022 to 2023 to insulate consumers and businesses.
Europe is still trying to unravel its overreliance on Russian gas, which continues to influence EU energy and foreign policy decisions.
But it is not just energy supplies where Europe faces security risks.
Beijing is using its economic leverage against Europe, most recently by tightening restrictions on the export of rare earth materials, and they are not the only case of supply dependence on China. Around 70% of lithium processing, vital for electric vehicles, is undertaken in China, and 90% of the base chemicals needed for medicines are produced there.
Europe needs friends and allies to strengthen its supply chains and diversify away from single sources. One has to question whether the Union should — without consultation and agreement — expose the firms of its friends and allies to fines of up to 5% of net worldwide revenue, as well as civil liability and tender blacklisting, while trying to build new supply chains with those self-same friends and allies.
It is also clear that the directive is not taking a particularly limited approach to the scope of liabilities. It is not just the worldwide net turnover cap of 5% but the application of joint and several liability down the supply chain and the refusal to countenance third-party verification systems as a defense against liability.
A further concern, as indicated below, is that the very broad scope of CSDDD opens up companies to very broad-based liability. Were you proactive enough? Why did you not foresee this environmental event?
While the threat risks disincentivizing new independent supply chains between the EU and third states, there is also a question over the likely effectiveness of the directive.
Relatively successful supply chain legislation, in states such as the UK and Australia, has had a much narrower focus to address issues like forced labor. By contrast, the CSSDD has a very wide scope of social and environmental justice objectives. Rather than imposing specific human rights and environmental rights objectives, the directive imposes very broad-based due diligence and risk management obligations on the supply chains of companies inside and outside the Union.
Given the wide range of objectives and breadth of claimed jurisdiction, there is a significant danger of endless box-ticking, heavy compliance costs, and significant underenforcement. Focusing on a narrower front would result in a more effective regime, and one that would be more manageable for business. Put simply, the EU is imposing costs on itself and its trade partners through its over-ambition.
Europe can and should continue to develop supply chain surveillance, but with a focus on its economic security. The EU – in partnership with its friends and allies – could build a network of vital suppliers with high labor, human rights, and environmental standards, for example.
By diversifying sources and collaborating closely with allied nations, European countries can reduce vulnerability to disruption, ensure stable access to critical materials, and strengthen economic security while reinforcing their social and environmental goals.
Investing in strategic partnerships and shared infrastructure would not only mitigate risk but would foster mutual trust and stability, reinforcing Europe’s capacity to navigate complex international markets while maintaining control over its essential resources.
Europe could then continue its legacy of economic integration and collaboration – the very principle on which the EU was founded.
Alan Riley is a Visiting Professor at the College of Europe, Natolin, and leads the EU economic security course.
Europe’s Edge is CEPA’s online journal covering critical topics on the foreign policy docket across Europe and North America. All opinions expressed on Europe’s Edge are those of the author alone and may not represent those of the institutions they represent or the Center for European Policy Analysis. CEPA maintains a strict intellectual independence policy across all its projects and publications.
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