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Late last year, European negotiators reached an initial agreement on a landmark bill that would hold big companies in fashion and other industries accountable for labor abuses and environmental damage in their supply chains.
The hard-won agreement among member states was described at the time as a “weak compromise.”
Its fragility was exposed when efforts to pass the bill stalled due to last-minute opposition from Germany’s pro-business politicians. The vote to give the bill an initial green light has been postponed twice since Friday.
The situation puts at risk a key part of the EU’s agenda to tighten requirements for companies to operate in a greener and more socially responsible manner. This reflects an increasingly strong backlash against stricter and more costly sustainability regulations.
What’s the problem?
The EU’s Corporate Sustainability Due Diligence Directive will require large companies around the world that sell products in the EU to report and take action on environmental and human rights violations in their supply chains.
The proposed rules would apply to European companies with 500 or more employees and global net sales of more than 150 million euros ($161 million). International companies with revenues of more than 150 million euros in the EU will also be subject to the regulation, but there will be a three-year delay before it comes into force. In other words, most of the world’s biggest and famous fashion brands will be under its umbrella.
Fines for violating the rules could reach 5% of a company’s global turnover, and companies that do not address the damage could face civil legal liability.
Supporters see the proposal as a breakthrough in efforts to police global supply chains and prevent large companies from effectively avoiding responsibility for their environmental and social impacts. (However, suppliers are concerned that companies will simply shift the burden of compliance onto themselves.)
UN High Commissioner for Human Rights Volker Türk said on Tuesday: “This process has truly raised hopes that big business will ensure more effective management of human rights risks.” “If this directive were to fail now, it would be a huge blow.”
Critics complain that the law imposes onerous reporting requirements on companies that are often unenforceable. But the system has been embraced by fashion industry advocacy groups such as the Sustainable Apparel Coalition and the Global Fashion Agenda, whose members include many of the world’s biggest brands and apparel manufacturers.
“We are concerned about recent political developments that threaten to derail this effort,” said SAC Executive Vice President Andrew Martin. “The decision not to adopt or even delay this important legislation is seen as not only a missed opportunity but also a major setback for global efforts towards regulatory harmonization and the implementation of sustainable business practices. It will raise the bar.”
Why On The Rocks?
The EU’s efforts to clean up companies’ supply chains come as part of its Green Deal, which aims to overhaul the bloc’s economy in line with global goals to stop the worst effects of climate change. This is part of a broader set of policies that have been implemented.
The vision, which sees the EU pursue some of the most ambitious climate legislation in the world, was developed after the 2019 election and amid a wave of protests in support of climate action.
However, with the next European Parliament elections scheduled for June, politics are undergoing major changes. Populist and pro-business politicians are gaining traction in an economy battered by the pandemic, war in Ukraine and soaring energy prices, arguing that tighter environmental regulations are overburdening companies with bureaucratic red tape. This is slowing down European action.
Still, many were surprised when the procedural vote on the European Due Diligence Act, originally scheduled for February 9, suddenly fell through. The issue stems from a rift in Germany’s ruling coalition, with minority parties turning the rule into a domestic political red flag amid an economic downturn and uncertainty over the future of the country’s industrial sector.
After Germany signaled its intention to abstain last Friday, other countries followed suit, delaying the vote. The topic was put back on the agenda for another meeting Wednesday, but was pushed back again.
For the bill to be approved, member states representing a majority of the bloc’s population must approve the bill. The European Parliament also has a say, but the window for passing the bill is closing in the run-up to elections in June. Typically, laws must be formally approved several weeks in advance. Some fear that if the law is not passed by then, the more right-leaning Congress could kill it altogether.
“This feels like a once-in-a-decade opportunity for companies to become more responsible with their supply chains,” said sustainable fashion advocate George Harding Rawls. Without legislation, “it would feel like we were just carrying on with business as usual at the exact time we needed to be more ambitious.”
What does that mean for fashion?
While the fate of the EU’s due diligence directive is currently uncertain, the fashion industry still faces more regulations that require companies to know where and how their clothes are made.
Several targets (directly or as part of broader industry efforts) target the sector’s environmental footprint, including tighter rules around greenwashing, stronger environmental disclosure requirements, and stricter ecodesign standards. measures have already been approved.
Several countries, including France and, ironically, Germany, have already introduced their own due diligence laws targeting large companies operating in these markets. The New York Fashion Law aims to introduce similar measures in the United States. Companies may end up having to deal with even more headaches and a broader patchwork of regulations.
“Common sense regulations are inevitable,” says Maxine Beda, founder of the New Standards Institute, a sustainable fashion think tank, and a leading advocate of New York state fashion law. “Delays from the EU will not stop the regulations, it will simply give New York state the lead in setting the conditions.”
But realizing that ambition is likely to become even more difficult if efforts to strengthen oversight in the EU, the regulatory frontier, falter. That could have a “chilling effect” elsewhere, warns Pascal Moreau, founder of public relations consultancy Ohana. “A little uncertainty doesn’t help.”
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