Late last year, European negotiators reached an initial agreement on landmark legislation to hold large companies in fashion and other industries accountable for labour exploitation and environmental damage in their supply chains.
The hard-won agreement between member states was described at the time as a “fragile compromise”.
It is now clear how weak the bill is, and efforts to turn it into law were thwarted by last-minute opposition from Germany’s pro-business politicians. A vote to initially approve the bill has been postponed twice since Friday.
The situation puts at risk a key EU policy of tightening requirements for companies to operate in a more environmentally and socially responsible way, and reflects a growing backlash against tougher and more costly sustainability regulations.
What is at stake?
The EU’s Corporate Sustainability Due Diligence Directive requires large companies around the world that sell products into 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 more than 500 employees and global net sales of more than 150 million euros ($161 million). International companies that make more than 150 million euros in the EU would also be subject to the rules, but there would be a three-year delay before they come into force, meaning most of the world’s biggest and best-known fashion brands would be included.
Fines for violating the rules could amount to up to 5% of a company’s global turnover, and companies that fail to address the damage could face civil liability.
Supporters see the proposal as a landmark step forward in efforts to police global supply chains and prevent large corporations from effectively shirking responsibility for their environmental and social impacts (though suppliers worry that companies will simply shift the burden of compliance onto themselves).
“This process has really raised hopes of ensuring more effective management of human rights risks by large companies,” U.N. High Commissioner for Human Rights Volker Turk said Tuesday. “If the directive now fails, it would be a major blow.”
Critics complain that the law imposes burdensome reporting requirements on companies and is often unenforceable, but fashion industry advocacy groups such as the Sustainable Apparel Coalition and the Global Fashion Agenda, whose members include many of the world’s largest brands and apparel manufacturers, support the law.
“We are concerned by recent political developments that threaten to derail this effort,” said SAC Executive Vice President Andrew Martin. “A decision not to adopt or further delay this important legislation would not only be a missed opportunity, but could be seen as a major setback for global efforts towards regulatory harmonization that would raise the bar on implementing sustainable business practices.”
Why on the rocks?
The EU’s efforts to clean up companies’ supply chains are part of a wider set of policies introduced as part of the Green Deal, which aims to reform the EU economy to align with global goals of halting the worst effects of climate change.
The vision, which would see the EU pursue some of the most ambitious climate legislation in the world, was forged after the 2019 election amid a wave of pro-climate protests.
But with the next European elections scheduled for June, politics are shifting dramatically. Populist and pro-business politicians are gaining power in economies battered by the pandemic, the war in Ukraine and soaring energy prices, slowing Europe’s action by arguing that tougher environmental regulations overburden companies with bureaucratic red tape.
Still, the sudden cancellation of a procedural vote on a European due diligence law originally scheduled for Feb. 9 surprised many. The issue has its roots in a rift in Germany’s ruling coalition, with the minority party turning the regulation into a domestic political red flag amid a sluggish economy and uncertainty about the future of the country’s industry.
After Germany abstained last Friday and other countries followed suit, the vote was postponed. The issue was put back on the agenda for another meeting on Wednesday, but was postponed again.
For the bill to be approved, member states representing a majority of the EU’s population must approve it. The European Parliament also has a say, but time is running out to pass the bill before elections in June; laws usually have to be formally approved just weeks in advance, and some fear that if it’s not passed by then, it could be killed entirely by the right-leaning parliament.
“This really feels like a once-in-a-decade opportunity to get companies to take more responsibility for their supply chains,” said sustainable fashion advocate George Harding Rawls. Without the legislation, “it would just feel like we’re continuing with business as usual at a time when we need to be raising our ambition.”
What does that mean for fashion?
While the fate of the EU’s due diligence directive remains unclear for now, the fashion industry still faces far more regulation that requires companies to know where and how their clothes are made.
Several measures have already been approved targeting the industry’s environmental footprint (either directly or as part of an industry-wide effort), including stricter rules on greenwashing, increased environmental disclosure requirements, and stricter eco-design standards.
Several countries, including France and, ironically, Germany, have already introduced their own due diligence laws targeting large companies operating in these markets, and the New York Fashion Law is seeking to introduce a similar measure in the U.S. This could ultimately create more headaches for companies, who may find themselves dealing with a patchwork of more far-reaching regulations.
“Common sense regulation is inevitable,” said Maxine Bedat, founder of the sustainable fashion think tank New Standard Institute and a leading advocate of the New York fashion law. “The EU’s delay won’t stop regulation, it will just put New York in the driver’s seat in setting the conditions.”
But that ambition is likely to be harder to realise if efforts to ramp up oversight in the EU, the regulatory bellwether, fail. That could have a “chilling effect” on other regions, warns Pascal Moreau, founder of public policy consultancy Ohana. “There’s a bit of uncertainty and it’s not helpful.”
