EU must not swap sustainability rules for short-sighted populist measures

Johannes Jäger is professor and head of the economics department at the University of Applied Sciences BFI Vienna, and Laurence Scialom is economics professor at Université Paris Nanterre

Plans to simplify EU sustainability reporting and due diligence rules lack sound economic analysis

Tabled in February, the European Commission’s omnibus proposal remains the talk of the day in sustainability policy circles. The EU executive is seeking to water down multiple laws, including the recently adopted Corporate Sustainability Due Diligence Directive and the Corporate Sustainability Reporting Directive. 

The CSDDD was only agreed on last year, and trade unions, civil society and progressive companies had considered it as a game-changer towards sustainability in global supply chains. However, the commission has started to question its own approach. 

The legislation was intended to force large European and foreign companies to comply with human rights standards. The CSDDD looks likely to be significantly weakened in the name of competitiveness and economic performance, even though the commission’s unpredictable behaviour will do nothing to create trust in EU economic governance. 

While many companies had already started to prepare for the newly established legislation, they now face substantial uncertainty. Indeed, the commission’s behaviour fuels fundamental uncertainty about the overall direction in the bloc in terms of sustainability policies. Will the EU remain a progressive international standard setter, or will it join a race to the bottom that it will never be able to win? 

Today, in a statement co-signed by more than 80 economists from 11 EU member states, we express our concern that the commission’s proposal lacks substantial arguments and seems to be rooted in short-sighted political tactics rather than in sound economic analysis. 

A value-based modern economy

Contrary to what the commission is arguing, sustainability legislation is less of a burden and more of an opportunity for European companies. In times of erratic “Trumponomics”, a clear and lasting approach to sustainability could enhance the EU’s position as a value-based modern economy that builds its wealth not on a systematic abuse of human rights abroad. 

Much of the commission’s arguments used to weaken the support for the CSDDD focus on compliance costs for companies constituting an administrative burden. Most regulations come with associated costs. However, the commission’s own research has shown that compliance costs for large companies are a negligible percentage of revenues generated. The costs, however, are only one side of the equation. 

The EU directive, in supporting compliance with human rights, also offers opportunities to reduce significantly the costs of economic activities that companies generate for third parties — so-called negative externalities. 

The sluggishness of the European economy can hardly be attributed to laws that have not yet been implemented or that have just entered into force

The externalisation of costs harms local livelihoods and exporting economies and can also harm the economy more broadly. Human rights abuses such as poverty wages, unhealthy work conditions and the use of harmful pesticide create additional costs for society and are, unfortunately, too common in many economies of the global south. They also prevent affected countries from diversifying their economies and claiming a larger share of the value produced in global value chains. 

The second political argument by the commission, that the CSDDD and the CSRD harm European competitiveness, also evaporates at closer scrutiny. 

The sluggishness of the European economy can hardly be attributed to laws that have not yet been implemented or that have just entered into force. Restrictive fiscal policies and a systematic lack of investments in public goods, including infrastructure, a conflict-ridden global environment, and an export-oriented global model — now in crisis also due to US tariffs — are much more significant explanations. 

Yet, these are much harder problems to solve. They require proper economic and industrial policies, rather than populist political moves pretending that cutting compliance costs will bring EU economies back to growth. On the contrary, a stable commitment to maintain a strong focus on sustainability in Europe is likely to provide a reliable context for European companies to adapt their long-term strategies and to promote sustainable growth.

In conclusion, the idea that sustainability obligations only create costs for companies is misguided. Legislators should also look at the benefits that the CSDDD will have for European economies and for the economies of its trading partners. Overall, the benefits are expected to outweigh the costs by far. 

Economic choices are political choices. With the omnibus proposal, the commission is cheering short-sighted populist calls and deviating attention from the big challenges the European economy faces. By continuing to allow for external costs and human rights abuses in supply chains, the EU risks falling back on its regulatory achievements in terms of sustainability. 

The European parliament and the European Council can still stop the watering down of sustainability legislation. The failure to do so will come at a cost to us all.