The EU’s landmark ESG legislation aimed at eradicating human rights and environmental abuses in supply chains has stalled after member states failed to vote it through.

The European Parliament and the Council reached a provisional deal at the end of last year on the proposed corporate sustainability due diligence directive (CSDDD), but it was blocked today at the Council level after failing to win majority support.

Opposition to the draft law was led by the German, French and Italian governments. Germany and Italy already abstained from voting earlier this month, a move classed as corresponding to a ‘no’ vote.

Germany’s opposition centres on fears the directive will put businesses under extra bureaucratic strain and open up liability risks due to an overly wide definition of supply chains, according to a letter seen by Reuters from two German ministers, both members of the country’s Free Democrats party.

Julia Grothaus, litigation, arbitration and investigations partner at Linklaters, says the directive – years in the making – is now “back to square one”.

“Too many member states refused to approve the CSDDD, which has been criticised for being too much of a burden on companies, particularly small- and medium-sized ones,” Grothaus says.

The directive is likely to be renegotiated between the Council and Parliament after the EU elections, due to take place in June this year, Grothaus explains.

“It therefore remains to be seen to what extent the project will push ahead in the new legislative period – and whether the EU will succeed in creating a level playing field for companies operating in the EU without charging them with considerable burdens,” she adds.

The CSDDD would apply to companies with more than 500 employees and €150mn in net global turnover, requiring them to identify and mitigate abuses such as forced labour and pollution.

Financial institutions are currently excluded.

Affected businesses would have to identify, prevent and put a stop to negative impacts their activities have on the environment and human rights – taking into account both their operations and those of subsidiaries and business partners.

Penalties include fines of at least 5% of a firm’s net global turnover.

Friends of the Earth Europe dubbed the news a “deplorable setback for corporate accountability and the protection of human rights and the environment worldwide”.

“Stalling the vote on this corporate sustainability law right at the finish line is blatant disregard for the widespread public support for CSDDD, and a betrayal to the countless victims of corporate abuse by European companies,” says Alban Grosdidier, climate campaigner at Friends of the Earth Europe.

“It’s one minute to midnight and decisionmakers have a chance to uphold the EU’s reputation for democratic leadership,” Grosdidier adds.

The delay comes amid a turbulent time for European climate commitments. This month, the European Commission recommended a target of reducing net emissions by 90% by 2040, the next milestone on the bloc’s path to net zero by 2050.

Yet emissions targets linked to agriculture were cut following protests from farmers, including references to cutting agricultural emissions of methane and nitrogen.