Germany and EU Corp. Sustainability Due Diligence Directive

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Last week, news broke that the German federal government may end up not supporting the European Union’s Corporate Sustainability Due Diligence Directive (CSDDD) at the upcoming vote on 9 February. Given the fact that German federal ministries were closely involved in negotiations on the text over these past years, such a turn of events seems even more surprising. At closer inspection, however, it may not be. In any case, it warrants the question: How did we get here? 

To start off, we have to understand that so far it is not the German federal government in its entirety that opposes the CSDDD’s adoption, but rather its smallest coalition partner, the Liberal Democrats (FDP). The government coalition is headed by the Social Democrats (SPD), with the Greens being the middle-sized partner. First, there was a decision by the FDP’s party leadership in mid-January, then followed by a joint statement of the Federal Ministry of Finance and the Federal Ministry of Justice, arguably the two most prominent federal ministries held by the FDP. Without going into detail on every argument here, some are worth mentioning. Among other things, they reject the CSDDD for weakening SMEs opposite larger businesses, excessive bureaucracy, and far-reaching liability for business leaderships. They also argue that the CSDDD would be doing a disservice to the environment and human rights by pushing German companies with overall good records out of foreign markets, thereby making way for more careless competitors from third countries. If the Liberal Democrats prevent the federal government from reaching a consensus on the CSDDD, the government can only abstain in the European Council vote which would essentially amount to voting No. 

One should view this apparently sudden U-turn by Germany’s Liberal Democrats in light of domestic German politics. Apart from the Christian Democrats (CDU and CSU), the Liberal Democrats are the relevant German political party that portrays itself as the natural champion of Germany’s Mittelstand, the country’s SMEs. The latter are notably the one of those currently part of the federal government. For much of the incumbent government’s tenure that began in December 2021, the Liberal Democrats have presented themselves as the voice of fiscal responsibility and economic prudence. This is the benevolent way to put it. Put more concretely, the Liberal Democrats have opposed any tax increases to raise urgently needed funds but are, in turn, usually open to relieving taxes on businesses and the wealthy. As the Federal Minister of Finance, their party chairman Christian Lindner is in an excellent position to block the projects of their Social Democrat and Green coalition partners, both of which – unlike the Liberal Democrats – are at least nominally left-of-centre parties. Opposing the passing of the CSDDD in the EU fits right into the party’s preferred image as a staunch defender of (small and medium) business. This is regardless of the coalition agreement of December 2021 stating that the government would support effective EU legislation based on the UN Guiding Principles on Business and Human Rights – which is the CSDDD. 

Curiously, and this has been a common thread over the years among opponents of any type of legislation on corporate sustainability, these opponents never seem to engage with businesses in favour of such legislation. Forgive me for shamelessly plugging my doctoral dissertation here. This current case is no different, with various business leaders coming out in support of the CSDDD. Sure, there are numerous business leaders in line with the FDP on opposing such legislation but there are also those who are not. In the end, all of business does not speak with one united voice – of course it does not – but acknowledging that would undermine the FDP’s self-portrayal as the business whisperer among Germany’s political parties. 

Federal Minister of Labour and Social Affairs Hubertus Heil of the SPD (left) and Federal Minister of Finance and FDP party chairman Christian Lindner (right). Photo: Filip Singer / EPA 

We need to interpret opposition to the CSDDD and much of this intra-coalition obstruction more generally as part of the FDP’s desire to enhance its profile with voters. This motivation seems understandable. Discomfort of part of the FDP’s base with the current government coalition has gone so far as to have resulted in a December 2023 members’ vote on whether to end the coalition. Barely more than 52 % of party voters elected to stay the course which, if anything, puts only more pressure on the party leadership to flaunt its alleged economic and business expertise. Moreover, leaving the coalition at this point would be a dangerous gamble. After getting decimated in just about every state election since 2021, the FDP has been consistently polling around or below an abysmal 5 % of the vote at the federal level. This is a drastic drop-off from its last federal election result of 11,5 %. Parties that manage to get less than 5 % of the vote usually do not enter the German parliament. 

Though the party would never admit it, the FDP is desperate and so German party politics will have – not for the first time – very real consequences for a crucial piece of EU legislation. Just yesterday, on 6 February, Germany’s Federal Minister of Labour and Social Affairs Hubertus Heil of the SPD has declared intra-coalition negotiations with the FDP to have failed. Germany’s abstention in Friday’s vote is now all but assured. This is even more regrettable given Germany’s overall position in the EU and the influence its position may have on the governments of smaller member states. 

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