(Bloomberg) -- A European Union law designed to clean up corporate supply chains has been derailed by the bloc’s biggest member states, forcing negotiators back to the drawing board on one of the most consequential pieces of ESG legislation ever attempted.

The Corporate Sustainability Due Diligence Directive would expose companies to legal liability if they fail to address environmental or human rights abuses in their value chains. Parliament and national representatives had reached a provisional agreement in December, only for key member countries to withdraw their support on Wednesday.

Lara Wolters, the lawmaker in charge of steering CSDDD through the EU Parliament, said she was “outraged at the political games being played in Council today on due diligence,” in a comment posted on X. 

The development represents a “flagrant disregard for the European Parliament,” she said. “Member states need to get their act together.”

The fate of CSDDD, which also requires EU businesses to have climate transition plans, now hangs in the balance with time running out before EU elections in June. All laws usually need to be finalized around three months beforehand and it’s unclear whether the EU Parliament would accept a substantial rewrite of the text.

At a press conference called after it was clear CSDDD had been blocked, Wolters said that member states holding back the process were “listening to a minority of extreme business voices.”

But she also indicated lawmakers may be open to changing some parts of the proposed directive, which has been two years in the making. 

“This project is one where Europe needs to lead,” Wolters said.

The German coalition partner that had pushed for CSDDD to be stalled cheered Wednesday’s development. It’s “good news,” Johannes Vogel, deputy chair of the FDP, said in an emailed comment. “The EU must stand for a strong economy, not for bureaucracy,” he said. “This CSDDD might be well-intentioned, but is badly done and damages its good purpose. Little modifications will not change this.”

Meanwhile, Germany doesn’t expect there’ll be another attempt at getting CSDDD passed until after EU parliamentary elections.

“There are EU elections coming up, and a new Commission will have to be found, the new majorities in parliament will find themselves,” German government spokesman Steffen Hebestreit said at a regular press conference in Berlin on Wednesday. “Then we will have to see what can be done. But we cannot determine that at the current moment.”

Belgium, which holds the EU’s rotating presidency, had been trying to get Italy on side to get CSDDD over the finish line, despite last-minute German objections. Those efforts proved unsuccessful with both Italy and Germany — along with a number of smaller EU countries — citing concerns as to how such a law would affect the competitiveness of European businesses. 

France also withdrew its support after insisting CSDDD only apply to much larger businesses than the current text requires, according to a person in the room who asked not to be identified discussing private talks. It’s likely that France’s conditions will be examined closely with a view to taking its concerns into account, the person said. 

“We now have to consider the state of play and we will see if it’s possible to address the concerns put forward by member states in consultation with the European Parliament,” the Belgian presidency posted on X.

The outcome of Wednesday’s decision quickly drew condemnation from climate and human-rights activists.

“EU governments’ last-minute sabotaging and postponement of this new rulebook not only disregard the lives, communities, and ecosystems affected by destructive business practices, but also deal a blow to the EU’s credibility as a legislator,” said Uku Lilleväli, sustainable finance policy officer at WWF’s European Policy Office. 

“Let’s be clear: the law wouldn’t burden companies with unnecessary red tape; instead, it would secure a level playing field and help firms navigate necessary transitions in an informed and responsible manner,” Lilleväli said.

--With assistance from Arne Delfs.

(Updates to add comment from MEP Lara Wolters following press conference, in sixth paragraph.)

©2024 Bloomberg L.P.