German Split Coalition Forces EU to Delay Toughest ESG Law

(Bloomberg) -- Tensions within Germany’s ruling coalition are holding up a deal on the European Union’s toughest ESG rule to date, marking the latest disruption to the bloc’s ability to do business due to infighting in the government of its largest economy.

At the last minute, a decision to approve legislation requiring firms to screen value chains for environmental and human rights abuses was postponed. Germany’s decision to place hurdles in the way of any agreement led other countries to follow, according to people familiar with the matter who spoke on the condition of anonymity.

Belgium, which holds the EU’s rotating presidency, has yet to announce a new date for EU ambassadors to meet and discuss the rule, which is known as the Corporate Sustainability Due Diligence Directive.

Italy signaled it would join Germany in abstaining from a vote, according to one of the people familiar with the process. That means a qualified majority without two of the bloc’s biggest members would be almost impossible. Other smaller EU states, including Finland and Sweden, were doubtful as to whether they’d approve the rules.

The episode is an embarrassing one for Germany after a series of last-minute disagreements in Chancellor Olaf Scholz’s three-party coalition. The lack of unity has hampered the passage of EU laws spanning the phase-out of the combustion engine to financial aid for Ukraine.

The delay represents a major blow for efforts to clean up corporate supply chains. While the postponement could give Germany and other opponents a chance to win more assurances, the window is closing before European Parliament elections in June. Laws typically have to be formally approved weeks beforehand.

“Recent months have shown that harnessing public opposition to ESG regulation is an increasingly popular political strategy in many European countries,” said Stephan Kippe, head of ESG research at Commerzbank AG. “While many large companies seem to be on board with CSDDD, the expected regulatory burden is much harder to stomach for the smaller companies that form the backbone of the German economy.”

EU countries did however back a deal to slash emissions in trucks and other heavy duty vehicles by 90% by 2040, which had also been in doubt amid tensions within Germany’s ruling coalition. In the end, Berlin signaled its support for the rule after it won a minor concession on so-called e-fuels.

Germany’s opposition to CSDDD was driven by the Free Democrats, a business-friendly coalition member. The party refused to back the rule because of what it characterized as too much red tape for German companies.

The Free Democrats have become a source of uncertainty as their support drops below 5% in national polls, feeding speculation that they might not make it into parliament in the next elections. Party leader Christian Lindner, who is also finance minister, has clashed with his Social Democratic and Green coalition partners in an attempt to boost support. 

Foreign Minister Annalena Baerbock, from the Greens, lambasted the Free Democrats for dropping their initial backing of the due diligence directive. 

“If we break our word once given in Brussels, we lose trust,” Baerbock said. “The fact that Germany is now abstaining in the last few meters despite earlier approval of the supply chain law is damaging our reliability as a partner and our weight in Europe.” 

Germany was among initial supporters of the due diligence directive, already having similar national legislation. So too was France, which also has set supply chain due diligence requirements for its companies. One of the initiative’s goals is to create bloc-wide requirements, to avoid such regulatory fragmentation.

(Updates with deal on heavy duty vehicles in eighth paragraph.)

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