The EU Dilemma in Implementing ESG Regulations: Second Part - The Revision of ESG Regulations in the EU

A recent report by Bloomberg reveals a significant shift in the European Commission's stance on ESG regulation. Under growing internal and external pressure, the Commission proposes substantial modifications to the Corporate Sustainability Due Diligence Directive (CSDDD), reducing corporate obligations and limiting legal exposure.

Key proposed changes include:

• Restricting the scope of due diligence to direct business partners.

• Eliminating the obligation to terminate business relationships as a "last resort."

• Reducing monitoring and ESG compliance control requirements.

• Removing the minimum threshold for financial penalties.

• Eliminating certain provisions related to civil liability.

This restructuring responds to criticisms from European businesses, which have warned about the competitive disadvantage the CSDDD could pose against markets like the U.S. and Asia. France has even requested that the directive be shelved. Meanwhile, in the U.S., the appointment of new Commerce Secretary Howard Lutnick opens the possibility of trade measures in response to European sustainability requirements.

However, this rollback has been labeled "reckless" by civil society organizations. Maria van der Heide of ShareAction has warned that these modifications represent "deregulation disguised as simplification," undermining efforts to combat climate change and human rights violations in global supply chains.

Impact on Valencian Manufacturing Business: Supply and Export Policies

This paradigm shift in ESG regulation will also have a direct impact on the supply and export policies of the Valencian business fabric, especially in strategic sectors such as the ceramic industry, footwear, and agri-food.

The relaxation of the CSDDD could create uncertainty in supply chain management, as many Valencian companies depend on suppliers located outside the EU. The removal of strict due diligence obligations may lead to less traceability of inputs, making it more challenging to identify environmental and social risks in the value chain. This, in turn, could affect the reputation and ability of these companies to access markets that maintain high ESG standards, such as Northern Europe and the United States.

In terms of exports, a relaxation of ESG criteria could represent both an advantage and a threat. On one hand, reduced administrative burdens would allow companies to lower compliance costs and improve short-term competitiveness. However, in the long term, less stringent sustainability requirements could weaken the position of Valencian companies in markets where consumers and regulators demand stricter environmental and social guarantees.

The ceramic sector, in particular, may be affected by these changes. Given that a significant portion of its production is destined for export, a loss of credibility in sustainability matters could limit access to contracts with large distributors and construction projects with environmental certifications. Additionally, the relaxation of regulations could lead local producers to face increased competition from foreign companies with lower sustainable production standards.

Balancing Competitiveness and ESG Responsibility

This revision of the CSDDD highlights the fundamental dilemma facing the EU: finding a balance between competitiveness and corporate responsibility. While the business sector welcomes the reduction of administrative burdens, environmental and human rights organizations warn of the risk of weakening regulations aimed at addressing climate and social crises.

This episode also underscores the need to harmonize ESG regulations with other instruments such as the Sustainable Finance Taxonomy and the Corporate Sustainability Reporting Directive (CSRD). The EU's ability to lead the sustainable transition will largely depend on its capacity to implement effective regulations without stifling the competitiveness of its businesses in the global market.

The final decision on these modifications is expected on February 26, when the Commission will officially present its ESG reform proposal within the "omnibus" legislative process. It remains to be seen whether the EU will manage to consolidate a regulatory model that balances efficiency and pragmatism in an environment of increasing international pressure.