15.1 Introduction
The business sector has a well-recognised role to play in achieving the development goals of the United Nations’ (UN) 2030 Agenda, in a ‘fair transition’Footnote 1 to a green economy (EU Green Deal), and in the system for the protection of human rights (via the UN Guiding Principles on Business and Human Rights; UNGPs).Footnote 2 The aim of this chapter is to examine the transformation of the notion of corporate social responsibility (CSR) by putting it in a historical and contemporary context, with a special focus on the EU space in the last 20 years. The questions posed herein are: what are the factors driving this rethinking of CSR, what does the change consist of, and how is that change likely to bear on corporate compliance and sustainability performance?
Corporate social responsibility has been a polarising concept due to its governance ramifications. Private ordering and self-regulation have been the domain of CSR scholarship and practice for decades in their attempt to define the private sector’s role and competitive strategies. The divide between CSR hopefuls – pointing out that business can innovate and contribute without drastic legislative mandates – and CSR sceptics – arguing for legal intervention and deterrence – persists. Corporate voluntarism and industry self-regulation extoll virtues of flexibility, innovation, rapidity and costs-saving presumably out of reach for public regulators.Footnote 3 With its positive connotations CSR was often presented as an alternative to the derided ‘command and control’.Footnote 4 These ideas carried on in the human rights area, where business self-regulation appeared as a viable response to gaps in international law and States’ unwillingness to regulate transnational companies.
This chapter contributes to climate change scholarship by examining CSR from the ‘business and human rights’ (BHR) vantage point. This treatment is chosen for several reasons: human rights are a significant normative element in the ‘fair’ transition, developments in BHR have changed the understanding of CSR in the last two decades, and advances in human rights due diligence are spilling over into the environmental pillar of CSR. The chapter’s main argument is that older notions of CSR have been abandoned in BHR at two significant turning points: first, in 2011 when the UNGPs prompted the EU to redefine CSR away from ‘voluntarism’ and toward ‘smart regulatory mixes’, and second since 2017, when the EU began moving towards the Green Deal and building a regulatory regime for sustainable finance.Footnote 5
The following two sections examine in more depth the two turning points in the last decade of BHR. The fourth section explores some considerations regarding the regulatory regime surrounding CSR nowadays and implications for a fair transition and addressing climate change. In terms of sources, the chapter relies primarily on EU laws, policies, regulatory evaluations and expert reports, as well as academic literature.
15.2 Corporate Social Responsibility in the Pre-Green Deal Period
Corporate social responsibility reached prominence in the United States context in the 1960s, marked by Friedman’s famous critique.Footnote 6 It developed fast primarily on the environmental side, which emphasised quantitative measurements, technological solutions and importance of innovation, which shaped the CSR discourse towards emphasising flexibility and self-regulation.Footnote 7 By the 1990s, the EU began promoting this notion of CSR and expanded it to the social area.Footnote 8 This fit the deregulatory vein of the time, with CSR appearing as ‘neoliberalism’s answer to the social and environmental externalities it was enabling’.Footnote 9 In the EU, CSR was mentioned in the 2000 Lisbon strategy with its ambition of EU becoming the world’s most competitive economy by 2010.Footnote 10 The EU elaborated on CSR throughout the first decade of the 2000s with four CSR strategy papers.Footnote 11 At this time, the UN was proceeding with Global Compact (2000) as a ‘learning platform’ and largest CSR initiative worldwide, and the doomed attempt to devise UN Norms on human rights responsibilities for multinational companies.Footnote 12
15.2.1 Corporate Social Responsibility as Voluntarism and Beyond Compliance
The relation of CSR to the regulatory sphere was a contentious issue. For the EU, CSR was defined as inherently voluntary,Footnote 13 with new regulations promoting CSR being seen as red tape, stifling and incompatible with CSR. Thus, CSR writings and policy documents presented CSR as a matter of ‘beyond-compliance’, while compliance with existing laws being a given. Notably this understanding of CSR developed in the highly regulated space specific to EU welfare States – or the rule of law levels of developed countries as previously in the United States – and this helped preserve an emphasis on voluntarism, flexibility and innovation with governments taking a supportive role only (these being positive incentives for CSR). This rosy view of legal reality made sense only superficially even in industrialised countries; indeed, this simply assumed away regulatory gaps and business influence on the legislative process. It assumed that adequate laws were in place and properly enforced thus delivering compliance.Footnote 14 By comparison, in developing countries where multinational enterprises and their supply chains were operating, such assumption was misplaced. Sweatshop abuses and environmental degradation were happening regularly as companies operated with impunity, taking advantage of gaps in national and international human rights frameworks.Footnote 15 In such a context, CSR as ‘beyond compliance’ was fundamentally inadequate.
Corporate social responsibility received criticism from both ends of the political spectrum. Critics of CSR from the left exposed CSR as a deregulatory ploy and denied corporate self-regulation any significance in advancing human rights.Footnote 16 Critics of CSR from the right questioned the legitimacy of CSR from both a private-interest perspective (in its use of shareholders’ money)Footnote 17 and a public one (that is, accumulation of power in private hands without democratic oversight).Footnote 18 Promoters of CSR drew attention to the learning and socialization merits of CSR (that is, ‘enlightened self-interest’ combining profits and principles)Footnote 19 while acknowledging – expressly or tacitly – its limits and indeed fundamental incapacity, if presented as an alternative to public law.Footnote 20 For some corporate accountability non-governmental organisations (NGOs), the glaring governance gaps and unwillingness of States to regulate meant a conditional and perhaps temporary support for CSR; such NGOs collaborated with the commercial sector in the form of direct engagement with companies, partnerships and voluntary sustainability standards.Footnote 21
Seen through regulatory governance lenses, there were also notable differences. In legal doctrinal treatments, international soft law and CSR were often merged into one category due to their non-binding nature. Such was also the case with non-State actors at international law, as Alston insightfully noted.Footnote 22 A certain role in the evolution of law was implied for (public) international soft law, but rarely fleshed out for (private) regulation through CSR.Footnote 23 In comparison, political science and international relations perspectives proved more able to handle regulatory evolution, and CSR looked like a step in a much longer process of consensus-building and norm formation.Footnote 24 From this perspective, private regulation’s merits might even extend beyond such a temporary usefulness as norms crystallise into laws. Indeed, CSR or self-regulation could have a permanent role in ‘smart mixes’ of measures that create legal, market and societal incentives; human rights should not be understood as only legal rights, especially in transnational settings fraught with regulatory gaps, Ruggie wrote.Footnote 25
15.2.2 Corporate Social Responsibility Redefined During the Ruggie Mandate
During his UN mandate (2005–2011), Ruggie reshaped CSR thinking. Tasked to bridge the gap left open by the UN Norms shelved in 2004, Harvard international relations professor John Ruggie elaborated a concept of CSR fit for the human rights area and international commerce. He exposed the voluntary–mandatory dichotomy as a ‘red herring’Footnote 26 and unproductive way of understanding the relation between private and public authority. He also noted UN’s previous failed attempts to advance corporate accountability through international legal instruments. Ruggie thus challenged orthodoxies on both sides of the CSR spectrum: CSR is not inherently voluntary, and a UN treaty is not necessarily the best first step to progress towards corporate accountability. This set his mandate on an innovative track and planted the seeds for the EU redefining CSR in 2011.Footnote 27
Regarding CSR, Ruggie established ‘do no harm’ as the minimum expected from all businesses in all situations and measured against international human rights standards. With this he exposed the window-dressing effects of CSR where companies tended to highlight positive impacts and offset their negative impacts with commendable societal or environmental actions. Such offsets are not legitimate, Ruggie argued. Furthermore, his CSR concept is more expansive and covers the entirety of supply chains. With this Ruggie delegitimised CSR orthodoxy which confined itself to direct contractors only (that is, the first tier of supply chains) where strong leverage over business partners (such as direct contractors and controlled subsidiaries) exists; the rest of the supply chain where serious human rights abuses lie would be ignored. He argued that corporate responsibility should follow from ‘impact’ instead of ‘leverage’; so what creates a responsibility to act is involvement with adverse impacts wherever in the supply chain and not the existence of leverage. Even more, Ruggie changed how businesses should prioritise risks. Instead of addressing risks to business, as is often done in CSR, companies should address risks to human rights-holders, and ‘severe’ human rights impacts should be dealt with priority and wherever in the supply chain they occurred. This ran counter to common wisdom in CSR steeped into stakeholder management and business case thinking that made CSR about managing societal threats to the company itself. Together, these clarifications reframed CSR and redirected this management exercise to deal with human rights abuses in supply chains.Footnote 28
Regarding regulation, Ruggie rejected legalistic framings embodied in the UN Norms project and also problematised the push for UN treaty as commonly conceived in human rights circles. Instead, Ruggie enmeshed responsible business conduct in a ‘polycentric governance’ framework that depends less on State action and an international treaty.Footnote 29 He achieved clarity and simplicity by promoting ‘human rights due diligence’ as the main operational concept in CSR, supported by a more flexible ‘polycentric governance’ view. He pushed relentlessly for a stakeholder agreement to build momentum for change, including regulatory changes, and embraced ‘principled pragmatism’ as his approach to CSR. In this way, Ruggie recognized the limits of CSR,Footnote 30 and private governance,Footnote 31 without diminishing their value while still recognising the need for intervention of public authority, including through legislation. His mandate culminating in the UNGPs primed the CSR field for the ‘smart regulatory mix’ revolution in the EU.
15.2.3 Corporate Social Responsibility and the Incipient Regulatory Mix in the European Union
The EU immediately endorsed the UNGPs and began acting on this new thinking on CSR. In its 2011 CSR paper, the EU redefined CSR away from being ‘inherently voluntary’ and towards the ‘regulatory mix’ approach.Footnote 32 It began adopting transparency and sectoral regulations inspired by the United States, especially the Dodd–Frank Wall Street Reform and Consumer Protection Act.Footnote 33 Examples are the EU laws on revenue transparency in extractives in 2013,Footnote 34 corporate transparency on ESG in 2014,Footnote 35 and conflict minerals in 2017.Footnote 36 During this period the EU had a strong focus on transparency laws, which was by turns both significant and disappointing at the same time. On the one hand, it marked a change of course from soft law to hard law in CSR; this added much-needed legal incentives for responsible business conduct (RBC).Footnote 37 On the other hand, disclosure laws offered no remedies to victims, and did not generate the ‘name and shame’ or ‘benchmarking’ effects to significantly advance the corporate accountability movement.Footnote 38 These laws did not generate reliable data and lacked appropriate metrics of performance, which meant that markets and investors did not have either the possibility or the incentives to demand CSR from companies.
By the EU’s own assessments,Footnote 39 such disclosure laws failed to achieve their policy objective and shift corporations towards RBC. Furthermore, established means of connecting international trade and development, such as trade agreements and preferential trade schemes, were largely seen as a separate discussion concerning inter-state relations. Indeed, with the 2006 CSR paper the EU attempted a more holistic treatment of CSR and international economic legal regimes, but ultimately did not manage to persuasively connect the two domains because of the original sin of seeing CSR as inherently voluntary.
The effects of CSR – including private sustainability standardsFootnote 40 and multistakeholder partnershipsFootnote 41 – are still being debated and remain dependent on one’s evaluative framework and initial expectations about what CSR is meant to achieve.Footnote 42 As such, variation in assessments is to be expected. Where there is growing agreement is about the limits of CSR, its inherent incapacity to substitute for public regulatory frameworks, and the need for States to re-engage, support, mandate and impose sanctions. As the next section demonstrates, the EU has shifted to mandatory measures backed by sanctions for both RBC and trade agreements areas. Whether by NGOs or by leading companies, there is recognition that some human rights abuses have systemic rootsFootnote 43 and can only be tackled effectively and at scale by co-ordinating in the spirit of ‘shared responsibility’.Footnote 44
In hindsight, the early EU approach to CSR could be seen as minimally demanding, naïvely enabling, and poorly integrated in a coherent policy whole. However, with CSR as voluntarism being revealed as conceptually inadequate to the BHR area and finally put to rest in 2011, the ‘smart regulatory mix’ is beginning to emerge – if in a rather rudimentary form, and with excessive confidence in transparency laws. The application of established notions of CSR to the BHR context at a time of ‘global supply chains revolution’ has led to a redefinition of the notion of CSR. Ruggie’s versatile concept of human rights due diligence facilitated this rethinking of CSR. The term RBC is increasingly used and can be boiled down to corporate due diligence and, coupled with the ‘regulatory mix’ thinking employed by the UNGPs and the EU, has now superseded CSR as voluntarism. The defining shift in CSR in this period was from voluntarism to light touch regulation within an incipient regulatory mix.
15.3 Corporate Social Responsibility in the Green Deal Period
After examining the EU’s CSR approach in the pre-Green Deal period and the shift in CSR that occurred in 2011 on the heels of the UNGPs, this section analyses a second shift in CSR in the Green Deal period. The section has a twofold aim: first to explain the EU model of sustainable growth to which CSR now belongs, and second to identify the drivers for the EU’s changed approach to CSR. The main point is that the EU is moving fast to erect a comprehensive and more demanding ‘regulatory mix’ in CSR and that a constellation of new and old drivers is propelling CSR into a new phase of its evolution. The turning point in the EU is arguably the work on sustainable finance that it began in 2017. This EU objective is coupling finance and the real economy to raise capital and thus enable the transition to green economies,Footnote 45 and is transforming not only the climate and environmental responsibilities of businesses, but is also serving as the major boost regarding their human rights responsibilities.
Some key moments in developing the EU sustainable growth model have been the establishment of the High-Level Expert Group (HLEG) on sustainable finance in 2016Footnote 46, which was followed up by the Technical Expert Group (TEG) on sustainable finance in 2018,Footnote 47 and lately by the permanent advisory expert body, the Platform on Sustainable Finance (PSF) in 2020. Drawing on such expertise, the EU has moved fast with the Action Plan on Financing Sustainable Growth (2018),Footnote 48 the Green Deal Communication (2019),Footnote 49 a Green Taxonomy (2020),Footnote 50 and a Financing Strategy (2021),Footnote 51 as well as a host of legislation and commitments to legislate in an array of discrete areas. In just a few years the EU has erected an entire regulatory ecosystem.
In this context, the EU acknowledged deficiencies regarding its previous approach to CSR. These shortcomings regarded both the few hard laws the EU had employed, as well as the attempted but failed policy coherence in RBC. The EU has conducted its own evaluations and assessed whether reliance on corporate voluntarism and transparency regulations is sufficient, or if passing more stringent legislation is warranted. From this process, the limitations of voluntarism and light touch regulation have emerged strikingly clearly time and time again in the areas of reporting,Footnote 52 due diligence,Footnote 53 and corporate governance.Footnote 54 Juxtaposed with such damning assessments is the urgency of climate action.
15.3.1 Corporate Social Responsibility as Responsible Business Conduct Powered by a New European Union Regulatory Ecosystem
In a significant break with corporate voluntarism, the European Commission proposed in February 2022 a Directive to mandate environmental and human rights due diligence, called the Directive on Corporate Sustainability Due Diligence (CSDDD).Footnote 55 The Commission’s announcement in April 2020 that EU legislation on due diligence was forthcoming was a surprise for all bar those following very closely the sustainable finance discussions in the EU.Footnote 56 The first hint appeared in the 2018 Action Plan which focused on sustainable finance and identified three priorities, one being to ‘foster transparency and long-termism in financial and economic activity’. Regarding this priority, the Plan outlined two specific actions, one regarding the Non-Financial Reporting Directive and the other regarding corporate governance. It was in the latter that ‘due diligence throughout the supply chain’ was mentioned, in rather tentative language.Footnote 57 The final report issued months earlier by the EU High-Level Expert Group on sustainable finance made no such reference to supply chain due diligence.Footnote 58
Thus, in the 2018 Action Plan, due diligence regarding supply chains was briefly referred to, almost obliquely, as part of the corporate governance section, and drowned among numerous actions targeted at the financial sector. It was in this detailed and technical plan focused primarily on finance (rather than real economy) and on environmental impacts (rather than social impactsFootnote 59) that the first reference to mandating CSR for companies appeared. This mention was followed by an ample study on the necessity and regulatory options for due diligence published in early 2020.Footnote 60 The Commission went through its regular procedure consulting externally through public feedback and internally with the Commission’s Regulatory Scrutiny Board, which criticised and twice rejected the Commission’s proposals.Footnote 61 Eventually, the proposal for a Directive was published in February 2022, and will go through the usual reconciliation process with the European Council and Parliament and be followed by the two-year transposition period.
The CSDDD is part of a complex regulatory ecosystem that could be described as a core set of laws applying to the real economy and finance (RBC package) and flanking measures aimed at supporting compliance and complementing these supply chains laws (international trade and development package). In a nutshell, the current CSDDD design establishes obligations for large companies to conduct due diligence to be enforced through civil liability and administrative sanctions.Footnote 62 Due diligence draws on the UNGPs as a risk management approach to prevent and correct adverse impacts on human rights, environment and even climate change.Footnote 63 However, transposing a seemingly clear norm from soft law (UNGPs) to hard law (CSDDD) is a complex process fraught with numerous design options that have been thoroughly contested during the public consultation process.Footnote 64 Indeed, the Commission explained the reasons that triggered this Directive. Among these policy aims that need to be reconciled are legal certainty and predictability, levelling the playing field, avoiding fragmentation of the EU common market, and scaling-up the protection of human rights and the environment.Footnote 65
15.3.1.1 The Responsible Business Conduct Package
Regarding the ‘RBC package’, this is a set of EU laws directed at market actors – basically commercial actors (private or public) – across both businesses and finance. The CSDDD, together with other laws, create a host of legal and market incentives to ensure compliance and promote sustainability. On the one hand, for businesses (that is, the real economy), the EU already has the 2014 Non-Financial Reporting Directive (NFRD) in place,Footnote 66 to be revised and strengthened into the Corporate Sustainability Reporting Directive (CSRD).Footnote 67 On the other hand, for investors (finance), the EU has the Sustainable Finance Disclosure Regulation (SFDR, 2019), and the Green Taxonomy Regulation (2020).Footnote 68 A complementary Social Taxonomy was also considered.Footnote 69 The proposed CSDDD itself goes to some lengths in pointing to the existence of, and relationship between, these laws for reasons of policy consistency.Footnote 70
These hard law instruments reveal a deliberate coupling of investors and investee companies that create new legal and market incentives across supply chains. The EU uses a range of regulatory techniques. Some are purely enabling for the investors, like the Taxonomy regulation, offering a classification that provides clarity on which investee activities can be considered sustainable.Footnote 71 Others remove constraints and thus increase discretion to take ESG factors into account without mandating new conduct. For example, the CSDDD corporate governance provisions ‘liberate’ corporate directors from the ‘tyranny’ of ‘short termism’,Footnote 72 and the public procurement directives (2014) ‘liberated’ agencies to take CSR into account.Footnote 73 Yet some other laws are more prescriptive, such as the NFRD (2014) and the SFDR (2019), which impose reporting obligations,Footnote 74 but do not mandate changes in decision-making and count instead on market incentives to indirectly achieve such changes. Finally, a law like the CSDDD will be closest to the prescriptive end as it makes risk management mandatory and creates both legal and market incentives. Some financial institutions are already covered by the CSDDD, but a future law might impose due diligence obligations for financial actors that currently have only reporting obligations under the SFDR.Footnote 75
What these new and older forms of CSR legalisations have in common is that they are all targeted directly at market players, whether from finance, business or governmental procurement agencies. They create legal and market incentives and are meant to be reinforcing through the company–investor interface. Notably, laws that are prescriptive for companies are enabling for investors that gain access to indispensable data so they can themselves comply with their obligations. It is not surprising that some of the most vocal supporters of a stringent CSDDD are financial institutions.Footnote 76 The quality of corporate CSR reporting, despite decades of private ESG standardisation,Footnote 77 has made such data effectively unusable to investors.Footnote 78 Despite the oft-recited growth in responsible investment,Footnote 79 and interest of investment funds demonstrated with figures in the trillions of U.S. dollars invested based on ESG criteria, the latest EU actions reveal the sobering reality and lasting deficiencies in CSR reporting and the inability of investors to act on such information. Alliances for responsible investment are nothing new,Footnote 80 but as the EU’s assessments of the NFRD recognised, legislators mistakenly assumed that corporate voluntarism, private standardisation of ESG metrics, and reporting regulations such as the NFRD were the perfect light-touch regulation, and would be sufficient to pull the financial sector into sustainability.
Its merits notwithstanding, the current CSDDD draft reveals discrepancies regarding climate change provisions: climate is not part of the environmental due diligence provisions, but appears under the corporate governance provisions where directors have duties to identify climate risks, reconsider the business model, set climate target plans, and adjust renumeration.Footnote 81 Still, the proposed CSDDD claims complementarity of sustainability due diligence with the European Climate law and the ‘Fit for 55’ package of proposals.Footnote 82 As such, full consistency and policy coherence is still work in progress in the RBC package. In sum, the ‘regulatory mix’ approach of the EU is visible from the diversity of instruments but also their cross-linkages in the RBC package.Footnote 83
15.3.1.2 The Trade and Development Package
Regarding the ‘trade and development package’, it contains a mix of prescriptive and supportive measures targeted at other actors that are not covered by the RBC package (such as large companies and finance organisations) but that have roles in the operation of supply chains. Such actors include exporting states, suppliers, and even civil society groups. The measures in question consist of trade and development instruments that the EU has used for some time: unilateral trade schemes (the Generalised Scheme of Preferences; GSP),Footnote 84 bilateral free trade agreements (FTAs), multilateral development co-operation agreements,Footnote 85 and national official development assistance (ODA). All these instruments refer sustainability topics such as human rights, worker rights, and environmental protection. However, it is only recently that the EU has fully recognised the complementarity and synergies between measures in the two packages to govern supply chains.
A more stringent mix of measures is emerging through the strengthening of older instruments and the addition of new ones linked to CSDDD. Older measures are inter-State instruments creating obligations for States, but not for commercial actors. For example, under FTAs and GSPs, commercial actors do not acquire obligations, but it is instead exporting states that undertake to change the regulatory frameworks. This can result in more stringent national law obligations on suppliers in exporting states and stricter enforcement. Notably, these inter-State approaches were set in motion in previous decades: GSPs since 1971, development co-operation agreements with human rights conditionalities since 1991,Footnote 86 and FTAs with social clauses which appeared in the 1990s,Footnote 87 and which have contained trade and sustainable development (TSD) chapters since 2011.Footnote 88 Thus they precede CSR and sustainability due diligence as a way of connecting international trade and values (sustainability). Such social conditionalities in development co-operation and trade have received their own criticism for lack of effectiveness and problematic enforcement.Footnote 89
One development in this area is the strengthening and reform of these old State–State instruments. This is particularly evident in EU trade policy, which reveals a newfound assertiveness.Footnote 90 It is a requirement under EU law that all EU trade agreements include TSDs nowadays.Footnote 91 Recently, the EU acted on its commitment to more stringent TSDs in FTAs,Footnote 92 and a seeming willingness to use access to the EU market.Footnote 93 In 2022, the Commission proposed a ban on imports tainted by forced labour,Footnote 94 and reformed its approach to FTAs to utilize trade sanctions to enforce TSDs.Footnote 95 The EU is also involved in reform of international investment law, especially through addressing the much criticized arbitration system.Footnote 96
Another development is the addition of flanking measures to complement mandatory due diligence. The risk is that large companies comply with their new due diligence obligations under CSDDD in ways that shift responsibility for improvements to their suppliers. Indeed, the CSDDD uses the ‘cascading’ approach in which EU companies rely on contractual assurances from, and audits of, direct contractors, which in turn replicates these expectations for their own suppliers and thus drives improvements throughout the entire chain. To help all these suppliers respond to CSR requests from the large companies, the CSDDD refers to ‘accompanying measures’ for small and medium-sized enterprises that use ODA support, standards, information, and support for multistakeholder initiatives among others. Indeed, two months after issuing the CSDDD proposal the EU published a detailed report outlining these accompanying measures.Footnote 97 Furthermore, to support large companies covered by CSDDD, the CSDDD also applies to large non-EU companies. This aims to level the playing field; non-EU companies have to perform the same due diligence under the CSDDD in order to places product on the EU market and are thus prevented from operating to put EU companies at a competitive disadvantage.
The EU has developed a more coherent and encompassing approach to supply chains. Most notable are the EU trade policies, contained in the 2015 and 2021 communications from the Commission.Footnote 98 These trade policies are notable because they take into account the supply chain revolution, and also link trade to human rights, labour rights, and environmental protection under the ‘value-based trade’ discourse.Footnote 99 Historically speaking, the inter-State track of trade and development has evolved in almost clinical conceptual isolation from the voluntary, business-driven CSR track. In contrast, the current trade policies – as well as the recent decent work policyFootnote 100 – establish the link between trade, supply chain regulation, and values, and thus advances policy coherence. This creates an encompassing policy mix of legal and market incentives throughout supply chains, and does not shy away from including legal incentives that were taboo during the CSR and trade liberalisation period powered by neoliberalism.
The EU’s comprehensive regulatory mix approach does not reflect a command-and-control approach to global supply chains from industrialised States and/or their multinational enterprises (MNEs) subjected to new laws. The EU approach indicates a rejection of overreliance on legal incentives. This is detectable in both packages. On the one hand, in the RBC package, the civil liability provisions for failures of due diligence are carefully calibrated in a fault-based liability system. If liability remains as it is in the CSDDD proposal it marks a significant development and begins to lift carefully the corporate veil that has protected parent companies for so long.Footnote 101 However, the way in which the CSDDD specifies due diligence and balances legal certainty and meaningful compliance triggered criticism as a departure from the UNGPs.Footnote 102 On the one hand, in the trade and development package, there are continuing limitations despite reform being underway. Thus, under EU FTAs with sustainable development chapters, workers and unions have no standing and still have to rely on States to further their claims. In 2022 stringencies were added regarding both complaints mechanisms (Single Entry Point), but also regarding trade sanctions for TSDs that alter the traditionally promotional EU approach.Footnote 103 Regarding investment, shortcomings are recognised, but there is not a shift towards affected individuals and communities acquiring standing and rights in the Investor–State Dispute Settlement (ISDS) system. In sum, the turn to comprehensive regulatory mixes in CSR adds much-needed legal incentives, but does deliver the deterrence that would be created through stricter legal liability and/or actionable rights.
A final observation as the EU advances with its model of sustainable growth: does the urgency of climate change still allow time for these regulatory mix dynamics to unfold, or does this to constitute a flaw of the entire regulatory design? The ‘smart mix’ approach is a recalibration to address the inadequacies of CSR and a reversal of the retreat of the public sector from markets. Furthermore, two packages of measures have emerged in the context of the EU Green Deal and its continued reliance on markets to achieve a green and fair transition. Private finance is seen as essential to the SDGs and Green Deal, and the use of regulation is meant to enable sustainable finance and have impact at scale. However, the merits of this elegant ‘regulatory mix’ reasoning could pale into irrelevance if the pace or very destination – the ‘sustained growth’ model and vision of a ‘green economy’ – are incorrectly judged.Footnote 104
In sum, the strengthening of regulatory incentives in both packages is detectable. New legal and market incentives are created at the interface between finance and the real economy. The EU shows that CSR as voluntarism has become outdated in concept and practice. The defining shift in CSR in this period is from light-touch regulation within an incipient regulatory mix to a more stringent and fully fledged regulatory mix. The ‘regulatory mix’ to ensure responsible business conduct is advancing at a furious pace. There is a move towards policy coherence given that both the RBC package and the complementary trade and development package deal with one main target, the international supply chain. The major driver regarding RBC has emerged to be the EU’s bet on sustainable finance, as the centrepiece of its Green Deal and ‘fair transition’ due to the climate emergency. The next section explores further the why question and drivers behind EU’s CSR transformation.
15.3.2 Drivers Behind the European Union’s Revised Approach to Corporate Social Responsibility
In less than a decade, the EU dramatically changed its approach to CSR, first by abandoning CSR as voluntarism and beyond compliance after 2011, and second by developing its comprehensive ‘regulatory mix’ through the EU Green Deal process after 2017. It is thus clear that the climate emergency, the emphasis on sustainable finance, and the insistence on a ‘fair transition’ to a green economy are the key drivers for CSR in the EU at present. The analysis of the RBC package and trade and development package explained the EU’s regulatory strategy centred on corporate sustainability due diligence and flanking measures such that new legal and market incentives were purposively created at all levels of the supply chain.
This section further develops the explanation by pointing out three additional drivers that potentially shape the EU approach to CSR. They refer to the multilateral human rights system of the UN (as an international human rights law driver) where the human rights due diligence concept first appeared in the UNGPs; developments at national level in EU Member States; and geostrategic considerations, as the EU is still the largest market in the world in relation to trade with the United States and People’s Republic of China (PRC).
15.3.2.1 Driver 1: The International Human Rights System
International human rights law, through the UN General Assembly, recognised in 2022 the right to a clean environment as a human right.Footnote 105 Furthermore, human rights bodies routinely refer to climate change as the greatest threat to the protection of human rights nowadays. A significant contribution of the international human rights law system to CSR has been the human rights due diligence concept and enabling framework delivered by the UNGPs. By now due diligence has now moved from human rights to the broader Environmental, Social, and Governance (ESG) area with notions of climate due diligence and sustainability due diligence being in use. Because the UNGPs are inherently limited as soft law instruments, States in the UN Human Rights Council embarked in 2014 on an attempt to harden such soft law norms in a legally binding instrument. Deliberations on this treaty on business and human rights are proceeding slowly in what is bound to be a contentious and long-term effort.Footnote 106 Until 2022, the EU has followed such deliberations as an observer, voicing concerns where it considered it necessary.
The international human rights law system as the legal repository of human rights values and commitments of States has structural weaknesses. These seem even more difficult to overcome at the multilateral level (the UN) nowadays with a push back against human rights from authoritarian States. Thus, a number of States align for economic or political interests with the PRC’s ‘State multilateralism’ grounded in sovereigntist impulses and a deliberate rejection of human rights.Footnote 107 From a different angle, some corporate accountability advocates have decried what they perceive as a shift in the UN system from multilateralism to ‘multistakeholderism’. This shift that occurred at the turn of the millennium is embodied in the UN opening up to the private sector – through the UN Global Compact regarding CSR, the SDGs regarding development, and sustainable finance (such as green bonds) in the climate area – which critics identify with neoliberalism and an oversized role for commercial interests.Footnote 108 To counterbalance this, some civil society groups emphasise civil and political rights and/or the indivisibility of human rights as developed in the UN system, and support ‘inclusive multilateralism’. This would preserve and enlarge the space for civil society to participate in UN work and resist relegating human rights as the exclusive precinct of sovereign States (State multilateralism) and/or subject to the profit-driven interests of corporations (multistakeholderism).
The discussions around corporate accountability and the human rights responsibilities of multinational enterprises are shaped by this triangle of visions surrounding the UN human rights system: State multilateralism, inclusive multilateralism, and multistakeholderism. In this context, one could say that the current negotiations for a BHR treaty merely reflect the latest instalment of a half century attempt to deal with transnational corporations at the multilateral level.Footnote 109 During this long period, the regulatory mix approach appeared haltingly, and has only been embraced hesitantly in the UN. Indeed, the 2011 UNGPs have been the exception in their articulation and embrace of polycentric governance thinking, while pre-UNGPs (2003 UN Norms) and well as post-UNGPs (BHR treaty drafts) default on more coercive regulatory regimes for multinational enterprises.Footnote 110 Furthermore, the international human rights law system is pursuing a parallel track that partially overlaps with the analysis in this chapter and where these three visions also clash. Thus, there are deliberations around the right to development following a process initiated by the PRC and some participants in the Non Aligned Movement.Footnote 111 The ambition again is to harden soft law, that is, develop the 1986 Declaration into a legally binding convention.Footnote 112
It is then difficult for a strong RBC driver to emerge from within the multilateral human rights system to begin with, and uncertain if it would naturally align with the EU model. Indeed, the model of State multilateralism advanced by the PRC and like-minded developing countries increasingly rejects human rights, and thus implicitly the BHR agenda, while some advocates for ‘inclusive multilateralism’ reject the ’smart mix’ as a concession to neoliberalism. Furthermore, the above-mentioned initiatives within the UN also aim high, that is, towards adopting treaties, which adds significant negotiation and ratification challenges. It is, however, predictable that the EU will seek to promote its approach to RBC in multilateral settings. Driven by considerations to ‘level the playing field’ for EU businesses, the EU signalled in 2021 an intention to engage more closely with the UN treaty process. The Organisation for Economic Co-operation and Development (OECD) and the World Trade Organisation (WTO) might offer alternative arenas where the EU might push its model of mandatory due diligence. Thus in 2022 OECD issued guidelines for States, and in 2020 the WTO began negotiations on investment facilitation that open space for RBC to be included.Footnote 113 In this way, not only is the UN system not a driver for the current EU approach to RBC, but the reverse is conceivable, with the regional EU model instead being a driver for CSR in other regions through the so-called ‘Brussels effect’.Footnote 114
15.3.2.2 Driver 2: Developments at the National Level in European Union Member States
The Commission’s decision to propose the CSDDD was explicitly based on a desire to harmonise national legislation in EU Member States.Footnote 115 The last few years have seen European States adopt due diligence laws, or ponder their adoption, which has created a risk of fragmentation within the internal market and the divergence of legislative requirements for European companies in that space. Furthermore, strategic litigation in the EU and other industrialised States, for both human rights and environmental harms, has dramatically increased in the last decade.Footnote 116 With the arrival of new due diligence laws, some of them containing civil liability provisions (for example, with France and the CSDDD), case law can change in unpredictable ways. Indeed, courts can now factor into their tort law analyses a company’s failure to observe statutorily defined obligations of due diligence, and thereby find it causative of harm in supply chains. Such complex determinations of causation might easily lead to diverging case law in EU countries.
Notably, there has been a surprising level of support in business circles for mandatory due diligence. Groups of large multinational enterprises and/or investors, sometimes calling for the inclusion of civil liability clauses, have issued public statements of support.Footnote 117 At times such letters have been signed by both business and NGOs together. As is to be expected, there has been opposition, and lobbying efforts to water down the CSDDD proposal, as was revealed during the lengthy EU public consultation processes. To this end, gauging the level and areas of business support is a delicate task painting a complex picture.Footnote 118
Nevertheless, the CSR experience together with evidence on CSR accumulated in the last three decades have counted in the birth of the CSDDD. CSR allowed the EU to build on business practice to demonstrate the feasibility and necessity of mandatory due diligence. So, even though meaningful CSR remains confined to a fraction of businesses, leading businesses tend to support the regulatory mix reasoning precisely due to disincentives in the competitive marketplace and the difficulty they encounter in addressing deeper causes of abuse in supply chains. Nevertheless, even though the maturation of CSR is a notable development, this in itself cannot shift markets and have an effect at scale on sustainability, as EU evaluations have persuasively established. In sum, pioneering legislation in some EU member States, CSR experiences, and civil society advocacy have created a groundswell of demand and support for RBC that prompted the EU to intervene and pursue harmonisation through CSDDD.
15.3.2.3 Driver 3: Geostrategic Shifts
The EU puts forward a model of ‘sustainable growth’ to its geopolitical rivals, particularly the PRC, described as rival, competitor, and partner.Footnote 119 This is particularly evident vis-à-vis EU trade policy, which reveals a newfound assertiveness. Trade is thus part of a geopolitical rearrangement where the EU tries to position itself in relation to the United States and PRC as a global standard setter and promotor of values-infused, rule-based multilateralism.Footnote 120 The EU position, with RBC forming a part of a broader vision, is thus evolving in response to the PRC’s rise with its own model of State-capitalism and governance, and its concerted effort to reshape the human rights system.Footnote 121
The EU is currently answering a challenge from the outside (that is, the PRC’s rise and the United States’s hesitancy regarding multilateralism and free trade) as well as from the inside (that is, to succeed with its ‘just transition’ or succumb to climate change and vulnerabilities in its social market model). Responsible business conduct, understood as due diligence powered by regulatory mixes, is nowadays valued for its role in answering both the external and internal challenges the EU faces. The Russian war in Ukraine has only further compelled the EU to examine its energy and economic dependencies, and to double down on the green transition, while hundreds of western companies went beyond doctrinaire compliance and decided to withdraw from Russia entirely to protect their domestic and international reputations.Footnote 122
15.4 Conclusions
This chapter set out to examine the concept of CSR as it evolved in the last two decades as part of the BHR agenda. The question was how and why CSR has changed, in particular in the EU. The main findings are that these changes have happened primarily because of the climate emergency and the policy response that relies on sustainable finance. Notions of corporate due diligence play a key role in two ways. On the one hand, corporate due diligence proved to be a unifying concept. The EU brings together human rights and environmental sides of CSR throughout EU value chains. Originally it was the UNGPs that emphasized human rights due diligence, and the EU has now embraced and expanded the concept as sustainability due diligence. On the other hand, the EU has advanced significantly with the ‘regulatory mix’ ideas in the UNGPs. Not only was the ‘voluntarism’ aspect of CSR abandoned, but the EU is now mobilising a broad set of regulatory techniques to create legal and market incentives for sustainability. Within just a decade, the regulatory landscape around CSR has changed dramatically in the EU space, where a comprehensive regulatory ecosystem is being erected at a rapid pace. With its Green Deal, the EU has set its objective a ‘fair transition’ to a green economy that emphasizes the environmental and social sides of CSR in a European model of sustainable growth.
What does this exploration of CSR from a human rights and historical perspective add to the question on whether CSR measures can be effective in implementing climate policies? The business and human rights experience has exposed the ‘voluntarism versus law’ framing as a ‘red herring’ and a less-productive way to think of global governance and the private sector. CSR as corporate voluntarism is a concept that has outlived its usefulness and remains wedded to a neoliberal era when State intervention was anathema and growth within planetary boundaries was not an issue.Footnote 123 The concept now, as exemplified by the EU example, is responsible business conduct understood as due diligence backed by a regulatory mix. The lesson from the CSR period is that it cannot deliver without an enabling regulatory environment, whether in the climate area or the human rights area. In particular, it cannot deliver at scale and cannot achieve transformations at industry and systemic levels. When problems are systemic in this way, private governance encounters limitations despite its claimed speed, flexibility, and innovation. These incentives are simply not sufficient, either for the real economy or the financial sector.
The current regulatory mix experiment in the EU indicates that CSR has to be understood not as pure voluntarism, but rather as a level of corporate discretion that is guided by a battery of legal and market incentives.Footnote 124 Notably, the EU is not erecting a command-and-control system. Corporate social responsibility is not about voluntarism, but instead about meaningful compliance in a complex legislative ecosystem and the responsible exercise of discretion. It is premature to gauge corporate compliance in supply chains under this regulatory system, but the comprehensive approach and addition of legal incentives are transformative. Significantly, new opportunities arise in this exercise of discretion – for companies, investors, and States – to develop new competitive strategies such as ‘shared value’ for companies and participation in ‘value-based’ trade for States.Footnote 125 Responsible business conduct appears as a key ingredient in the EU policy framework for sustainable finance, production, and consumption, and has a significant role to play in the large-scale transformation to a green and rights-based economy.
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