Foreword
International tensions, the impact of the Covid-19 crisis on budgets and Donald Trump’s return to the White House have disrupted Europe’s standard- and regulation-based strategy for transitioning to an economy with a social and environmental conscience. The European Union (EU) has spent several years working to put in place two directives: the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CS3D). The first of these aims to regulate and strengthen transparency by ensuring businesses take responsibility for their environmental, social and governance impacts. In particular, they are required to produce a double materiality assessment within their non-financial reporting, disclose climate risks and supply data on their social and governance impacts. The second directive aims to lay down a transparent framework that will require large companies to put in place measures to identify, quantify, suspend, prevent and mitigate the negative impacts of their activities on human rights and the environment across their operations, value chains and subsidiaries. However, Ursula von der Leyen, the President of the European Commission, back peddled in the face of global competition and pressure from businesses and public opinion and plans to publish an omnibus package in February 2025. It will aim to simplify or even cancel the CSRD’s reporting obligations and potentially postpone the CS3D until it has been simplified. The Commission’s aim is to boost European competitiveness.
The EU is at a crossroads, and we therefore felt it was a good time to examine the concept of smart law, a “third way” between hard law (legally binding instruments) and soft law (non-binding recommendations). If a smart law solution was developed, it would be possible to put in place pragmatic regulations combining the rules of hard law and soft law, so that the desired social and sustainability objectives could be achieved while taking into account the constraints faced by different sectors. The idea is to encourage a posture of flexible adaptation to different situations, which is essential in a complex regulatory and competitive context.
Discussion with Diane de Saint-Affrique and Dhafer Saïdane. Interview carried out in February 2025 by Frédérique Vidal and Sean Scull
Diane de Saint-Affrique holds a doctorate in law. She is a professor at SKEMA Business School specialising in business law, corporate governance and CSR. She is the author of the SKEMA Publika report “Duty of vigilance: What are NGOs’ minimum requirements for companies?” and the article “Duty of vigilance – the CS3D: what are the new requirements for businesses?”. Diane is preparing to publish a report on surveys carried out with businesses to collect their views on the 2017 Duty of Vigilance law, its applicability and also how they are preparing to comply with the European Corporate Sustainability Due Diligence Directive (CS3D).This directive must be transposed into French law by 26 July 2026. Dhafer Saïdane is a professor and director of the International Observatory of Sustainable Finance at SKEMA Business School. His research focuses on sustainable finance. Together with Diane, Dhafer authored the contribution “More sustainable finance, self-regulation of businesses through smart law”.
Diane, could you tell us in a few words what the general feeling is regarding the European CSRD and CS3D standards? Fear? Insufficient time for businesses to adapt?
Diane de Saint-Affrique: The aim of the CSRD is to enable the EU to achieve carbon neutrality by 2050. To this end, the directive requires businesses to produce non-financial reporting on sustainability. This reporting includes various indicators, depending on the size of the business. The European Sustainability Reporting Standards impose 12 categories of sector-agnostic standards, sector-specific standards and business-specific standards.
The main criticism from businesses is that there are too many standards to comply with – more than 150 for some listed companies for example. Their view is that reporting on a few targeted indicators relevant to the company’s purpose would be more appropriate and effective in driving the implementation of a long-term continuous improvement approach. One solution could be to develop sector-specific standards and standards directly linked to the activities of the business or group. One of the difficulties that businesses face is the excessive number of metrics they are required to report. The burden of this obese mass of norms and regulations is too heavy. Seeing this situation weigh down attractiveness in the global market place, Germany has decided not to transpose the CSRD directive, despite an obligation as an EU country to do so, citing its negative impact on business competitiveness and the excessive bureaucracy it generates. France did transpose the CSRD within the required timescale. The first sustainability reports are due to be published this year, and the businesses required to file them have highlighted the unnecessarily Herculean workload involved in complying with the directive.
The CS3D will impose a due diligence duty on large companies regarding social and environmental rights throughout their value chains. The directive is scheduled to be transposed before 2026. The same criticisms are levelled at it, as the number of obligations it will impose make it liable to harm business competitiveness.
It is clear that despite their laudable intentions, in their current state the CSRD and CS3D represent a burden for EU businesses trying to compete with international counterparts who are not subject to the same rules.
Dhafer, you regularly work on projects linked to Africa. What is the impact of the European CSRD on the competitiveness of EU businesses on the domestic and external markets?
Dhafer Saïdane: The CSRD is having a significant impact on the competitiveness of EU businesses, on domestically and externally, including in Africa.
The CSRD is about two things: how to harmonise sustainability reporting and how to improve the way ESG (environmental, social and governance) metrics are publicised. Consequently, EU companies can benefit from enhanced transparency and therefore higher investor confidence, which can reinforce competitiveness. However, businesses will incur additional costs in order to comply with the new reporting requirements. They will have to form teams to collect the data, process it and analyse compliance. This could affect their competitiveness with foreign businesses based outside the EU that are not subject to the same obligations.
In the same vein as the CSRD, the Carbon Border Adjustment Mechanism (CBAM) is a new European regulation (October 2023) that will come into force fully in 2026. It will place a tariff on carbon-intensive products. The impact on Africa could be very dangerous: African exporters of highly carbon-intensive products could be impacted. They will incur additional costs to comply with the new requirements of the carbon tariff. Ultimately, this would impoverish Africa even further unless the EU makes provisions for compensation measures.
Diane, what is your vision of the impact of EU businesses on the internal and external markets? What are the risks for EU countries if we continue to pursue this policy of regulation?
Diane de Saint-Affrique: As we’ve already highlighted, these multiple laws reduce growth and weigh down European competitiveness both internally and externally. As regards the internal market, businesses have to deal with legislation not only at national level but also at European level, in respect of the energy transition, sustainability and their due diligence duty. In France, for example, the 2017 duty of vigilance law and the European CS3D directive have the same objective of instituting a due diligence duty regarding environmental and social rights across the entire production chain. While these standards affect French and European companies first and foremost, they also impact the external market: large non-European companies (10,000 employees for the 2017 law and €450m in turnover for the CS3D) are also subject to this legislation, which can discourage them from investing in Europe and working with European companies.
Dhafer, alternatives to regulation is one of your areas of expertise. You recently published an article on the Green Impact Exchange in the USA. Could you tell us a little about it? In what way does this project appear as an alternative to regulation?
Dhafer Saïdane: We show that there is a “flexible” alternative to the European regulatory approach: a private exchange where sustainability and economic incentives are naturally aligned. This model, which is based on market dynamics rather than on constraints, creates a framework for businesses within which they can promote their environmental commitments without the excessive regulation that is currently hampering Europe.
In an uncertain world, with the old order shifting, is regulation an appropriate lever for promoting sustainable finance? Can we say that market regulation is more efficient than bureaucratic regulation?
Dhafer Saïdane: Offering a dedicated space for committed companies, like the Green Impact Exchange (GIX) in the USA, demonstrates a new approach to ESG challenges, encouraging confidence and transparency within the market. If the initiative is successful and succeeds in offering an attractive alternative to the burden of excessive regulation, ESG leadership could rapidly shift from Europe to the United States!
Turning to you Diane, what is your opinion on the negotiations within the EU?
Diane de Saint-Affrique: The Draghi report published in September 2024 highlighted that the regulation imposed by the CSRD and the CS3D was compromising EU competitiveness. Draghi considered that it would be better to reduce the number of businesses covered by these directives by increasing the thresholds (number of employees and turnover of the business) at which the texts became applicable. Legislation should aim to reduce the regulatory burden on European businesses, not increase it. Stéphane Séjourné, the Vice-President of the European Commission, has also said that he is in favour of simplifying the CSRD. The idea is not to abandon the directive, but to trim it down, or potentially even cut out the reporting. Most recently, Mrs von der Leyen has announced an “omnibus proposal”, to be unveiled on 26 February, aiming to reduce the regulatory burden on businesses. Given the fierce state of global competitiveness, this seems reasonable.
Is there a risk of “over-transposition” of standards in France? Ultimately, would this not produce the opposite of the desired effect, with businesses wanting to look greener rather than actually be greener?
Diane de Saint-Affrique: Yes, because in France we have a tendency to pass laws as an emotional reaction. For example, the 2017 duty of vigilance law was triggered by a wave of popular emotion following the Rana Plaza disaster. This law imposes on major French companies a due diligence duty to prevent serious breaches of human rights, fundamental freedoms, personal health and safety and the environment within their own business activities and those of their subsidiaries, sub-contractors and suppliers. Until it was followed by Germany, France was the only European country to use hard law to impose these kinds of constraints on businesses.
Europe followed in the footsteps of France and Germany by adopting the CS3D directive (required, as we explained above, to be transposed before 2026), which has the same objectives as the 2017 duty of vigilance law, with even more demanding thresholds. Consequently, we are witnessing a mushrooming of standards in France and in Europe.
Moreover, it is important to highlight that the terms of the law are vague, and there is no enforcement decree. This will give more powers to judges as they will be called upon to decide, on a case-by-case basis, whether or not a company is complying with environmental and social laws. In my opinion, this interpretation of the concept CSR has pushed it off course in France, in that the authorities put it forward as a constraint rather than as what it should be – a voluntary, ethical and non-burdensome continuous improvement approach aiming for a set of objectives.
Dhafer Saïdane: The risk of a hard law is that it will push companies to “look greener” and therefore encourage increasingly undetectable greenwashing.
Do you think that, given a little more time, European businesses will support the standards? Are they a demonstration of the progress of history? A demonstration of the impact of climate change on the real world?
Diane de Saint-Affrique: The challenge for Europeans is to understand that it is necessary to combine the energy transition and competitiveness. As exemplary as the CSRD and CS3D are in theory, the constraints, costs and complexity they involve on a practical level are incompatible with the competitive world in which businesses operate, and hamper their competitiveness in a tense international context.
Dhafer Saïdane: To achieve a smart law, it is necessary to synchronise two timescales: the political timescale for reform linked to the timing and temporal nature of our democracies – expressed through hard law – and the long timescale of a sustainable world which calls for less calculation and more intergenerational altruism. It is a fact that green finance needs to be looked at on a long timescale, which is a paradox when we think that democracy operates on a short timescale, obeying the imperatives of the electoral calendar.
In addition, to create a more sustainable world, we need to correct our self-absorbed, ethnocentric vision of space. The ecological transition and climate risks concern the entire planet, rich and poor alike. There may be divergence between perceptions and needs. Consequently, to tackle the question of sustainable finance properly, we have to step out of any defined space.
What would be the options to take? What alternative strategy can we imagine? How can we combine the energy transition with the need to remain economically competitive in an international environment where there is no alignment on regulations, in particular considering the refusal of China and the USA to be bound by the European vision of the energy transition by regulation? There is a need to find a balance.
Diane de Saint-Affrique: We need to put an end to this trend of systematically transforming soft law standards into hard law, obliging businesses to deal with an obese body of legislation that is impossible to manage. This quest for increasingly tight constraints disqualifies businesses from competing on markets outside Europe, because of the high cost of complying with the directives. Recently, major American banks have left the Net-Zero Banking Alliance (NZBA), whereas European banks have committed themselves to complying with the Green Deal. This makes the European banks less competitive compared to their US counterparts.
Within the EU, we need, without betraying our commitment to the principles of sustainability, ethical behaviour and sustainable development, to think about how we can adopt balanced measures that would both achieve the objectives of the energy transition that we would like to see and remain compatible with the situation of businesses faced with increasingly fierce global competition. The creation of smart law would make it possible to implement pragmatic regulations combining rules from soft and hard law that would encourage flexible adaptation tailored to the various situations, which is essential in a complex regulatory and competitive context. This would limit the risk of disqualifying European businesses from competing with the rest of the world, where their counterparts are not subject to the same type of regulatory constraints. The concept of smart law implies fixing the rules in consultation with all the stakeholders (businesses, NGOs and politicians), rather than in the current top-down fashion.
What does the regulatory landscape look like in other EU countries and across the world?
Diane de Saint-Affrique: Across the EU, there is a multitude of national regulations around the protection of biodiversity, the use of fossil fuels and the energy transition more generally. That makes it pointless, or even counterproductive, for the EU to add another layer of regulations and therefore an additional burden with the CSRD and the CS3D in their current form. They’re just adding regulation on top of regulation that already exists.
Dhafer Saïdane: According to the MSCI (Morgan Stanley Capital International Index), the number of ESG regulations around the world has sky-rocketed over the past 15 years. From 51 laws in 2010, the total has grown to 250 today.
USA = 55, EU = 33, China = 16. The fact to notice here is that there are fewer regulations in Europe than in the USA, but they are more intrusive.
Dhafer, with the Americans refusing to be bound by the European vision of achieving the energy transition through regulation, is it possible to find a balance?
Dhafer Saïdane: The balance will be decided by traditional market forces and by the dissemination of genuine convictions through education.
On the day he took office, 20 January 2025, Donald Trump signed an executive order titled “Unleashing American Energy” with the purpose of giving new impetus to raw materials extraction and above all deregulating to make the USA dominant and more competitive in energy production. What is the difference between the American and European regulations? And above all, what does this paradigm shift mean for Europe? Does it make corporate sustainability due diligence and sustainable finance obsolete?
Diane de Saint-Affrique: With the return of Donald Trump, the Republican administration is pushing to let loose the USA’s energy and economic potential. For a long time, Europe has been travelling in the other direction, towards regulation, which has created a restrictive economic environment. Today, we can interpret Mrs von der Leyen’s reaction as the sign of a new understanding that CSR regulation needs to be proportionate. Norms and competitiveness have to coexist. If they cannot, it becomes impossible for EU companies to compete on the global stage.
Dhafer Saïdane: In the USA, the driving force behind the economy is the market and shareholders. This centuries-old set-up will support ESG topics if shareholders believe they stand to benefit. The ESG-oriented market will work if it succeeds in establishing and encouraging confidence and transparency. This mechanism will then create an attractive alternative to the burdens of excessive regulation.
