Late last year, European negotiators clinched an initial agreement on a landmark piece of legislation that would make big companies in fashion and other industries accountable for labour abuses and environmental damage in their supply chains.

The hard-won deal between member states was described as “a fragile compromise” at the time.

Exactly how fragile has now become clear, with efforts to move the draft into law derailed by last-minute objections led by pro-business politicians in Germany. A vote to give the legislation an initial greenlight has been delayed twice since Friday.

The situation throws into jeopardy a flagship piece of the EU’s agenda to toughen up requirements for firms to operate in a greener and more socially responsible manner. This reflects an increasingly powerful backlash against more stringent — and more costly — sustainability regulations.

What’s at Stake?

The EU’s Corporate Sustainability Due Diligence Directive would require large companies from around the world that sell products in the EU to report and take action on any environmental and human rights abuses in their supply chains.

The proposed rules would apply to European companies with more than 500 employees and a net global turnover of more than €150 million ($161 million). International companies that generate more than €150 million in the EU would also be captured by the rules, though with a three-year lag from when they come into effect. In short, it would capture most of the world’s largest big-name fashion brands.

Penalties for breaching the rules could be as much as five percent of a businesses’ global turnover and companies that fail to address harms could face civil legal liability.

Supporters view the proposal as a groundbreaking advance in efforts to police global supply chains and prevent big businesses from effectively dodging responsibility for their environmental and social impact. (Though suppliers fret that companies will simply pass along the burden of compliance to them.)

“This process has truly raised hopes of ensuring more effective management of human rights risks by large companies,” UN High Commissioner for Human Rights Volker Türk said Tuesday. “For the Directive to fail now would be a massive blow.”

Critics have complained that the law would put burdensome reporting requirements on companies and in many cases is unworkable. But it’s been embraced by fashion industry advocacy groups like the Sustainable Apparel Coalition and Global Fashion Agenda, which count many of the world’s biggest brands and apparel manufacturers among its members.

“We view the recent political developments that threaten to derail this initiative with concern,” SAC executive vice president Andrew Martin said. “The failure to adopt, or the decision to further delay, this critical legislation would represent not only a missed opportunity but could be seen as a significant setback for global efforts toward regulatory harmonisation, which would raise the bar on the implementation of sustainable business practices.”

Why Is it on the Rocks?

The EU’s push to clean up corporate supply chains are part of a broader suite of policies introduced as part of its “Green Deal,” which aims to overhaul the bloc’s economy to align with global ambitions to stave off the worst effects of climate change.

The vision, which has seen the EU pursue some of the world’s most ambitious climate laws, was forged after elections in 2019 amid a wave of protests in favour of climate action.

But with the next European parliamentary elections set for June, the politics have changed drastically. Populist and pro-business politicians have gained ground in economies battered by the pandemic, the war in Ukraine and rising energy prices, slowing the roll of European action with arguments that tougher environmental regulation is over-burdening companies with bureaucratic red tape.

Still, the abrupt derailment of what was meant to be a procedural vote on Europe’s due diligence law initially scheduled for Feb. 9 took many by surprise. The issue stem from fractures in Germany’s ruling coalition, where a minority party has turned the rule into a political red flag domestically amid a sluggish economy and uncertainty over the future of the country’s industrial sector.

After Germany indicated it would abstain last Friday, other countries followed suit, prompting a delay in the vote. The topic was put back on the agenda for another meeting Wednesday, only to be pushed again.

For the legislation to be approved, member states representing a majority of the bloc’s population must endorse it. The European Parliament will also have a say and the window to pass it is closing before elections in June. Laws typically have to be formally approved weeks beforehand. If the law does not pass before then, some fear it could get scrapped altogether in a more right-leaning parliament.

“This really does feel like a once-in-a-decade opportunity to make businesses more accountable for their supply chains,” said sustainable fashion advocate George Harding-Rolls. Without the law, “it would feel like just carrying on with business as usual at the very time we need to be upping our ambition.”

What Does it Mean for Fashion?

Though the fate of the EU’s due diligence directive is now murky, the fashion industry is still facing much more regulation that will require companies to get a grip on where and how their clothes are made.

Several measures that take aim at the sector’s environmental footprint (either directly or as part of efforts to target industry more broadly) have already been approved, including tougher rules around greenwashing, greater requirements for environmental disclosure and tighter eco-design standards.

Several countries, including France and, ironically, Germany, have also already introduced their own due diligence laws covering big businesses operating in those markets. The New York Fashion Act is angling to introduce similar measures in the US. For companies that may ultimately prove more of a headache, leaving them to deal with a broader hodgepodge of regulations.

“Common sense regulation is inevitable,” said Maxine Bédat, founder of sustainable fashion think tank New Standard Institute and a leading proponent of New York’s Fashion Act. “If the EU delays, regulation will not be stopped, New York will just take the lead on setting the terms.”

And yet delivering on that ambition is likely to be harder if efforts to ratchet up oversight in the EU, a regulatory frontrunner, stumble. It could have a “chilling effect” elsewhere, warns Pascale Moreau, founder and public affairs consultancy Ohana. “It’s a bit of uncertainty that’s not helpful.”