Abstract The EU’s Corporate Sustainability Due Diligence Directive represents an ambitious regulatory experiment that transforms large corporations into gatekeepers of sustainable supply chains. This article provides a comprehensive governance analysis of the directive, drawing on regulatory theory and economic reasoning to reveal several overlooked incentive problems that may undermine its effectiveness. The article identifies environmental harm and human rights violations as “public bads” requiring intervention. However, the analysis demonstrates that the directive’s enforcement mechanisms may produce perverse outcomes, creating risks of both over-deterrence and under-deterrence through its combination of regulatory fines and civil liability. The article explains why the EU’s recent decision to deharmonise civil liability through the Omnibus Package does not resolve this problem. It further documents significant unintended consequences, including chilling effects on legitimate business activity and a statistical discrimination dynamic that may harm the very populations the directive aims to protect.
Jabotinsky et al. (Wed,) studied this question.
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