The recommendation for the highly controversial EU Supply Chain Act is as clear as it is explosive: The negotiators from Spain propose to "exclude the financial sector from the scope of the directive" to the EU ambassadors of the other member states. Including banks, insurers, and asset managers could be postponed to a later phase through a corresponding clause, preceded by a "detailed impact assessment."

This compromise line is indicated by the Spanish Presidency in a document obtained by Börsen-Zeitung. They aim to conclude the negotiations on this extensive project before Christmas. Their proposal to achieve this goal is significant: it amounts to weakening the due diligence obligations launched by the EU Commission regarding human rights and environmental protection at a central point. In return, regulations for other sectors could be stricter.

The first protests from the business sector highlight the sensitivity of the issue. Berthold Welling, Managing Director of Legal Affairs and Taxes at the German Chemical Industry Association (VCI), appeals: The goal of a quick agreement at the EU level before the European elections must not lead to bad compromises, pitting sectors against each other and risking overburdening the real economy. The expansion of obligations contradicts a fundamental declaration by Germany and France in October to significantly relieve companies at the European level of bureaucracy.

Indeed, a conflict line in the negotiations on the EU Supply Chain Act runs between Paris and Berlin. The French government vehemently opposes due diligence obligations for the financial sector. The German government pursues a different approach, as it is said: It is willing to make concessions for asset managers but wants to legally obligate banks and insurers in direct relationships with credit and insurance takers.

With their compromise proposal, the Spaniards yield to the resistance from France. However, it is by no means certain that this will be the outcome. A supporter of comprehensive due diligence sitting at the negotiating table points out that EU states are still not in agreement. There has been resistance to the proposed approach. And there has been no formal vote.

The VCI has concerns that member companies, including medium-sized enterprises, could be burdened with additional due diligence obligations in exchange for concessions in dealing with the financial sector. Additionally, civil liability might be tightened, according to the concern. This is "completely unacceptable," says Welling from the VCI. "Medium-sized companies are already massively burdened by the national supply chain law and overwhelmed with almost impossible bureaucratic requirements."

Thilo Brodtmann, the head of the Mechanical Engineering Association (VDMA), demands: "The EU should learn from the insights of the German Supply Chain Law and show a sense of reality." He refers to the target group: Formally, companies in Germany with 3,000 employees or more are subject to due diligence obligations from this year; from January, the threshold will drop to 1,000. The problem from the perspective of the economy: it only exists on paper.

Indeed, the requirements are passed on to smaller suppliers from medium-sized enterprises, which are overwhelmed, according to associations. In Germany, there is a discussion about how to make the Supply Chain Act more manageable, says Brodtmann. "The EU wants to take a different path and set the threshold at companies with 500 employees – that would be a completely wrong signal." This is also a point of contention in the ongoing negotiations.

For human rights and environmental protection groups, the matter is clear: The EU must not "miss the chance to effectively involve powerful players in the financial system in the transformation of the economy to climate neutrality," says Laura Niederdrenk, financial market expert at WWF Germany. At worst, there is a risk of a regulatory patchwork that hinders the climate-friendly transformation of the economy.