ABSTRACT
The Corporate Sustainability Due Diligence Directive (CS3D), adopted by the European Union in June 2024, represents an ambitious regulatory experiment that transforms large corporations into gatekeepers of sustainable supply chains. This paper provides a comprehensive Law & Economics analysis of the CS3D, revealing several overlooked incentive problems that may undermine its effectiveness. We identify environmental harm and human rights violations as ‘public bads’ requiring intervention, but demonstrate that the CS3D’s mechanisms may create perverse outcomes. Through transaction cost analysis, we further show how the directive may inefficiently allocate monitoring responsibilities. The analysis further reveals risks of both over-deterrence and under-deterrence arising from the problematic combination of regulatory fines and civil liability. Most concerning, we document multiple unintended consequences: chilling effects that may drive firms from markets, a statistical discrimination problem that could harm the very populations the directive aims to protect, higher prices, potential competition effects, and rent-seeking costs due to circumvention attempts. Our analysis suggests that without careful calibration, the CS3D may trade one set of market failures for another, potentially harming both economic efficiency and the vulnerable populations it seeks to protect.
Jabotinsky, Hadar Yoana and Sarel, Roee, The Corporate Sustainability Due Diligence Directive: A Law & Economics Evaluation (September 15, 2025).
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