ESG requirements undermine fundamental entrepreneurial freedoms

The new EU Commission has realised that it has gone too far in imposing climate action and human rights requirements on companies, and is now planning to relax the rules. But is the whole idea of using standards to change companies’ behaviour really compatible with the constitution? A new expert opinion says: no.

Munich, 4 July 2025. Family businesses generally have high standards when it comes to compliance. No family business would dispute that laws must be obeyed and that the principles of honourable business conduct must be upheld. Sustainable business practices (ESG) also form part of a company’s corporate responsibility.

However, rather than relying on voluntary compliance or traditional regulatory law, the European Union (EU) is seeking to enforce compliance with ESG requirements through an “implementative governance approach”. It obliges companies to adopt politically or morally desirable behaviour, backed by harsh sanctions and extensive publicity.

The Foundation for Family Businesses asked Prof. Udo Di Fabio, a lawyer and former constitutional court judge from Bonn, to weigh in on this type of governance. His take:

The study examines EU legal acts such as the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD), as well as the Carbon Border Adjustment Mechanism (CBAM) Regulation. These acts lay down due diligence and reporting obligations and require risk assessments to be carried out. However, they do not specify exactly what behaviour should be adopted, leaving this to be defined by the companies themselves.

Social control, harsh sanctions

Furthermore, the legal acts have been issued in rapid succession, lack a common logic and even contradict each other in some respects. Monitoring is carried out by non-governmental organisations or trade unions, thereby effectively forcing companies to cooperate. At the same time, there are significant liability risks, such as fines of up to five percent of the company’s global net sales under the Corporate Sustainability Due Diligence Directive.

Di Fabio feels that this is a violation of the freedom to conduct a business, an aspect of the freedom to choose an occupation, as protected by Article 12 of the German Basic Law and Article 16 of the EU Charter of Fundamental Rights. In his view, (family) business owners are no longer able to make decisions freely. They are less likely to make decisions that require extensive documentation. Uncertainty about what is actually required can lead to companies going above and beyond what is necessary. Out of caution, they may sever business relationships or stop doing business with certain countries altogether, making them less competitive.

The study assesses these interventions as excessive, not only because of the effort involved. According to Di Fabio, the audits are virtually impossible to carry out in a highly interconnected global economy, which inevitably leads to questionable results. Even smaller companies operating as suppliers cannot avoid them. Meanwhile, it remains unclear whether the desired effect, for example the protection of human rights, will be achieved.

Teaserimage © Adobe Stock