CO₂-H₂O can damage the rock microstructure and change the tensile failure characteristics and fracture propagation mode during CO₂ fracturing in shale reservoirs. X-ray diffraction (XRD) tests, scanning electron microscope (SEM) observation, and Brazilian tests are conducted to investigate the microscopic damage and failure characteristics, and fracture propagation mode of Longmaxi and Chang-7 shale specimens after CO₂-H₂O treatment. The results show that the microscopic damage of bedding after CO₂-H₂O treatment is more significant than that of the matrix. The volume of bedding clay minerals is reduced due to dehydration, the organic matter is extracted and contracted, and the large-size microfractures (10−30 μm in length and 1−5 μm in width) are generated in the laminae distributed along the bedding. Carbonate and feldspar minerals in the matrix are dissolved and induce randomly distributed small-size microcracks (< 1 μm in length and < 0.5 μm in width). After CO₂-H₂O treatment, the tensile strength of shale decreases, and the anisotropy increases. The failure mode of shale changes from tensile failure to mixed tension-shear failure, and the shear action of specimens loaded vertically to the bedding is stronger. Fracture propagation is restricted by the bedding for specimens loaded vertically to the bedding, leading to fracture propagation along the bedding; for specimens loaded horizontally to the bedding, the bedding exerts stronger constraints on fracture propagation, resulting in fracture propagation merely within the bedding.