European Commission proposal to amend CS3D Directive

On February 26, the European Commission (the "Commission") approved a proposal for a regulatory package (the "Omnibus I Proposal") simplifying sustainability reporting and due diligence requirements. In the Post | Towards simplification of sustainability and investment, we summarize the changes in the Omnibus I Proposal and its justification. The Omnibus I Proposal includes the amendment of certain aspects of the Directive 2024/1760/EU on Corporate Sustainability Due Diligence (the "CS3D Directive"). Below we highlight the key aspects of this amendment.

Rationale

The reasons given by the Commission for its proposal to amend the CS3D Directive can be summarized as follows:

• To give Member States more time to transpose the CS3D Directive and companies more time to prepare or adapt their diligent risk management systems for mitigating adverse human rights and environmental impacts.
• To reduce administrative burden and costs for companies—and those integrated in their chains of activities—minimizing the impact on European companies’ competitiveness compared to other regions that do not yet have similar regulations.
• To reinforce harmonization of the code of conduct established in the CS3D Directive to ensure greater uniformity in its transposition in Member States and align certain obligations with other regulations—specifically the Corporate Sustainability Reporting Directive (the "CSRD Directive")—ensuring consistency of the rules applying to companies.

Overview of CS3D Directive amendments

Postponing transposition deadline and application of the CS3D Directive for largest companies. Transposition of the CS3D Directive by Member States is extended until July 26, 2027. Additionally, article 2 of the Omnibus I Proposal postpones the application for the largest companies in the EU (those with over 5,000 employees and a net annual turnover of over EUR 1.5 billion) to July 26,2028. For the other two company groups, the schedule does not change.

• Deadline for Commission to issue necessary guidelines brought forward. The deadline for the Commission to issue guidelines and best practices on how to conduct corporate due diligence will be brought forward to July 2026, allowing Member States and companies to properly prepare their respective obligations.
• Extension of maximum harmonization. The issues on which Member States cannot establish more stringent conditions than those provided for in the CS3D Directive are extended. This will better ensure a level playing field across the EU. Maximum harmonization covers the basic due diligence obligations. This particularly includes identifying and assessing adverse impacts, preventing potential adverse impacts, bringing actual adverse impacts to an end, and establishing a notification mechanism and a complaints procedure.
• Limiting the scope  of due diligence in chains of activities. Companies should limit due diligence to their own transactions, those of their subsidiaries and direct business partners involved in their chains of activities. This limitation will not apply where there is plausible information suggesting the existence of adverse impacts in the transactions of indirect partners or where other European due diligence rules require it.
• Reducing the trickle-down effect by limiting information requests. Except in justified circumstances, companies can only request information from business partners with no more than 500 employees and are restricted to the information specified in the voluntary sustainability reporting standards for SMEs (VSME standard). See Post | Voluntary sustainability reporting standards for SMEs.
• Narrowing the definition of stakeholders and matters on which their consultation is required. The definition of stakeholders is limited to (i) the company’s employees, trade unions and workers’ representatives, and those of its subsidiaries and direct business partners; and (ii) individuals and communities directly affected by the products, services and transactions of the company, its subsidiaries and business partners. The definition excludes groupings, consumers, entities, civil society organizations and institutions advocating human rights and the environment. It also reduces the purpose of the consultation duty, excluding consultation when suspending a business relationship and when developing indicators to monitor the due diligence system.
• Extending intervals between regular periodic assessments and updates of due diligence measures from one year to five years, unless there are new circumstances, e.g., acquiring or opening a new economic activity or extending activity to new countries, or if the implemented measures are no longer adequate or effective.
• Removing obligation to terminate business relationship with business partners as a measure of last resort. Instead, if it is impossible to prevent or mitigate potential or actual adverse impacts in the chains of activity, only as a last-resort measure, and if permitted by the law applicable to the contract, companies can terminate the business relationship while continuing to work with the supplier towards a solution.
• Eliminating concept of an EU civil liability regime but not the duty of the Member States to ensure full compensation for damage caused to the person or company, under their own civil liability regimes.
• Revoking representative actions and mandatory application. The obligation of Member States in relation to representative actions by trade unions or NGOs is revoked. This enables national law to define whether its civil liability provisions override otherwise applicable rules of the third country where the damage occurs.
• New regulation of supervisory authorities’ penalties. The 5% threshold based on turnover is removed for non-compliance and, in turn, it is prohibited for Member States to set a maximum amount that would prevent supervisory authorities from imposing penalties according to established principles and factors. The Commission will issue guidelines for national supervisory authorities on how to determine penalties.
• Eliminating specific review clause from the CS3D Directive regarding applying due diligence standard to the financial sector. The review clause requiring the Commission to submit "no later than July 26, 2026" a report on the need to establish additional due diligence requirements for regulated financial undertakings is removed.
• Aligning climate transition plan with the CSRD Directive. Companies must adopt a transition plan for climate change mitigation that includes implementing actions. However, the idea that reporting such a plan in their sustainability report fulfills the adoption obligation is removed.

Next steps

The proposed CS3D Directive amendments and the other amendments included in the Omnibus I Proposal will be subject to consideration by the European Parliament and the Council for evaluation and adoption through the ordinary legislative procedure. There is now the possibility to introduce changes to these proposals. The amendments will be implemented once they are approved by these institutions and published in the Official Journal of the European Union.

The Commission has urged the European Parliament and the Council to prioritize this Omnibus package.