Omnibus I and impact on CS3D

Sustainability and Corporate Due Diligence

In our eighth post about Directive (EU) 2024/1760 on corporate sustainability due diligence ("CS3D"), and following the recent publication of the first regulatory simplification proposal of the European Commission (the “Commission”) on February 26 (the "Omnibus I Proposal" or the “Proposal”), we share our thoughts on the Proposal’s objectives to: (a) achieve greater consistency between sustainability regulations in the EU, and (b) reinforce harmonization of the standard due diligence system in the European market.

Access previous publications in this series here:

Post | The CS3D in perspective

Post | Who does the CS3D affect?

Post | Legal interests protected by the CS3D

Post | Risk-based approach

Post | The Shell case and its potential implications for corporate due diligence

Post | Obligations to end adverse impacts and to provide remediation beyond financial compensation

Post | Due diligence in the chain of activities: a contractual perspective

Harmonization and consistency as justification

One of the reasons for the changes brought by the Proposal is to ensure greater harmonization of the mandatory due diligence standard under the CS3D and a better alignment and consistency with other European sustainability regulations, particularly with Directive (EU) 2022/2464 (the "CSRD"). For more details, see Post| Omnibus I – European Commission Proposal to amend the CS3D Directive.

With this objective, the Proposal acknowledges the interrelationship between the CS3D and other regulations governing the corporate governance of the sustainability risks, and the need to carry out a joint reading of the obligations arising from the different regulations and their impact. This is particularly because of the following:

• There are European regulations other than the CS3D that establish mandatory corporate due diligence in the governance of sustainability risks and impacts. Examples are the due diligence standard behind the reporting obligations in the CSRD and several specific EU pieces of legislation, such as the deforestation and the forced labor regulations. For more details, see the Post | The CS3D in perspective.
  
• Meeting the due diligence obligations has an impact on the chains of activities and value chains of companies and actors within those chainswho are not subject to  other EU pieces of sustainability legislation or are only subject to some of them and not always under the same conditions. For more details, see Post | Who does the CS3D affect?
• Usually, the European legislation establishing special mandatory due diligence in the management of particular risks and impacts on human rights and on the environment adopt the form of Regulation. However, the CS3D, which is the general regulation on corporate due diligence, has been passed as  a Directive that must be transposed by each Member State into domestic law, leaving room for fragmentation in its implementation, which is not always desirable. This is what has happened with the transposition of the CSRD, where achieving harmonization throughout Europe of corporate sustainable information disclosure has been difficult due to (a) the delay in the transposition by some Member States, and (b) the gold-plating practices in some Member States exceeding the CSRD requirements.

How does the Proposal address this objective?

Proposals aimed at achieving greater harmonization and consistency

• Certain alignment of thresholds for determining the subjective scope of the general regulations. The proposal to amend the CSRD establishes as a precondition of applicability that the company had an average of over 1,000 employees in the previous tax year. This threshold, which is the same as the one in the CS3D, would exclude 80% of the companies currently affected by the CSRD. However, there are different financial thresholds in the two regulations, and there will continue to be companies only subject to the subjective scope of application of the CSRD and not to the CS3D if their annual turnover is less than €450 million. These companies will continue to have a duty to explain in their sustainability reports how they deploy a diligent corporate governance of their material risks and impacts (i.e., adverse effects) on human rights and the environment.
  
• Extension of maximum harmonization clause to greater number of provisions of the CS3D. The Proposal covers regulation of the obligations to identify and assess adverse impacts, prevent potential adverse impacts, bring actual adverse impacts to an end, and establish a notification mechanism and a complaints procedure. Regarding these issues, the Member States will not be able to establish different or more restrictive regulations in their transposition laws—meaning prevention of the gold-plating practices we mentioned earlier—.
• Limit of effects on the chain of activities due to three changes:
• Reduction of the extension of due diligence in the chain of activities to direct business partners ("tier 1") as a general rule; the exceptions to this rule are when there is plausible information suggesting that adverse impacts at the level of the operations of an indirect business partner have arisen or may arise, or when another European regulation requires a wider extension.
• Limitation on the amount of information requested from business partners with less than 500 employees to the information set under the voluntary standards applicable to SMEs— meaning that the information request is mainly reduced to risks in the business partners’ own operations.
• Removal of the obligation to terminate the relationship with the business partner when a real or potential adverse effect is generated in its operations and it was not possible to prevent, mitigate or eliminate it. In these cases, it is possible to only suspend the relationship.

Proposals that seem to take a different direction

However, other amendments to the CS3D included in the Proposal would lead to greater fragmentation of the Member States’ national regulations, particularly in the mechanisms for monitoring compliance and ensuring access to judicial remedies:

• Removal of a European civil liability regime, removal of the representative action and of the imperative nature of the law applicable to these claims. With these amendment proposals, action for compensation for damages would be governed by the system of each Member State, opening the door for diverse regimes with differences in the conceptualization of civil liability, in the law applicable to the claim, and in substantive and procedural matters that are key for access to effective judicial remedies.
• Substitution of a minimum common base in the European market of sanctions for non-compliance, with a guide to be drafted by the Commission in consultation with the control authorities of each Member State.

Reflection

After reading the Proposal considering the aspects affecting the CS3D from the perspective of the objectives of harmonization, consistency and alignment with other corporate sustainability due diligence regulations, doubts are raised as to the response given by these objectives.

• Different concepts continue to exist: "value chain" in the CSRD and "chain of activities" limited to tier 1—excluding exceptions—in the CS3D. There will be companies that must explain and account for their diligent governance of impacts and risks on human rights in their chains (value chains or chains of activities) under regimes with different scopes.
• The Proposal has not been used to clarify the interaction between the CS3D as a general due diligence regulation (article 3.1) and the special corporate due diligence regulations that have different subjective scopes and protect specific legal interests. Many of these special regulations expressly require the extension of due diligence beyond tier 1, e.g., the  deforestation, batteries, AI and digital services regulations. Other regulations refer to the general due diligence regime but clearly require an extension beyond tier 1 in the chain of activities to be effective in protecting  legal interests constituting their purpose, e.g., the Forced Labor Regulation.
• There are references to the United Nations Guiding Principles on Business and Human Rights and to the OECD’s Guiding Principles that will shape the extension of companies’ risk-based approach. For example in recital 31 and articles 19bis 1 f) and 29bis 1 f) of CSRD; and in article 3 of the Taxonomy Regulation. 
• Regarding compliance or enforcement, the Proposal seems to be proposing a step back in the harmonization likely to lead to legal uncertainty due to the variability of the civil liability regimes. Also, it seems the Proposal conveys a questionable message of relaxation regarding the enforceability of the liabilities resulting from the mandatory due diligence standard, compared to the reality indicating increased litigation in Europe and in other regions of the world.

We must wait for the dialog between the European co-lawmakers to find out whether some or all of these reflections are the object of debate.

Watch this space for more updates.