Ilyana Ait Ahmed
Clémentine Baldon
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On the 26th of February, the European Commission presented its first two Omnibus packages, aimed at “simplifying” the sustainability obligations imposed on companies. However, instead of achieving simplification, the packages introduce significant legal uncertainty for companies and bring more complexity than clarity to compliance requirements by proposing to amend five key legal instruments before they have even taken effect.
These Omnibus Packages consist in 4 new proposals and a draft delegated act:
- A proposal for a Directive amending the Corporate Sustainability Reporting Directive (CSRD), and the Corporate Sustainability Due Diligence Directive (CSDDD);
- A “stop-the-clock” proposal postponing the application of some reporting requirements in the CSRD and the transposition deadline and application of the CSDDD;
- A draft delegated act amending the Taxonomy Disclosures and the Taxonomy Climate and Environmental Delegated Acts;
- A proposal to amend the Carbon Border Adjustment Mechanism (CBAM) Regulation.
- A proposal for a Regulation amending the InvestEu Regulation.
This article focuses on key amendments proposed to the CSDDD.
The CSDDD was adopted in May 2024 and entered into force on 25 July 2024. It essentially requires companies falling within its scope to identify and address adverse human rights and environmental impacts in their value chain. Long-awaited, the CSDDD was set to have a significant impact on businesses—both within the EU and beyond. This is why its amendment through the Omnibus Packages has sparked intense debate.
Delayed transposition and application
According to the current rules, the CSDDD has to be transposed by Member States into national law by July 2026. Moreover, the entry into application of the CSDDD is envisaged in three waves:
- July 2027: for EU companies with over 5,000 employees and €1.5 billion in annual turnover and non-EU companies generating such net turnover in the EU;
- July 2028: for EU companies with more than 3,000 employees and €900 million in turnover and non-EU companies generating such net turnover in the EU;
- July 2029: for EU companies with more than 1,000 employees and €450 million turnover and non-EU companies generating such net turnover in the EU.
In the Omnibus Package, the Commission proposes to postpone, by one year, the transposition deadline from July 2026 to July 2027, and remove the first wave for the entry into application, moving the application deadline for wave 1 companies from July 2027 to July 2028. Therefore, wave 1 and wave 2 companies will have to comply by July 2028, with wave 3 companies having to comply by July 2029.
Scope limitation
Under the current rules, companies are required to identify and address potential and actual adverse human rights and environmental impacts in their own operations, those of their subsidiaries and where related to their value chain(s), those of their direct and indirect business partners.
The Omnibus proposal significantly narrows the scope of due diligence obligations by focusing on direct business partners, rather than across the entire value chain – in contrast with the OECD Guidelines and the UN Guiding Principles on Business and Human Rights. Indeed, the proposal limits the obligations to the company’s own operations, those of its subsidiaries and its direct business partners (“Tier 1”).
Additional due diligence requirements for indirect business partners will only apply in two specific cases:
- if the business relationship lacks economic rationale and suggests that it was chosen to remove an otherwise direct supplier with harmful activities from the purview of the company (i.e., if intermediate partners are artificially / fraudulently established);
- or if a company has plausible information suggesting actual or potential impacts at the level of an indirect partner.
According to the European Commission, “plausible information” means “information of an objective character that allows the company to conclude that there is a reasonable likelihood that the information is true. This may be the case where the company concerned has received a complaint or is in the possession of information, for example through credible media or NGO reports, reports of recent incidents, or through recurring problems at certain locations about likely or actual harmful activities at the level of an indirect business partner. Where the company has such information, it should carry out an in-depth assessment.”[1]
The determination of what constitutes ‘plausible information’ will ultimately depend on judicial interpretation. However, in light of the rapid dissemination and accessibility of information today, coupled with the efforts of numerous NGOs, it may be argued that many companies are already in possession of ‘plausible information’ regarding serious human rights and environmental concerns within their supply chains.
Monitoring frequency cut from annual to once every five years
The proposal extends the frequency of the periodic assessments – when a company needs to evaluate the implementation, the adequacy and the effectiveness of its due diligence measures – and the frequency of updating, if necessary, its due diligence policy and appropriate measures from one to five years.
Financial institutions exempt
The CSDDD exempts the downstream value chains of financial sector companies from the due diligence regime.
Pursuant to the existing framework, a review clause requires the Commission to submit by 26 July 2026 a report to the European Parliament and to the Council on the necessity for additional sustainability due diligence rules tailored to regulated financial undertakings with respect to the provision of financial services and investment activities. This report should be accompanied by a legislative proposal, if appropriate.
Under the Omnibus proposal, this requirement for the Commission to review the inclusion of downstream activities of financial services businesses is removed.
While the European Commission presents this amendment as a decision to postpone the matter to a later stage[2], we view it as a clear indication that the Commission does not intend to extend the scope of the Directive to include these relationships.
No obligation to terminate contracts with non-compliant suppliers
The Directive as in force requires companies to disengage and terminate a business relationship as a last resort, after all other due diligence steps have been exhausted and failed (i.e. when there is no reasonable expectation that the efforts outlined in action plans with clear timelines will succeed), and if the impact is severe.
The proposal removes the obligation to terminate the business relationship but does not remove the obligation to suspend it. Therefore, as a last resort, companies are expected to suspend the relationship while working collaboratively with the relevant partner to find a solution.
It should also be noted that, under the proposal, no timeline is required for implementing action plans and, as long as there is a reasonable expectation that the action plan will succeed, the mere fact of continuing to engage with the business partner cannot trigger the company’s liability.
Transition Plans
The current Directive requires companies to adopt and put into effect, on a best effort basis, a transition plan for climate change mitigation aligned with the 2050 climate neutrality objective of the Paris Agreement as well as intermediate targets under the European Climate Law.
While companies will still be required to adopt such transition plans, the proposal erases the obligation to “put them into effect”, focusing on the requirement for the plan to include “implementation actions” for transitioning to a sustainable economy.
In doing so, the European Commission aligns corporate obligations regarding climate transition plans with those set out in the CSRD, whereas the requirements under the initial CSDDD were significantly more stringent.
This amendment undermines the consistency of the CSDDD with the EU Climate Law, which legally enshrines the European Green Deal’s objective of achieving climate neutrality by 2050 and establishes an intermediate target of reducing net GHG emissions by at least 55% by 2030, compared to 1990 levels.
Expansion of maximum harmonisation: member states prohibited from imposing stricter due diligence requirements
The current Directive contains a partial maximum harmonisation clause, which prevents Member States from introducing provisions that would go beyond the CSDDD’s requirements. This clause covers some of the core due diligence obligations regarding identification, prevention and mitigation of adverse impacts, laid down in Article 8(1) and (2), Article 10(1) and Article 11(1) of the CSDDD.
To ensure a level playing field within the EU, the proposal extends the scope of maximum harmonisation to several additional provisions of the Directive, namely Articles 6 and 8, Article 10(1) to (5), Article 11(1) to (6) and Article 14 of the Directive. This includes the identification duty, the duties to address adverse impacts that have been or should have been identified, and the duty to provide for a complaints and notification mechanism.
Concretely, this would mean that when transposing the directive into national law, Member States would not be able to modify the duty to identify and assess impacts or amend the list of appropriate measures set out in Article 8 of the CSDDD. Notably, they would be prevented from imposing an obligation on companies to carry out an in-depth assessment of the operations of their indirect business partners (except in the specific circumstances set out in the CSDDD).
Likewise, Member States would not be able to alter the criteria for determining a company’s involvement or introduce additional categories of appropriate measures to address adverse impacts (Articles 10 and 11).
However, Member States will retain the flexibility to introduce more stringent rules on other aspects or provisions that are more specific in terms of the objective or the field covered, including to address emerging risks linked to new products or services.[3]
Lastly, in light of the maximum harmonisation clause and the amendments proposed under the Omnibus package, questions arise as to whether Member States with existing due diligence legislation that exceeds the Directive’s requirements on certain points will be required to amend their laws to lower their standards or narrow their scope.
For example, this prompts consideration of whether the French legislature would need to amend its legislation to:
- restrict the obligation to assess the negative impacts of a company’s activities within its value chain to direct or first-tier business partners, except in specific circumstances;
- ensure that, for mapping purposes, companies do not seek to obtain information from direct business partners with fewer than 500 employees, unless they cannot obtain it through other means.
In our view, Member States with existing due diligence legislation should not lower their standards, as the harmonisation clause specifies that harmonisation must occur “without prejudice to Article 1(2)” of the CSDDD, which provides that the “Directive shall not constitute grounds for reducing the level of protection of human rights, environmental and social rights, or of protection of the environment or of protection of the climate provided for in the national law of the Member States”. Accordingly, any transposition that lowers existing standards would violate EU law and could subject national governments to infringement proceedings.
Therefore, while Member States with existing due diligence legislation will overall need to adjust their national laws to align with the finalized framework, they should not lower standards where their existing laws go beyond those of the proposed CSDDD.
Nevertheless, it cannot be excluded that, from a political standpoint, these Member States, including France, may be inclined to lower the level of protection of their due diligence laws. If this happens, the reform could be challenged in court, where judges would have to decide whether Member States can legislate in this manner despite Article 1(2) of the CSDDD.
What’s Next?
The legislative proposals will now be subject to discussion and debate by the co-legislators – the European Parliament and the Council of the European Union. The text could therefore still undergo significant changes.
Until the revised Directive is formally adopted, companies are still expected to implement the current CSDDD text according to the existing timeline.
Thus, the uncertainty surrounding the final scope and interpretation of due diligence obligations — coupled with the possibility of further delays — is particularly detrimental to businesses striving to align with forthcoming corporate sustainability requirements. At a time when legal predictability is crucial for decarbonisation efforts, the package not only undermines long-term corporate planning but also marks a concerning step backward in sustainability policy.
Notes
[1] Proposal for a Directive of the European Parliament and of the Council amending Directives 2006/43/EC, 2013/34/EU, (EU) 2022/2464 and (EU) 2024/1760 as regards certain corporate sustainability reporting and due diligence requirements, p. 26.
[2] In its proposal, the European Commission specifies: “It is proposed to delete this review clause as it does not leave any time to take into account the experience with the newly established, general due diligence framework.” (p. 20). In the Commission Staff Working Document accompanying this proposal, the European Commission adds that: “In any case, the Commission retains the right of initiative to propose dedicated due diligence rules for the financial sector, if and when appropriate, following better regulation principles.” (p. 40).
[3] The proposal provides that the Directive “shall not preclude Member States from introducing, in their national law, more stringent provisions diverging from those laid down in provisions other than Articles 6 and, 8, Article 10(1) to (5), Article 11(1) to (6) and Article 14, or provisions that are more specific in terms of the objective or the field covered, including by regulating specific products, services or situations, in order to achieve a different level of protection of human, employment and social rights, the environment or the climate.” (Proposal for a Directive of the European Parliament and of the Council amending Directives 2006/43/EC, 2013/34/EU, (EU) 2022/2464 and (EU) 2024/1760 as regards certain corporate sustainability reporting and due diligence requirements, Article 4, p. 38).
