In April, the European Parliament approved the EU’s proposed ‘stop-the-clock’ directive, which would delay implementation of parts of the bloc’s recent sustainability legislation.  

The directive is included within the EU’s recently proposed ‘Omnibus’ package of legislative changes. A second directive in this package introduces changes to the content and scope of the EU’s sustainability reporting and due diligence requirements and is being considered separately by legislators.  

The European Council will now review the ‘stop-the-clock’ directive. Presuming it’s formally approved, Member States will have until July 2027 to transpose the Corporate Sustainability Due Diligence Directive (CSDDD) into national legislation. The first wave of affected businesses won’t have to apply the rules until 2028. Application of the Corporate Sustainability Reporting Directive (CSRD) will also be delayed by two years for the second and third waves of in-scope companies. 

The CSDDD aims to ‘[foster] sustainable and responsible corporate behaviour’, while the CSRD requires in-scope companies to report on their social and environmental risks and how their activities impact people and the environment. 

The proposed changes to the CSRD include a new voluntary reporting standard. The information in-scope businesses would be able to request from smaller companies in their value chain would be limited to the areas covered by this standard. The European Commission wants the standard to shield smaller companies from onerous reporting requirements. De Backer says this introduces a ‘value chain gap,’ also reducing the information available on ESG and sustainability.  

Roberto Randazzo, Secretary of the IBA Business Human Rights Committee, believes that reducing the CSRD’s scope will allow smaller companies to concentrate on innovation and growth and encourage them to develop voluntary sustainability initiatives at their own pace. The Omnibus proposals would also revise the delegated act that established the European Sustainability Reporting Standards (ESRS) – used by companies subject to the CSRD – to substantially reduce the number of data points required, clarify the provisions deemed unclear and make the standards more consistent with other legislation. Francesco Bernardi, a lawyer at Legance in Milan, says these proposals would mitigate the complexity of reporting requirements and make it easier for companies to implement ESG practices efficiently. 

Companies would still be required to report on a double materiality basis, both on their internal risks and opportunities related to sustainability as well as on how their operations affect the environment and society. Clare Connellan, a partner at White & Case in London, says this principle is a ‘fundamental part of the CSRD’ because the impact is both ‘inside out’ and ‘outside in.’ 

The Omnibus proposals would limit due diligence requirements under the CSDDD to direct business partners in the value chain and the company’s own operations. A company would only be required to carry out full due diligence on an indirect business partner if it had credible evidence to suggest adverse impacts had or could arise in its activities. Gauthier van Thuyne, Head of Belgium Environmental and Public Law at A&O Shearman in Brussels, says these changes would mean ‘a whole part of [the] chain of activities has disappeared’ from a company’s due diligence obligations. 

The European Commission says the proposals would also streamline the CSDDD’s stakeholder engagement requirements and remove the obligation to terminate the business relationship as a last resort measure. Randazzo, who’s also a partner at Legance in Milan, says the changes would introduce a more pragmatic approach to due diligence, focusing on direct suppliers while still maintaining strong ESG commitments.  

Companies would only be required to ‘adopt’ – rather than ‘put into effect’ – a transition plan. However, this process would still mean outlining the implementing actions that have been planned or carried out. Van Thuyne believes there’s a lack of clarity about what companies need to do here, which could expose them to litigation.  

The proposals would remove from the CSDDD the harmonised EU conditions for civil liability, which require all Member States to implement certain provisions to ensure a company can be held liable for damage caused through non-compliance with its obligations under the Directive. The obligation for Member States to provide reasonable conditions for representative actions by trade unions or non-governmental organisations on behalf of victims would be revoked.  

The CSDDD’s civil liability provisions are currently of ‘overriding mandatory application’ when being transposed by Member States. Deleting this requirement would leave national law to define whether its civil liability laws override the relevant rules of a third country in which harm has taken place.

Meanwhile, penalties would no longer be linked to five per cent of the company’s global net turnover.  

Sarah Ellington, Newsletter Officer of the IBA Business Human Rights Committee, says removing the EU-wide civil liability regime ‘reduces the very real prospect of conflict and cross-over with existing, national civil liability regimes’, such as where tortious claims under national law could be brought as an alternative, or potentially as parallel proceedings, in another jurisdiction or under a different applicable law. 

Emily Lee, Head of Human Rights at Nature Positive, says however that the loss of the regime would ‘reduce the effectiveness of the legislation quite substantially.’ She adds that ‘the case for resource and support to implement due diligence programmes effectively was greater’ when the legislation included the threat of large fines for non-compliance. Lee argues the Omnibus proposals have missed the point of what companies needed. Businesses ‘weren’t really asking for deregulation,’ she says, ‘it’s just that the guidance was overly complicated.’ 

Ferdinand Fromholzer, a partner at Gibson Dunn in Munich, says the EU wants to relieve companies from burdens that place them in a detrimental position compared with competitors outside the bloc. ‘We probably cannot go forward in Europe with a gold standard if the rest of the world does not,’ he says. Regardless of whether the Omnibus proposal is accepted, however, Ellington believes the CSRD and CSDDD still represent ‘a significant shift in EU policy addressing business impacts on human rights and the environment.’ 

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