Earlier this year, the European Commission published the ‘Omnibus I’ directive proposal (the Omnibus): a ‘package’ of measures aimed at simplifying key sustainability-related EU legislation, including the Corporate Sustainability Due Diligence Directive (CS3D). The CS3D creates a due diligence duty upon large companies to address certain adverse human rights and environmental impacts in their operations and chain of activities. This article will consider the amends proposed by the Omnibus that affect the CS3D and, particularly, the proposed removal of the EU-wide civil liability regime, what this might mean for the future of class actions in the EU, and whether the EU remains committed to the enforcement of its sustainability regulations through mechanisms for collective redress.
What might the Omnibus mean for UK organisations?
UK businesses with significant operations in the EU can be within scope of the CS3D (broadly, those with a net turnover over EUR450 million in the EU). In addition, UK businesses may feel the effects of the CS3D due to being part of the chain of activities of in-scope EU-based businesses. Also, the CS3D will be relevant to NGOs, civil society organisations and trade unions that are interested in the prevention and remedy of human rights breaches and environmental harms within corporate value chains.
Although the CS3D was introduced into EU law relatively recently, the Omnibus describes European businesses as operating in a ‘new and difficult context’ given current global challenges, emphasising the need to reduce the burden on business and support competitiveness. However, the Omnibus reforms have also raised concerns. These include uncertainty for companies that have already begun compliance efforts and the dilution of requirements for businesses to engage with their externalised negative impacts, at a time when there is increasing pressure to address environmental and social risks, including as may affect future market stability in the EU and beyond.
From an EU-wide civil liability regime to liability determined by national laws
The CS3D sets out an EU-wide civil liability regime for non-compliance with the directive. A business may be liable if it intentionally or negligently fails to comply with its obligations to prevent, mitigate or stop an ‘adverse impact’ within its ‘chain of activities’, and this non-compliance causes damage to the claimant’s legal interest protected under national law, in relation to international human rights and environmental instruments specified in the CS3D. This regime also requires Member States to allow injured parties to be represented by a trade union or NGO before the national courts.
These provisions aim to support access to justice, particularly given that individuals may be in a disadvantaged position when bringing actions against large businesses. However, the Omnibus would remove the EU-wide liability regime, including the requirement that Member States allow for trade union and NGO representation. Although the Omnibus would not remove the right for victims of non-compliance to receive compensation under national laws, the removal of harmonised conditions for liability would leave these to be determined by each Member State.
The UN Working Group on Business and Human Rights has criticised the Omnibus proposal, including that removing the harmonised civil liability regime could reduce accountability through a lack of consistency in access to remedies across the EU. Victims of harm could be left to navigate inconsistent national laws, which may present a range of barriers to bringing a claim, such as in relation to time limits, evidentiary burden and options for collective action and representation, if a jurisdiction offers a pathway to civil redress for the type of harm done. Where a Member State does not allow NGO and trade union representation, many potential claimants may not have the resources to seek redress independently.
The removal of the civil liability regime potentially creates uncertainty for businesses operating in multiple Member States. The reform may reduce the risks of operating in Member States that have more limited liability conditions compared to the CS3D, but it is also possible that some jurisdictions may have conditions more favourable to claimants. Removing the requirement that Member States allow for trade union and NGO representation may result in businesses being subject to fewer claims, but these could become more fragmented, rather than claims on the same issue being dealt with through collective actions.
Further proposed reforms
The Omnibus also proposes reforms to limit the due diligence obligations of in-scope businesses to their own operations and their direct business partners (effectively, ‘tier 1’ entities in the supply chain), unless plausible information indicates an adverse impact at indirect business partner level. It would require contractual assurances down the chain of activities for compliance with the company’s code of conduct (part of its due diligence policy). Also, it would reduce the scope of ‘stakeholders’ for the purposes of stakeholder engagement, dilute climate transition plan requirements, and extend the monitoring period from 1 to 5 years, for assessing the effectiveness due diligence measures.
Since the publication of the Omnibus, the EU Parliament’s Committee on Legal Affairs has supported the removal of the harmonised civil liability regime and called for further reforms. These include reducing EU businesses in scope by increasing the employee threshold to 3,000, replacing adverse impact ‘mapping’ with risk-based ‘scoping’, based solely on information that is already reasonably available, and removing both the contractual cascade requirement for codes of conduct and the transition plan reporting requirements. The EU Council’s negotiation mandate, among other points, supports removing the civil liability regime and limiting the scope of the due diligence assessment to direct business partners, with certain exceptions. It would also increase the thresholds for in-scope EU businesses to 5,000 employees and (also for non-EU businesses) €1.5 billion in net turnover and proposes a risk-based scoping approach.
Practical implications for corporate accountability and transparency
The Omnibus appears to dilute measures for improving corporate accountability and transparency, and it sits against a wider backdrop of the EU’s pushback on its sustainability agenda. However, it is not a signal for businesses to down tools on sustainability. If the Omnibus is adopted as proposed, human rights and environmental due diligence requirements will still be part of the EU’s compliance landscape. The question is how high the bar will be set and exactly what processes businesses will need to have in place. Also, while the Omnibus introduces uncertainty, the key drivers for preventing social and environmental harm in the value chain remain strong, including reputational and legal risk.
The proposed removal of the CS3D’s harmonised civil liability regime suggests a weakening resolve from the EU to ensure that businesses are held accountable for their negative impacts through collective redress mechanisms. Litigation relating to human rights and environmental harms caused by corporate operations is a developing area, and the use of strategic litigation against corporates is increasing. However, these avenues for redress develop slowly and without a framework for coordination. If the Omnibus is adopted, the removal of the civil liability regime may be a lost opportunity to create consistency and certainty for businesses, as well as for injured parties and the organisations that would support actions for collective redress.