Deregulating Due Diligence?

On June 5, the AfD, a German far-right party, introduced a draft law to abolish the European Corporate Sustainability Due Diligence Directive (CSDDD) and German Supply Chain Due Diligence Act (LkSG) under the title “Initiating a Bureaucracy Turnaround.” Although this draft was widely rejected in the German parliament, some of its lines of argument appear to be echoed in the coalition’s plans between the SPD and CDU/CSU and the era of expanding regulation appears to be over. This post analyses the German coalition agreement regarding supply chain responsibilities in the light of the UN Guiding Principles on Business and Human Rights (UNGPs or Ruggie Principles) and the minimum core obligations under Art. 2 (1) International Covenant on Economic, Social and Cultural Rights (ICESCR), especially with the European Commission’s Omnibus I in mind. It concludes that the current measures on the national and international level constitute deregulations and the justifications need to be necessary and proportionate, which are not given in the current state of the debate.

The Fear of Regulation

From a human rights perspective, a passage in the German coalition agreement is particularly noteworthy, as it also seems to mirror the line of argumentation of the AfD:

“In addition, we will repeal the national Supply Chain Due Diligence Act (LkSG). It will be replaced by a law on international corporate responsibility that implements the European Supply Chain Directive (CSDDD) in a manner that is low in bureaucracy and enforcement-friendly.” (Coalition Agreement, para. 1904, translation by the author.)

Other sections of the agreement also reflect the notion that overregulation should be avoided. Deregulation of EU rules appears politically fashionable and is also affecting regulations concerning sustainability reporting (CSRD) and sustainable investment (Taxonomy Regulation, para. 2002).

According to Valdis Dombrovskis, Commissioner for Economy and Productivity, the initiative is not about deregulation. This post understands deregulation as the repeal of binding norms, as normative retrogressive measures can be understood as steps backwards in terms of legal guarantees. Thus, this post will analyze whether reopened gaps may constitute violations of states’ own human rights obligations where they fail to take appropriate measures to prevent violations.

National and European Deregulation Efforts in Light of the ICESCR and the Ruggie-Principles

The importance of regulation in the area of business and human rights was highlighted by John Ruggiewho was a former UN Secretary-General’s Special Representative for Business and Human Rights and developed the UN Guiding Principles on Business and Human Right (UN Doc A/HRC/8/5, para. 3):

“The root cause of the business and human rights predicament today lies in the governance gaps created by globalization – between the scope and impact of economic forces and actors, and the capacity of societies to manage their adverse consequences. These governance gaps provide the permissive environment for wrongful acts by companies of all kinds without adequate sanctioning or reparation. How to narrow and ultimately bridge the gaps in relation to human rights is our fundamental challenge.”

The UN Guiding Principles are based on a three-pillar framework: Protect, Respect, and Remedy (UNGPs, p. 1). Those pillars were also recognized in General comment No. 24 on State obligations under the ICESCR in the context of business activities.

Obligation to Protect

States are obliged to prevent, investigate, punish, and redress human rights violations by third parties, particularly businesses (UNGPs, p. 3 and GC No. 24, p.5 f.). While states generally have a discretion in how they fulfil these duties, that discretion is limited where deregulation leads to reopened governance gaps. This would then constitute a retrogressive measure in the sense of Art. 2(1) (see General Comment (GC) No. 3). For such retrogressive measures to be justified (Stellungnahme, p. 5), they have to be necessary and proportionate.

The LkSG represented Germany’s attempt to enshrine states’ obligations explicitly, including both preventive measures and sanction mechanisms. Criticism towards the LkSG emerged early on in the business sector, but also from civil society actors such as the European Center for Constitutional and Human Rights (ECCHR). Although the ECCHR identified significant shortcomings, such as weak complaint mechanisms, limited transparency and participation of affected individuals, and insufficient enforcement, it ultimately concluded that the law remains an effective tool for enhancing corporate accountability. With the planned repeal of the LkSG, a functioning state instrument would thus be lost. In particular, the reporting obligation, which according to the coalition agreement is to be eliminated without replacement, significantly undermines the LkSGs preventive measure. Unless the CSDDD, which is intended to replace the national law, contains sufficiently robust provisions, this would constitute a step back in light of the first pillar and a retrogressive measure. Therefore, reasonable arguments must be put forward (Stellungnahme, p. 8). For such a measure to be lawful, Germany must demonstrate the most careful consideration of the rights provided for in the Covenant. These considerations must be made in the context of the state’s maximum available resources (GC No. 3, para. 9). In concrete terms, this can be summarized as follows: A measure is presumed to be retrogressive under GC No. 3, and thus incompatible with the ICESCR, if it represents a deliberate step backward rather than stagnation, is adopted despite the state’s failure to use all available resources, is implemented without rigorous, evidence-based consideration, and cannot ultimately be justified in light of the Covenant as a whole.

While Art. 5 CSDDD obliges Member States to ensure that corporate due diligence duties are enforceable and Art. 14 and 15 CSDDD provide for complaint mechanisms and supervision respectively, these provisions only apply to companies covered by the scope of Article 2(1) CSDDD. One key amendment under Omnibus l is the removal of small and medium-sized enterprises (SMEs) from the scope of the Directive, which is a clear reduction in regulatory reach, as the LkSG had the same threshold for the size of the company’s total number of employees but, in comparison to the CSDDD, did not provide for a sales threshold.

Furthermore, it is planned to restrict the scope of “stakeholders” as defined in Art. 3 (1) (n) CSDDD. While the LKsG and the previous version of the CSDDD included consumers and advocacy groups, only directly affected individuals and their representatives are to be included according to Omnibus I. If both the coalition agreement and the Omnibus I reform are implemented as currently planned, this would represent a step back, as they reduce the number of regulated companies and limit stakeholder participation. Here, reducing bureaucracy and ensuring competition, as brought forward in the coalition agreement, but also subsidiary in the general objectives of Omnibus I (see para 1.3.1. and p.1), arguably does not suffice as a justification, as the measures would not be as effective to serve the objective of the ICESCR.

Obligation to Respect and Access to Remedy

The Ruggie Principles also stipulate that companies must not violate human rights and should address any adverse impacts in which they are involved (UNGPs, p. 13). Unlike states, companies are not considered primary human rights duty-bearers under traditional international law. Rather, they are expected to conduct human rights due diligence by adopting policies and implementing procedures to identify, prevent, and mitigate risks. These requirements are also anchored in the CSDDD (para. 38). At the same time, the state’s own obligation to protect human rights is often overlooked in the context of corporate responsibility. The state itself must not prioritize the interests of companies over the rights set out in the ICESCR or also pursue policies that are negatively affecting such rights (GC No. 24, para 12). Here, Germany must adopt regulations that have an appropriate impact on companies.

The LkSG never covered risk analysis and preventive measures for indirect suppliers and expected a policy paper and risk assessment only from the businesses within the regulatory reach (§ 3(1), § 6(2) lit. 2 LkSG). The repeal of the LkSG would leave a regulatory gap the CSDDD would need to fill. The current CSDDD originally addressed both direct and indirect supplier within its risk assessment (see para. 38 f.) and therefore had a much higher standard than the LkSG. However, under Omnibus I, only direct suppliers would remain within scope, meaning many indirect but relevant actors would be excluded. While policy commitments per se are not eliminated, their substantive content is indirectly weakened through the smaller regulatory reach. Considering this regulatory reach, this backstep also constitutes a retrogressive measure. It therefore demands a reasonable justification that goes further than reducing bureaucracy and enabling competition. Moreover, when one reads the prohibition of retrogression in conjunction with the principle of frustration, one might draw the argument, that Germany may not take measures that dilute the CSDDD’s minimum standards, since the directive’s entry into force is only a matter of time.

Finally, the UNGPs require states to ensure access to remedy. This includes judicial and non-judicial mechanisms that provide redress to victims of business-related human rights violations. Under the LkSG, § 8 required companies to establish an internal remedy mechanism, while § 3(3) clarified that a violation under the act would not in itself trigger civil liability, though any existing liability under general civil law remained unaffected. Here it is noteworthy that other stakeholders, such as trade unions and NGO’s, had a special standing, § 18 LkSG. The current CSDDD also allows special standing for those given groups (see CSDDD, para 83). On the other hand, omnibus I just declares that this standing is only allowed if national law allows it. With the replacement of the LkSG, this will no longer be the case. The simultaneous removal of the LkSG and weakening of the CSDDD therefore signals a broader trend of legal deregulation.

 Looking Forward in a Time of Backlashes

In conclusion, both the planned repeal of the LkSG at the national level and the proposed changes to the CSDDD under Omnibus I represent rollbacks across all three pillars of the UNGPs. Civil society, academia, and human rights institutions have justifiably criticized these developments (see joint statement).

Although these reforms are framed as efforts to reduce bureaucracy and boost competitiveness, they have profound implications for human rights protection, as they are reopening previously closed protection gaps. Legally, they constitute a form of deregulation, as they are constituting retrogressions and need profound justifications, which are not given in the current state of debate.

Whether these reforms will mark a lasting setback in the area of business and human rights remains to be seen. What is clear, however, is that human rights implications of deregulation must be more thoroughly addressed in both national and European policy and legal debates and easy way outs must be critically monitored.

The “Bofaxe” series appears as part of a collaboration between the IFHV and Völkerrechtsblog.