The European Union (EU) has consistently led the way in establishing benchmarks for corporate sustainability, and the new Corporate Sustainability Due Diligence Directive (CS3D) is no exception. This directive imposes responsibilities on companies to minimize their adverse effects on human rights and the environment, within the EU and worldwide.
In December 2023, EU lawmakers reached a tentative agreement on the proposed directive, and on March 15, 2024, the Council of the EU approved it. While CS3D still awaits formal endorsement by the Legal Affairs Committee and the European Parliament, all stakeholders have signaled their commitment to moving forward with the legislation. Therefore, companies falling under its purview should start formulating a plan of action for supply chain sustainability due diligence.
What is the Corporate Sustainability Due Diligence Directive?
The Corporate Sustainability Due Diligence Directive is an EU legislation that has implications for companies worldwide, as international companies must adapt to EU regulations to keep their products on the EU market. Even if you do not import any products directly into the EU, you may be asked to support your EU customers on this, similar to how non-EU companies are asked to support REACH, ELV, RoHS, and other regulations.
The CS3D places mandates on in-scope companies to identify, assess, prevent, mitigate, and remedy the adverse impacts of their operations on environmental, social, and governance (ESG) key performance indicators.
These companies must incorporate due diligence procedures into their policies and risk management frameworks, outlining their approach and methods clearly and integrating them into their code of conduct. This encompasses scrutinizing their supply chains and supplier operations to ensure they are not inadvertently contributing to issues such as forced labor or environmental degradation.
Failure to comply with the CS3D may lead to penalties imposed by supervisory authorities of member states, including fines of up to 5% of a company’s global turnover and public disclosure of their shortcomings. Additionally, individuals and entities affected by adverse impacts on human rights and the environment retain the right to pursue damage claims against these companies.
Who will be Affected by the CS3D?
The directive applies to EU-based companies with over 500 employees and a net worldwide turnover of €150 million as well as EU companies with over 250 employees and a turnover exceeding €40 million, provided that at least €20 million originates from high-risk sectors, such as textiles, clothing, footwear, agriculture, mineral resources, and construction.
However, the directive also applies to non-EU companies. Non-EU companies with a net turnover of €300 million generated within the EU are also subject to the CS3D. These entities are granted a three-year window following the directive’s implementation to ensure compliance.
While this extended timeframe offers non-EU companies additional preparation time, it’s essential to acknowledge that establishing supply chain sustainability due diligence programs meeting European standards may require more time than anticipated. Many EU companies have already implemented due diligence processes aligned with existing corporate sustainability frameworks, such as the Corporate Sustainability Reporting Directive (CSRD), which took effect on January 5, 2023.
How to Prepare for CS3D Compliance
Companies should refer to the official CS3D final rule when it is formally published to ensure full compliance with the legislation. However, companies can begin proactively preparing for CS3D compliance now by collecting ESG impact data from their suppliers. This includes surveying suppliers on their labor practices and environmental footprints, as well as due diligence on mineral sourcing and smelting. Companies that operate in the high-risk sectors identified in the CS3D should practice due diligence by conducting enhanced supplier screening to check for ESG risks not disclosed in supplier self-reporting.
These steps create the foundation for supply chain sustainability due diligence and documentation that will help manufacturers and suppliers prepare for the broad requirements of the CS3D.
Looking Ahead
The CS3D is slated to be passed into EU law sometime in 2024 and transposed into national law by the Member States by 2026. Once the Directive is fully adopted, it will follow a phased-in approach to allow businesses three to five years to ensure compliance.
The timeline for compliance will be based on each company’s employee numbers and turnover. Assuming this takes place in 2024, the largest companies formed in an EU Member State with 5000+ employees and a net worldwide turnover of more than €1.5 billion will be required to comply within three years of entry into force, i.e., in 2027.
Companies with over 3,000 employees and a net worldwide turnover more than €900 million would be required to comply within four years. The remaining companies with over 1,000 employees and a net worldwide turnover of €450 million would be required to comply within five years.
Similar thresholds apply to non-EU companies, which are also phased in over a three-to-five-year period from entry into force.
By proactively implementing robust due diligence measures, engaging with stakeholders, and regularly monitoring their impact on human rights and the environment, manufacturers will be better prepared for the CS3D and related ESG regulations.
Get Support
If you need help understanding the implications of the CS3D or preparing for compliance, contact our experts at [email protected]. We have years of experience in EU market reporting and can help you establish a framework to prepare for the broad requirements of the CS3D.
