CS3D: What You Need to Know — Highlights of the Corporate Sustainability Due Diligence Directive

In a move poised to redefine the landscape of corporate responsibility within the European Union, the European Commission’s proposal for a Directive on Corporate Sustainability Due Diligence would mandate companies to assess and mitigate their impact on human rights and the environment.

This legislative push emerges from research indicating that companies’ voluntary due diligence actions tend to be narrowly focused on the first link in their supply chains, neglecting the deeper, often more problematic, layers where significant human rights and environmental damages persist. The proposed Directive seeks to rectify this gap by providing a framework for businesses to scrutinize and reform their entire supply chain operations.

As the EU Parliament gears up for a pivotal vote on April 24, companies across the bloc and beyond face a pressing imperative to align with these new requirements or risk severe financial, legal, and reputational consequences. This directive not only signals a significant shift toward sustainable and accountable business practices but also sets the clock for organizations to adapt in an increasingly complex global market.

Understanding CS3D’s Impact on Businesses

The Risks of Non-Compliance

Under the proposed EU Corporate Sustainability Due Diligence Directive, companies that fail to adhere to the new regulations could face substantial repercussions such as:

• Financial Penalties: Non-compliant companies may face fines of no less than 5 per cent of their net worldwide turnover imposed by Member States supervisory authorities.

• Access to justice: Those affected by the adverse impacts of company activities would have five years to bring claims forward. Companies would also be required to carry out meaningful engagement including a dialogue and consultation with affected stakeholders.

• Public procurement: Compliance with the proposed Directive could be qualified as a criterion for the award of public contracts.

• Reputational Damage: Beyond financial penalties, Member State supervisory authorities could employ "naming and shaming" tactics against non-compliant companies, publicly highlighting their failures to meet their obligations. The resulting damage to a company's reputation could lead to diminished consumer trust, investor confidence, and the erosion of stakeholder relationships, ultimately impacting the company's long-term sustainability.

Overall, the consequences of non-compliance with the EU Corporate Sustainability Due Diligence proposed Directive could be significant and could have far-reaching implications for businesses. The stakes are high, with financial, legal, and reputational risks on the line. Companies must take proactive measures to ensure compliance with the proposed new rules to mitigate risks and uphold their social and environmental responsibilities. For public and government affairs teams, this means staying informed and guiding their organizations through this complex landscape, safeguarding against the significant implications of non-compliance.

How Might CS3D Benefit Companies?

The CS3D proposal has the potential to drive positive change by encouraging companies to adopt more sustainable and responsible business practices, leading to improved resilience and competitiveness. Companies will be able to increase trust among stakeholders, including consumers, investors, employees, communities, and regulators as they can demonstrate their commitment to accountability by engaging in transparent reporting on their due diligence efforts.