CS3D: What You Need to Know — Highlights of the Corporate Sustainability Due Diligence Directive
by Minoas Vitalis, EU Policy Analyst, FiscalNote EU Issue Tracker
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 the new CS3D requirements or risk severe financial, legal, and reputational consequences.
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.
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What is the Scope of CS3D’s Application?
The proposed directive is poised to apply to a broad spectrum of companies incorporated under the laws of an EU Member State, specifically those meeting one of several criteria based on their size, financial turnover, or business model. These criteria include companies with over 1000 employees and a net worldwide turnover exceeding 450 million euros in the last financial year, as well as those not meeting these thresholds but are the ultimate parent company of a group that does. Additionally, companies engaged in franchising or licensing agreements within the EU, generating substantial royalties, fall under the directive's purview.
For companies established outside the EU, the directive extends its reach provided they generate more than 450 million euros in turnover within the Union or are the ultimate parent company of a group meeting specified financial thresholds. Notably, an exemption exists for ultimate parent companies primarily involved in holding shares in operational subsidiaries without direct management or operational influence.
It also includes financial undertakings within its scope, albeit with a focus on their upstream activities, provided they meet the outlined criteria. An essential provision mandates the publication of an indicative list of third-country companies subject to the directive, enhancing transparency and compliance expectations.
CS3D Implementation and Timeline
The European Parliament and the Council initially reached an informal provisional agreement on the Corporate Sustainability Due Diligence Directive during the fifth trilogue on 13 December 2023. However, the Council decided to reopen the agreement in early 2024.
The revised agreement garnered approval from the Permanent Representatives Committee (COREPER I) on 15 March, followed by endorsement from the European Parliament’s Lead Committee on Legal Affairs (JURI) on 19 March. This sets the stage for the text to be presented to the European Parliament plenary for adoption as the Parliament’s first reading position on 24 April.
Assuming the proposed Directive enters into force in the second or third quarter of this year, it provides for a two-year transposition period until mid-2026. Thereafter, the new Directive is expected to be fully applicable by 2029, depending on company size.
For government and public affairs teams, this is a critical moment to guide their organizations through these changes, ensuring a smooth transition to meet the Directive's requirements while leveraging the benefits of enhanced sustainability and responsibility.
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