The CS3D was adopted!
Corporate Sustainability Due Diligence Directive
March 2024
Corporate Sustainability Due Diligence Directive CS3D was adopted by the EU!
The EU member states adopted the CS3D with a qualified majority on March 14, 2024.
After a long struggle, the Corporate Sustainability Due Diligence Directive (CS3D) was adopted by the EU member states. Thanks to the Belgian Council Presidency, a compromise was reached, with Germany abstaining following pressure from the FDP.
The EU Parliament approved the regulations on April 24, 2024. The final vote in the European Council took place one month later. All member states therefore have a total of two years from May 2024 to transpose the regulation into national law. In Germany, this includes the adaptation of the Supply Chain Due Diligence Act (LkSG).
Scope of the Corporate Sustainability Due Diligence Guideline
As with Germany’s LkSG, the new directive will also apply to stock corporations, LLCs and partnerships limited by shares. However, the CS3D extends the scope of application by also including insurance companies and regulated financial companies.
Initially, the CS3D will only apply to companies with a turnover of 1.5 billion euros and 5,000 or more employees. Over time, this threshold will be lowered further and further. 4 years after it comes into force, the threshold will be set to 3,000 employees and a turnover of 900 million euros and after 5 years it will be 1,000 employees with a turnover of 450 million euros.
Here is a summary of the most important information for you:
Areas of application
Unlike the LKsG, the CS3D not only applies to direct suppliers, but also includes all business partners involved in the company’s value chain – this applies to both pre-production and downstream processes associated with manufacturing of products or the provision of services by the company. This far-reaching value chain is defined as an “activity chain”. It not only includes the company’s direct business activities, but also extends to:
- Direct suppliers
- Indirect suppliers
- Subsidiaries
- Extraction of raw materials
- Transport
- Storage of the product
- Utilization of the product
- Disposal of the product
Implementation of the new CSDDD module
in the supply chain compliance system
Compliance Solutions provides a fully risk-based and workflow-driven solution for supply chain compliance. The platform includes:
- Automated, AI-powered risk assessment provides accurate data to facilitate decision making.
- Comprehensive screening of supply chain and corruption risk issues to identify potential risks at an early stage.
- The Corporate Sustainability Due Diligence Directive (CSDDD) module can be seamlessly integrated into existing workflows to ensure enforcement of the new standards. The dynamic systems from Compliance Solutions are flexibly adaptable and offer every company a tailor-made solution to remain compliant with the CS3D directive while minimizing legal risks.
Supply Chain Compliance System
Due diligence obligations of the CS3D
The CS3D requires companies to integrate several due diligence obligations into their corporate guidelines. As this regulation also refers to the Paris Climate Agreement, companies are required to recognize and eliminate harmful environmental impacts along their activities. Careful consideration of human rights is also required. Companies should evaluate their measures and engage in regular dialogue with the responsible authorities and contact points. Companies are expected to take remedial action and conduct regular audits to ensure compliance with the CS3D – these audits should take place at least annually. The findings of these audits are to be summarized in a report and made available to the public to inform them about the implementation of due diligence obligations.
Additionally, individuals, trade unions and employee representatives should be given the opportunity to report violations of the due diligence obligations and to start a dialogue with the companies through a complaints system.
Penalties for non-compliance
The regulation explicitly endorses civil liability and turnover-related fines for breaches of the duty of care to protect the environment and human rights. However, the exact extent of this penalty must be determined by the national authorities of each Member State individually, as this is a matter of each country’s national law. It is foreseeable that this will be a major issue in the national implementation of the CS3D.
Conclusion
It is advisable for all affected companies to find out immediately how the new standards can be seamlessly embedded into their corporate structures. Swiftly implementing these requirements into existing systems will guarantee companies a safe harbor from potential sanctions and the risk of reputational damage.
December 2023
CS3D and CSRD: Agreement by the end of 2023
Challenges and opportunities for companies
The Corporate Sustainability Due Diligence Directive (CS3D) is just around the corner!
The trilogue talks between the European Parliament (EP), the European Council and the Commission on the Corporate Sustainability Due Diligence Directive (CS3D) have come to an end, with very interesting agreements that will be both challenging and opportunity-rich for companies. However, it is crucial to emphasize that this agreement stands before the final revision of the directive text and approval by the Parliament and the Council.
The most important points of the provisional agreement are listed below:
- Scope of application: The CS3D will apply to companies with more than 500 employees and a worldwide net turnover of at least €150 million. Additionally, non-EU companies will be subject to the directive if they have a net turnover of €300 million in the EU within three years of the regulations coming into force.
- Exemption for the financial sector: Currently, the financial sector is exempt from the provisions of CS3D. However, this exemption will be reviewed in the future.
- Transition plan: Companies that fall within the scope of CS3D will be required to draw up a transition plan. The purpose of this plan is to ensure that a company’s business model and strategy are aligned with the goals of transitioning to a sustainable economy and limiting global warming to 1.5°C to stay in line with the Paris Climate Agreement. Achieving climate neutrality is another important goal.
- Scope of application: The CS3D will apply to companies with more than 500 employees and a worldwide net turnover of at least €150 million. Additionally, non-EU companies will be subject to the directive if they have a net turnover of €300 million in the EU within three years of the regulations coming into force.
Regarding sustainability reporting, the focus is on specifying the reporting requirements of the Corporate Sustainability Reporting Directive (CSRD) through the European Sustainability Reporting Standards (ESRS). These standards are binding for all companies covered by the CSRD and contain implicit duties to act and corporate governance requirements. Examples of these are:
- Disclosure of climate action plans, water and marine resource management strategies and biodiversity targets, if these are relevant to the company. This requires the active involvement of corporate bodies.
- Disclosure of the persons responsible for sustainability-related tasks on the Management Board and Supervisory Board, which emphasizes the importance of sustainability expertise in these bodies.
Overall, the CS3D and CSRD go beyond the mere regulation of supply chains and reporting.
As the Directive moves ever closer to finalization and adoption, it will be critical for affected companies to prepare for the changes and ensure alignment with the evolving regulatory landscape. Stay tuned for more updates on this important initiative.