CS3D has been adopted by the EU!
The EU member states adopted the CS3D with a qualified majority on 14 March 2024. Although in a weakened form.
After a long struggle, the Corporate Sustainability Due Diligence Directive (CS3D) has now been adopted by the EU member states.
A decision on the CS3D was originally due to be taken on 9 February 2024, but concerns from various member states led to the Council Presidency postponing the date once again, to avoid the possibility of this regulation being rejected.
Germany was also among those who criticized the draft, but thanks to compromise efforts by the Belgian Council Presidency, a watered-down form of the regulation was able to win enough votes in the EU, meaning that the CS3D has now been officially adopted. Germany abstained from the vote, following pressure from the FDP, one of their leading political parties.
On April 24, 2024, the European Parliament also adopted the rules, paving the way for the new directive. The final vote in the Council is expected in May/June 2024, followed by the publication in the Official Journal of the EU.
The EU member states have two years after the regulation comes into force to transpose it into national law. In Germany, the Supply Chain Due Diligence Act (LkSG) would be amended to adhere to these new regulations.
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.
If you have any questions about the regulations, Compliance Solutions will be happy to assist you with its many years of expertise.
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
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.
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.
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.
