The Corporate Sustainability Due Diligence Directive (CS3D)
The Corporate Sustainability Due Diligence Directive (CS3D)
Overview of the proposed legislation
The Corporate Sustainability Due Diligence Directive (CS3D), which was originally proposed by the European Commission in February 2022, is a pivotal initiative designed to tackle concerns surrounding environmental, social, and governance (ESG) issues and aims to promote sustainable and responsible corporate behaviour by integrating human rights and environmental considerations into companies' operations and governance.
The introduction of CS3D will ensure that businesses address adverse impacts, both within and beyond Europe, throughout their value chains and will require companies to engage meaningfully with affected stakeholders on environmental and human rights impacts thereby promoting responsible business conduct. Companies will be expected to:
- Adopt a strategic plan, confirming that their business model and outlook are fully compatible with the Paris agreement on sustainability and climate change.
- Achieve this through comprehensive due diligence commitments covering their operations, subsidiaries, and supply chains.
Who is in scope and when does it come into effect?
A provisional agreement on CS3D was reached by the European Parliament and the European Council on 14 December 2023. A revised version was passed through the European Parliament’s Committee on Legal Affairs (JURI) in March 2024. CS3D will, if passed in the European Parliament plenary vote scheduled for April 2024, become applicable to in-scope companies from Q2 2027 and gradually widen scope until 2030.
CS3D will ultimately impact companies with over 1000 employees and revenue in the EU of greater than €450 million, however implementation is on a phased basis. By 2027, EU companies with over 5000 employees and €1500 million net turnover including non-EU companies with €1500 million EU turnover must comply. By 2028 the scope extends to EU companies with over 3000 employees and €900 million net turnover including non-EU companies with €900 million EU turnover. By 2029, all other EU and non-EU companies in scope must comply.
CS3D also affects companies engaged in franchising or licensing in the EU that earn royalties exceeding €22.5 million and have a net turnover above €80 million. It's estimated that aspect of CS3D will apply to over 5,000 companies.
It is important to note that CS3D has been scaled back from its first draft, now applying to fewer companies, excluding specific reporting for higher-risk sectors, focusing on direct business relationships rather than indirect ones, and no longer linking directors’ remuneration to company’s plans for addressing climate risk - all of which were in the original draft, and whose support was withdrawn by key European players.
How can businesses prepare/responding?
Prior to the phased implementation BDO expects that in-scope enterprises will enter a period of significant preparation to ensure that they can meet the obligations of the reform. This will include:
- Ensuring Executive and Responsible Officers are aware of the obligations of CS3D.
- Effective planning and monitoring of sustainable practices.
- Training and building awareness for employees on CS3D-related matters.
- Creating clear due diligence policies and comprehensive monitoring of integral and extended supply chains.
- Reviewing existing supply chain contracts, placing or establishing obligations to place more emphasis on positive ESG practices.
A tone of commitment from the top down across, businesses, subsidiaries and supply chains, can create a narrative throughout these parties that CS3D is not ‘red-tape’, it is a way to improve business functions in a sustainable and ethical way.
Implications of non-compliance
Each EU country will appoint a supervisory authority to oversee companies' compliance with the CS3D obligations. These authorities will collaborate and share best practices through the European Network of Supervisory Authorities established by the Commission. They will have the power to conduct inspections, investigations, and impose penalties, including fines of up to 5% of a company's net worldwide turnover, along with "naming and shaming."
CS3D also implements a civil liability framework enabling full compensation claims for damages arising from a company's negligence in fulfilling its due diligence responsibilities.
Supporting the introduction of the change
At BDO, our Supply Chain and Ethics & Compliance teams can help you prepare for the new EU legislation by providing:
- End-to-End contract management and procurement services within supply chains, in addition to mapping your business’s due diligence processes under the new directive.
- Consistent reviewing of supply chain contracts where we can aid in forging sustainable relationships which meet the obligations required.
- High-quality, frequent audits to help assess your due diligence approach and how your business will meet the obligations set out by CS3D.
- Strategic planning to ensure that your business plan is in-line with the Paris Agreement as required by CS3D.
- Collaborating with your organisation to build or refine your due diligence framework, carefully identifying, assessing, and mitigating risks relating to human rights and environmental impacts across your operations and supply chains.
- Developing comprehensive sustainability policies aligned with the CS3D e.g. Responsible business conduct policies and supplier codes of conduct, ensuring compliance with regulatory requirements, and promoting ethical practices.
- Designing customised training programmes to meet the needs of employees at all levels within your organisation and fostering a culture of awareness regarding sustainability issues, due diligence processes, and the importance of CS3D compliance.
- Providing third-party monitoring services to uphold ongoing compliance with the CS3D.
- Providing insights and benchmarking analysis to enable your company to compare your sustainability performance with peers and providing continuous improvement initiatives.