The EU Corporate Sustainability Due Diligence Directive - What you need to know

When will companies need to comply by?

Once the Directive enters into force, there will be a phased-in approach to compliance for companies within scope of between three and five years.  This will be based on employee numbers and turnover.  Assuming this takes place in 2024, the largest companies formed in an EU Member State with 5000+ employees and a net worldwide turnover of more than €1,5 billion will be required to comply within three years of entry into force, i.e. in 2027.  Those companies with 3000+ employees and a net worldwide turnover in excess of €900 million would be required to comply within four years.  And the remaining companies with over 1000 employees and a net worldwide turnover of €450 million would be required to comply within five years.  Similar thresholds apply to third country companies which are also phased in over a three to five year period from entry into force.   

What is the impact of this scope? 

Whilst this Directive is primarily targeted at large companies its impact will be felt by those companies, including small and medium-sized enterprises (SMEs) and other business partners, in its chain of activities with whom it has a business relationship. The CS3D targets companies in the real economy and the European Commission will review the need for specific measures related to  the financial sector within two years of the Directive's entry into force.  

The key requirements for your company

The Directive requires companies to look at the adverse impacts of their operations, the operations of their subsidiaries and in the chain of activities of business partners on both the environment (including climate) and human rights. This is in keeping with the emerging trend of a more holistic and integrated approach to sustainable business in the context of viewing human rights and environmental due diligence together. In addition to identifying, preventing, minimising, prioritising, mitigating and ceasing adverse impacts (and potential adverse impacts), companies must also:

• integrate environmental and human rights due diligence in all corporate policies and risk management systems;
• develop and maintain notification and complaints mechanisms;  
• monitor, review, assess and verify the effectiveness and implementation of their due diligence policy and measures; and;
• disclose and report.

A further key provision is the requirement to develop and implement a detailed climate mitigation transition plan which ensures that the company's business model and strategy are aligned with the transition to sustainable economy and the 1.5°C Paris Agreement temperature goal.  This includes requiring the company to set time-bound climate-related targets for scope 1, 2 and, where relevant, scope 3 emissions and to describe their progress against these.  

What are the implications of non-compliance?

Not adhering to the CS3D requirements will come at a cost to companies with potential consequences including:

• maximum fines of up to 5% net global turnover;
• less favourable consideration due to inclusion as award criteria in EU public procurement;
• removal of goods from the market; and 
• potential civil liability claims/class actions arising from a failure to comply with the due diligence process.

C3SD also introduces a new network of supervisors within EU Member States to ensure compliance, with each national authority able to call for remedial actions and impose penalties. 

What's next?

Once the final agreements have been reached, CS3D enters into force 20 days after publication in the Official Journal of the European Union. Each Member State then has two years for transposition into national law. Notwithstanding, a growing number of Member States have or are in the process of putting in place mandatory human rights due diligence requirements. These, and the Directive itself, build on and cement the existing practices by businesses through adherence to voluntary frameworks (e.g. the UN Guiding Principles on Business and Human Rights, the OECD Guidelines for Multinational Enterprises, and the OECD Due Diligence Guidance for Responsible Business Conduct).