Executive summary

On 15 March 2024, the EU Council achieved consensus on the Corporate Sustainability Due Diligence Directive (CS3D), despite a few setbacks. The CS3D imposes obligations on companies to address negative impacts caused by commercial activities, from both an environmental and human rights perspective. The progress represents a pivotal legislative milestone in Europe's climate ambition and strategy. It is important to note that this agreement has been subject to extensive po­litical deliberations, consequently resulting in a compromise text that restricts the originally proposed legislative scope and extends the timeline for enactment. The legislative process will continue during March and April, with formal adoption expected in the first half of 2024, following a vote in European Parliament on 22-25 April.

The CS3D requires companies to engage in a thorough due-diligence process encompassing identifi­cation, assess­ment, prevention and mitigation of negative impacts on human beings and the environ­ment. To mitigate adverse impacts on human rights and the environment, a broad range of elements must be addressed, including child labor, forced labor, greenhouse gas emissions and deforestation. Importantly, companies are required to examine and document findings beyond their immediate operations, encompassing both up­stream and downstream supply chains.

Detailed discussion

The legislative process for the CS3D has not been smooth, despite the provisional three-party agreement reached between the European Commission, EU Council and European Parliament in December 2023. The CS3D recently saw vocal objections from Germany and Italy — citing excessive bureaucracy as one of the main concerns. Given the double majority rule (stipulating either the support of 55% of member states (15 out of 27) or the backing of member states representing at least 65% of the total EU population), the Belgian presidency sought and obtained an acceptable compromise.

Obligations

Under the CS3D, companies are required to institute due-diligence protocols within both their operational frameworks and value chains to alleviate adverse impacts on human rights and the environment. Areas to address include forced labor, exploitation of workers, child labor, just and favorable working conditions, fair and adequate living wages, unequal treatment in employment and the right to freedom of association and environmental issues such as emissions, deforestation, pollution, handling of hazardous wastes and chemicals, protection of the ozone layer, pollution, use of mercury and water usage.

The due diligence obligations set out under the CS3D follow the six steps as defined by the OECD Due Diligence Guidelines for Responsible Business Conduct:

1. Integrating due diligence into policies and management systems
2. Identifying and addressing adverse human rights and environmental impacts
3. Preventing, ceasing or minimizing actual and potential adverse human rights impacts
4. Monitoring and assessing the effectiveness of measures
5. Communicating
6. Providing remediation

Under the latest compromise text, the CS3D will cover a smaller number of companies and groups directly. Broadly, it applies to companies employing more than 1,000 individuals (previously 500) and with a global turnover surpassing €450m (formerly €150m). Importantly, non-EU (groups of) companies are also covered if they generate €450m turnover in the EU. There is no employee threshold for non-EU companies — as long as they turnover €450m in the EU they will be affected.

Indirectly, smaller companies operating in the value chains of covered companies across the globe will be affected as a result of contractual requirements imposed on them by covered companies (so called "trickle-down effect").

Other noteworthy amendments include:

• Downstream: A revised definition of downstream chain activities omits the inclusion of "indirect business relations," now referencing solely "business partners which perform business operations related to the operations, products or services of the company." (see (Art.3 (1) (e) (ii))
• High-risk sectors: The compromise text does not lower the general thresholds for companies in high-risk sectors (e.g., textiles, agriculture, extraction of minerals), but notes that these sectors could be incorporated at a later stage.
• Climate transition plans: The requirement for certain large enterprises to formulate and implement a climate transition plan aligned with the Paris Agreement has been rescinded and is deemed to be fulfilled under the reporting for Corporate Sustainability Reporting Directive (see Art. 15 (3)).

Applicability

The compromise text sets out a phased implementation of the CS3D as set out below for EU (groups of) companies. (For non-EU companies, the same revenue thresholds apply to the phased implementation, but note that there are no employee thresholds):

• Workforce of more than 5,000 individuals and turnover of €1.5b: comply within a three-year period
• Workforce more than 3,000 individuals and turnover of €900m: comply within a four-year period
• Workforce more than 1,000 individuals and turnover of €450m: comply within a five-year period

Noncompliance may result in sanctions such as fines and compliance orders, and there is also the potential for civil liability. In addition, the rules of directors' duties continue to be enforced through existing EU Member States' laws.

Next steps

Following the EU Council's vote on 15 March 2024, the Legal Affairs Committee approved (in a 20-4 vote) the Parliament’s proposal on 19 March. A definitive European Parliament vote is slated for late April (plenary votes are currently scheduled for 22-25 April).

Once final Parliament approvals are received (and barring any unforeseen delays), the directive is slated for formal adoption in the first half of 2024. EU Member States will then have two years to transpose the legislation into national laws.

Business implications

Businesses should continue to monitor the legislative process as further amendments may follow. For businesses with a workforce exceeding 5,000 individuals and turnover of €1.5b, the timeframe is shorter and requires prompt attention.

Although the CS3D has been watered down in terms of scope and timeline, affected businesses should not delay assessing the potential impact and the consequent build-out of due diligence action plans. Preparatory activities will include formulating and enacting policy documents, including defined quantitative metrics, protocols for supervisory oversight and monitoring and supplier outreach for data gathering. Where needed, it will be important to secure contractual assurances from business partners to ensure adherence.

It is also important to note that notwithstanding the inapplicability of CS3D to a company, its stakeholders may now require this approach to be adopted not least to minimize their risks, including reputational risks. Accordingly, stakeholder sentiment and requirements should also be understood in this context.