The EU's Corporate Sustainability Due Diligence Directive (often referred to as ‘CS3D') was published in the Official Journal on 5 July 2024, after a long negotiation process.
The Directive is part of the European framework of policies aimed at promoting sustainable development and a green economy. It comes in response to growing concerns about the impact of the activities of large businesses on the environment and on human rights (including fair working conditions, equal wages, adequate health and safety measures, and the rights of association and collective bargaining).
Who does the Directive apply to?
CS3D applies only to very large organisations. Specifically, it applies to:
- EU companies with more than 1,000 employees and global turnover of more than EUR 450 million;
- Non-EU companies whose operations within the EU generate turnover of more than EUR 450 million (regardless of the number of employees);
- Companies (whether or not based in the EU) that have a total net turnover exceeding EUR 80 million and that have signed franchise or licensing agreements in the EU which generate fees exceeding EUR 22.5 million; and
- Companies that, despite not meeting the above turnover figures, are the parent company of a subsidiary that does.
These thresholds are significantly higher than had originally been proposed by the Commission and the Parliament.
What does the Directive require?
The Directive requires companies to:
- integrate the duty of due diligence into all company policies and risk management systems;
- identify and assess actual or potential negative impacts of their activities (and those of others in the downstream value chain) on human rights and the environment;
- prevent and mitigate potential negative impacts;
- stop any actual negative impacts and take steps to remedy them;
- actively involve stakeholders including employees, unions and workers' representatives;
- establish procedures for notifications and complaints by those who have been adversely affected by the negative impact;
- adopt a transition plan for climate change mitigation;
- verify the effectiveness of the measures taken at least once a year; and
- publish an annual statement on its website detailing the diligence obligations implemented.
CS3D also introduces duties for company directors. These duties include setting up and overseeing the implementation of the due diligence processes and integrating due diligence into the corporate strategy.
How will the Directive be enforced?
CS3D leaves enforcement up to the individual Member States. Generally speaking, each Member State will be responsible to set up a regulatory authority to oversee compliance with the Directive, establish penalties, and enforce those penalties. However, it provides that the maximum fines for violations set by national law must be no less than 5% of the company's net worldwide turnover.
CS3D further provides that victims may seek compensation for damages suffered as a result of a company's failure to comply with the due diligence rules. The Directive provides the broad outlines for who may seek damages and what compensation can be awarded, but it leaves the specific rules to the Member States.
Takeaway for employers
The Directive must be transposed into Member States' national law by 26 July 2026. In transposing the Directive, the national laws must ensure that the obligations apply starting from:
- 26 July 2027 for companies with more than 5,000 employees and a worldwide net turnover exceeding EUR 1.5 billion;
- 26 July 2028 for companies with more than 3,000 employees and a worldwide net turnover of more than EUR 900 million; and
- 26 July 2029 for all other companies.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.