The environment and human rights are more than ever at the heart of concerns. This is confirmed by the European Union by placing (very) large companies at the centre of the sustainability battle waged by EU bodies for several years now.
Indeed, as of 25 July 2024, the so-called "Corporate Sustainability Due Diligence Directive" or "CSDDD" or "CS3D" has come into effect.
In this newsletter, we briefly review the content of this directive, while highlighting some points of attention for companies and their HR departments, who will soon be affected by the legislative changes aimed at transposing these new guidelines.
Enjoy the read!
1 The new "CS3D" directive has come into force
The new "CS3D" directive must be transposed into national law by 26 July 2026.
Directive 2024/1760 EU of the European Parliament and of the Council of 13 June 2024 "on corporate sustainability due diligence and amending Directive (EU) 2019/1937 and Regulation (EU) 2023/2859" entered into force on 25 July 2024.
This directive intends to impose certain obligations on companies in order to reduce the potential negative impacts of their business activities on the environment as well as on human rights.
In this sense, the directive covers a narrower field than the CSRD directive on sustainability reporting duties, which covers the three ESG pillars (Environment, Social, Governance) in a broad sense, which in social and human resources practice in particular is much broader than impacts on human rights. Due diligence exercises will therefore not automatically focus on all the social areas covered by the CSRD (to find out more, see our newsletter of 16 January 2023), but on a hard core of potential human rights violations. On the other hand, the human rights covered are defined in the annex to the directive in a broad sense, and include, for example, the right to strike, freedom of association, the prohibition of discrimination, and the right to equal remuneration for equal work.
Member States now have two years to adopt the laws, regulations and administrative provisions needed to comply with the European directive. Companies will then have a phased-in period, extending to 2030, to comply.
2 Scope of application
The directive is primarily aimed at (very) large companies.
The directive applies only to the following European companies:
- EU member companies with more than 1,000 employees and worldwide net worldwide turnover exceeding EUR 450 million;
- EU parent companies of a group with more than 1,000 employees and net worldwide turnover exceeding EUR 450 million;
- Franchises in the European Union with net worldwide turnover exceeding EUR 80 million, if at least EUR 22.5 million were generated by royalties;
Secondly, it also applies to non-European companies that meet the above net turnover criteria within the European Union.
In addition, if a parent company's main activity is holding shares in operating subsidiaries and does not take part in management, operational or financial decisions affecting the group or one or more of its subsidiaries, i.e., a pure holding company, it may apply to the competent supervisory authority for exemption from the obligations laid down in the new directive, provided certain conditions are met.
According to informal estimates, this would involve some 5,000 European companies, including 200 in Belgium.
3 A due diligence process
The "CS3D" directive establishes a due diligence process for large companies, covering the six measures defined by the OECD Guide to Responsible Business Conduct, providing certain tools for companies to identify and remedy negative impacts on the environment and human rights:
- Integrating the principles of responsible business conduct into corporate policies and management systems;
- Identifying and assessing actual and potential negative impacts associated with the company's activities, products and services;
- Ceasing, preventing and mitigating negative impacts;
- Monitoring the implementation of the due diligence and its results;
- Communicating how the company deals with its negative impacts;
- Repairing the company's negative impacts, by its own means or in cooperation with other players.
The directive translates these various measures into a concrete due diligence process that the companies concerned will now have to comply with.
Companies will be required to keep all documentation relating to the measures implemented to meet their due diligence obligations for a minimum of five years, with this period extended until the end of any legal or administrative proceedings that may have arisen during the initial period and not been closed.
3.1 Integrating due diligence into company policies and risk management systems
The due diligence process established by the directive requires companies to integrate the duty of care into all relevant risk management policies and systems.
So if you are concerned, consider integrating sustainability due diligence into existing risk management policies and systems.
In this context, companies also need to put in place a due diligence policy that ensures that due diligence is risk-based.
In order to draw up this policy, it is necessary to organise a consultation between the company and its employees, as well as their representatives. At this stage, we do not know how the directive will be transposed in Belgium, but it is likely that this will be a new competence of the works council. In addition, the policy contains several elements defined by the directive, and must be reviewed and updated regularly, or at least every two years.
3.2 Identifying, assessing and prioritizing actual or potential adverse impacts
Companies must take appropriate measures to identify and assess the actual and potential impacts (again, on the environment and human rights) arising from their own activities, those of their subsidiaries, or those of their business partners when linked to their chains of activity.
To this end, companies take appropriate measures such as:
- Mapping their own activities, those of their subsidiaries and those of their business partners, in order to identify the general areas in which negative impacts are most likely to occur and to be most severe;
- Then carry out an in-depth assessment of these activities in the areas identified.
Companies prioritise these negative impacts according to their means and possibilities for mitigating, eliminating or reducing them, but also according to their degree of severity and probability.
3.3 Preventing and mitigating potential adverse impacts
Companies must prevent or adequately mitigate potential adverse impacts that have been or should have been identified as described above.
To this end, companies should take appropriate measures, which are determined on the basis of a number of factors, influenced in particular by:
- the origin of the adverse impact, which may have been caused by the company itself, one of its subsidiaries or a business partner;
- the company's ability to influence such a trading partner.
The directive therefore provides for a series of appropriate measures to be taken by the company, according to its needs. These measures may also be accompanied by any other appropriate measures, such as dialogue with the business partners concerned, or the possibility of reinforcing the latter's capacities in terms of guidance, administrative and financial support, etc.
Where it has not been possible to prevent or mitigate certain potential adverse impacts through the above-mentioned measures, companies may seek to obtain contractual assurances from an indirect business partner, backed up by appropriate verification measures.
Finally, for potential adverse impacts that could not be prevented or could not be adequately mitigated, the company must suspend or terminate the business relationships that are problematic in terms of compliance with the due diligence and sustainability objectives advocated by the new directive - unless it can justify to the supervisory authority why such action would lead to more serious consequences than those that could not be put an end to.
3.4 Eliminating and mitigating actual adverse impacts
The companies concerned must put an end to the actual adverse impacts identified in accordance with the due diligence procedure.
Once again, companies must take appropriate measures, which are determined on the basis of a number of factors, including whether the adverse impact originated with the company itself, one of its subsidiaries or a business partner, and the company's ability to influence such a business partner.
If it is not possible to put an end to it, companies must try to minimise the extent of this adverse impact using the procedures developed by the directive. The latter seems to broadly incorporate any appropriate means of reducing such impact, and in particular encourages dialogue between the various players.
When none of the first two means of eliminating adverse impact has been successful, companies can seek contractual assurances from an indirect trading partner, backed up by appropriate verification measures.
Finally, if no solution is feasible, and no measures can reasonably be taken to put an end to or minimise the adverse impact, the company must suspend or terminate the business relationship which is problematic in terms of compliance with the due diligence and sustainability objectives of the new directive - unless it can justify to the supervisory authority why such action would lead to more severe consequences than those which could not be put an end to.
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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.