As part of the European Union (EU)’s European Green Deal, one of the areas of EU law that has developed most rapidly and profoundly is that relating to corporate sustainability governance.
The EU Commission adopted a proposal for a Directive on corporate sustainability due diligence. The aim of this Directive is to foster sustainable and responsible corporate behavior and to anchor human rights and environmental considerations in companies’ operations and corporate governance. The new rules will ensure that businesses address adverse impacts of their actions, including in their value chains inside and outside Europe.
This area focuses on shaping companies’ management of environmental, social, and governance (ESG) matters. A number of EU laws in this area have already been adopted – most notably the Corporate Sustainability Reporting Directive (CSRD) and the Taxonomy Regulation (see our previous articles). Most recently, the Corporate Sustainability Due Diligence Directive (“CS3D“), has been provisionally agreed at a political level in December 2023. The final text of the CS3D must still be formally adopted by the European Parliament and the Council of Ministers before it will enter into force, but this is typically only a formality at this stage.
This article will highlight the most important aspects of CS3D compliance following this initial overview of the CS3D that will answer the four most important initial CS3D questions:
- Which companies are covered? The CS3D differentiates between different categories of in-scope EU and non-EU companie, specifically:
Large EU limited liability companies:
Group 1: 500+ employees and net EUR 150 million+ turnover worldwide.
Group 2: 250+ employees and net EUR 40+ million turnover worldwide, and operating in defined high impact sectors, e.g. textiles, agriculture, extraction of minerals. For this group, the rules start to apply two years later than for group 1.
NON EU Companies
‘Very large’ companies that generated a net turnover of more than EUR 150 million in the EU in the financial year preceding the last financial year.
- What is required of covered companies?
- They will need to adopt and implement effective due diligence policies for identifying, preventing, mitigating, and bringing to an end actual and potential human rights and environmental harms in their own operations, those of subsidiaries, and of their business partners relating to their ‘chain of activities’ (i.e., specific parts of the value chain);
- They will also be required to adopt and put into effect a transition plan for climate change mitigation aligned with the Paris Agreement’s objective of limiting global warming to 1.5 °C.
- Why should companies comply? Because, otherwise, very significant administrative and financial penalties may be imposed, and they will be subject to civil liability for damages caused by non-compliance.
- When will this apply? The largest in-scope companies will have three years, likely meaning until 2027, from the entry into force of the CS3D to comply, others will have four or five years.
What are the benefits of these new rules?
For citizens
- Better protection of human rights, including labor rights.
- Healthier environment for present and future generations.
- Increased trust in businesses.
- More transparency enabling informed choices.
- Better access to justice for victims
For companies
Harmonized legal framework in the EU, creating legal certainty and level playing field.
Greater customer trust and employees’ commitment.
Better awareness of companies’ negative environmental and human rights impacts.
Better risk management and adaptability.
Increased attractiveness for talent, sustainability-oriented investors and public procurers.
Higher attention to innovation.
Better access to finance.
For developing countries
Better protection of human rights and the environment.
Increased stakeholder awareness on key sustainability issues.
Sustainable investment.
Improved sustainability-related practices.
Increased take-up of international standards.
Improved living conditions for people
What are the obligations for companies and their directors?
This Directive establishes a corporate due diligence duty. The core elements of this duty are identifying, bringing to an end, preventing, mitigating and accounting for negative human rights and environmental impacts in the company’s own operations, their subsidiaries and their value chains. In addition, certain large companies need to have a plan to ensure that their business strategy is compatible with limiting global warming to 1.5 °C in line with the Paris Agreement. Directors are incentivized to contribute to sustainability and climate change mitigation goals.
The Directive also introduces duties for the directors of the EU companies covered. These duties include setting up and overseeing the implementation of the due diligence processes and integrating due diligence into the corporate strategy. In addition, when fulfilling their duty to act in the best interest of the company, directors must take into account the human rights, climate change and environmental consequences of their decisions.
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