On January 30, the European Union released the final draft of the Corporate Sustainability Due Diligence Directive. If adopted, the CS3D will be the latest reporting requirement imposed on EU businesses to address environmental, social, and governance standards relating to climate change and human rights both within the company and in the supply chain. The CS3D will most likely be adopted in the spring, going into effect in phases starting in 2027.
The EU governing bodies adopted initial proposals for the CS3D in February 2022. As stated by the European Commission, “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.”
CS3D is designed to work alongside the Corporate Sustainability Reporting Directive. Adopted in November 2022, the CSRD created reporting obligations for both publicly traded and privately held businesses in the EU beginning in 2024. The directive called for the creation of European Sustainability Reporting Standards, the detailed processes used by businesses to report under the CSRD. The first round of ESRS standards were adopted in July 2023. The adoption of additional standards has hit delays, indicating that the full implementation of the CSRD may be pushed back two years.
For EU legislation like the CS3D, three proposals are passed, then negotiated to the final agreement. The proposals come from the European Commission, the European Parliament, and the European Council through individually passed legislation.
The CS3D draft agreement was released on LinkedIn by Axel Voss (EPP, DE) who serves as rapporteur for the European Parliament. Voss serves in the same capacity for the CSRD. The 435-page document includes the language of all three proposals alongside the final agreement.
There are four key takeaways from the proposal. First, companies will be required to adopt a climate plan. However, compliance with the CSRD will meet CS3D climate plan requirements.
Second, CS3D adopts a risk-based approach. Companies will be required to identify risks where they are most severe or most likely to occur, then prioritize the order of mitigation based on severity and likelihood. “An obligation to take measures only exists where a company has caused the risk itself; everything beyond this is subject to a duty of care.”
Third, Member States will regulate compliance and impose pecuniary penalties for violations, typically based on the company’s worldwide net turnover.
Finally, Member States will establish a process to allow victims of adverse impacts to have access to justice and compensation by creating civil liability. Liability is created through intent or negligence.
The implementation timeline will be as follows: EU companies with 1000+ employees must comply by 2027; EU companies with 500+ employees and net €150 million annual turnover by 2028; EU companies with 250+ employees, net €40+ million annual turnover, and that operate in high-risk sectors by 2029. Non-EU companies will have to comply if their annual turnover threshold is met by revenues in the EU.
The agreement will be voted on in a straight up or down vote, without amendment. The European Council will vote on February 9th. The European Parliament’s Committee on Legal Affairs, also known as JURI, will vote on February 13. According to Voss, following approval by JURI, a final vote by the full Parliament will most likely occur in April. The European Commission will follow a similar timeline. Once approved by all three bodies, member states will have two years to adopt the legislation into their national laws.