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The EU Corporate Sustainability Due Diligence Directive - What you need to know

15 November 2023

True Diligence – preparing for a new era of corporate responsibility

Originally published on 15 November 2023 and updated on 28 March and 20 June 2024.

On 24 May 2024, the EU Corporate Sustainability Due Diligence Directive ('CS3D') reached the final stage of its approval process.  The CS3D imposes an unparalleled and extensive corporate governance duty on many companies based in and outside the EU.

Unlike most other ESG obligations currently in force, this will not be a "comply-explain" obligation, but a "comply or be liable" obligation. It will require action beyond mere reporting, and it comes with regulatory, civil enforcement and compensation mechanisms.  

CS3D aims to foster sustainable and responsible corporate behaviour by establishing due diligence requirements on both human rights and the environment. More specifically, its requirements relate to identifying, managing, prioritising, preventing, mitigating and eliminating adverse impacts of chain of activities of companies' operations, the operations of their subsidiaries, and business partners on human rights and the environment.  

Will this apply to your company?

Companies falling within scope will help to create a critical mass of the business market to affect behavioural changes in support of a sustainable and just economy. Applicability criteria mainly relate to turnover in the last financial year for which annual financial statements have or should have been adopted. 

The Directive applies to companies established in the EU with over 1000 employees and a net worldwide turnover over €450million. It also applies to a company which did not meet these two thresholds, but is the ultimate parent company of a group that reaches the thresholds in the last financial year for which consolidated annual financial statements have been or should have been adopted. 
It has extra-territorial applicability, catching third-country companies, i.e. those established outside the EU, with over €450 million of turnover in the EU in the financial year preceding the last financial year. It also applies to a third-country company which did not meet this turnover threshold, but is the ultimate parent company of a group that did in the financial year preceding the last financial year. 
There are further criteria related to franchising and licensing agreements in the EU with a specific thresholds of royalties in excess of €22.5million combined with a net worldwide turnover or turnover within the EU of €80million (depending on whether the company is formed in an EU member state or a third country).

If you fall outside of the direct scope, then you should also consider whether you are in the chain of activities of any other entity who is in direct scope. If you are in their chain of activities, then they will cascade their CS3D requirements down to you.

When will companies need to comply by?

Once the Directive enters into force, there will be a phased-in approach to compliance for companies within scope of between three and five years.  This will be based on employee numbers and turnover.  The largest companies formed in an EU Member State with 5000+ employees and a net worldwide turnover of more than €1,5 billion will be required to comply within three years of entry into force, i.e. in 2027.  Those companies with 3000+ employees and a net worldwide turnover in excess of €900 million would be required to comply within four years.  And the remaining companies with over 1000 employees and a net worldwide turnover of €450 million would be required to comply within five years.  Similar thresholds apply to third country companies which are also phased in over a three to five year period from entry into force.   

What is the impact of this scope? 

Whilst this Directive is primarily targeted at large companies its impact will be felt by those companies, including small and medium-sized enterprises (SMEs) and other business partners, in its chain of activities with whom it has a business relationship. The CS3D targets companies in the real economy and the European Commission will review the need for specific measures related to the financial sector within two years of the Directive's entry into force.  

The key requirements for your company

The Directive requires companies to look at the adverse impacts of their operations, the operations of their subsidiaries and in the chain of activities of business partners on both the environment (including climate) and human rights. This is in keeping with the emerging trend of a more holistic and integrated approach to sustainable business in the context of viewing human rights and environmental due diligence together. In addition to identifying, preventing, minimising, prioritising, mitigating and ceasing adverse impacts (and potential adverse impacts), companies must also:

  • integrate environmental and human rights due diligence in all corporate policies and risk management systems;
  • develop and maintain notification and complaints mechanisms;  
  • monitor, review, assess and verify the effectiveness and implementation of their due diligence policy and measures; and;
  • disclose and report.

A further key provision is the requirement to develop and implement a detailed climate mitigation transition plan which ensures that the company's business model and strategy are aligned with the transition to sustainable economy and the 1.5°C Paris Agreement temperature goal.  This includes requiring the company to set time-bound climate-related targets for scope 1, 2 and, where relevant, scope 3 emissions and to describe their progress against these.  

What are the implications of non-compliance?

Not adhering to the CS3D requirements will come at a cost to companies with potential consequences including:

  • maximum fines of up to 5% net global turnover;
  • less favourable consideration due to inclusion as award criteria in EU public procurement;
  • removal of goods from the market; and 
  • potential civil liability claims/class actions arising from a failure to comply with the due diligence process.

C3SD also introduces a new network of supervisors within EU Member States to ensure compliance, with each national authority able to call for remedial actions and impose penalties. 

What's next?

Each Member State then has two years for transposition into national law. Notwithstanding, a growing number of Member States have or are in the process of putting in place mandatory human rights due diligence requirements. These, and the Directive itself, build on and cement the existing practices by businesses through adherence to voluntary frameworks (e.g. the UN Guiding Principles on Business and Human Rights, the OECD Guidelines for Multinational Enterprises, and the OECD Due Diligence Guidance for Responsible Business Conduct). 

The time to start preparing is now, not later

Whilst the precise final wording of the Directive remains to be agreed, there are six practical steps you can take now to accelerate your readiness for CS3D:

  • Step 1
  • Step 2
  • Step 3
  • Step 4
  • Step 5
  • Step 6
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Create a task force of your key internal stakeholders

Create a task force of your key internal stakeholders to determine whether the impact of the CS3D will directly apply (based on criteria such as net turnover, employee numbers, market sector and accounting policies), or indirectly, due to your role in another company's value chain.
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Map your value chain and business relationships

Map your value chain and business relationships. Collate the data. 
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Highlight the human and social value impact of the requirements across your value chain 

Highlight the human and social value impact of the requirements across your value chain including the risk of human trafficking, living wage, working conditions and employee health and well-being. 
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Identify what you are already doing

Identify what you are already doing e.g. procurement questionnaires, and identify gaps in your current processes.
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Undertake materiality assessments

Undertake materiality assessments to identify relevant human rights and environmental impacts across your value chain and prioritise material issues in your action plan. 
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Design and align your climate transition plan

Design and align your climate transition plan ready for implementation.

Starting with the above six actions positions your company part way on the journey to implementation of the Directive's requirements. Understanding what the actual and potential areas of impact across your global chain of activities on human rights and the environment is a critical foundation for ensuring a targeted and effective approach to implementation. The old adage 'don't let the perfect be the enemy of the good' applies here.

It is better to make progress on some areas than to wait and do nothing. Unlike other legislation, the CS3D firmly moves companies out of the sphere of merely reporting your plans or your intentions to implementing them. Undertaking these practical steps now will accelerate adoption and enable greater resilience of the company.

Now is the time to demonstrate your commitment to sustainable and responsible corporate behaviour.

If you would like help in developing your strategic response to CS3D please contact our team: 

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The EU Corporate Sustainability Due Diligence Directive - What you need to know