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), in its value chain with whom it has a business relationship. The CS3D targets companies in the real economy but also includes the financial sector (a point currently under debate).
The key requirements for your company
The Directive requires companies to look at the adverse impacts of their own activities, their subsidiaries and across their value chain 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, mitigating and ceasing adverse impacts (and potential adverse impacts), companies must also:
- integrate environmental and human rights due diligence in all corporate policies;
- develop and maintain a grievance mechanism;
- 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 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.
The Parliament proposes companies with over 1000 employees on average have a relevant and effective AGM-approved policy in place. This is to ensure that part of any variable remuneration for directors is linked to the transition plan.
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;
- exclusion from EU public procurement;
- removal of goods from the market;
- impacts on Directors' bonuses; 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 sanctions.
What's next?
Once the trilogue is completed and the final text agreed, CS3D enters into force 20 days after publication in the Official Journal of the European Union. 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).
