On April 24, 2024, the European Parliament voted to adopt the Corporate Sustainability Due Diligence Directive ("CS3D"). As described in a recent Jones Day Alert, this followed the Council of the European Union ("the Council") voting to approve the CS3D on March 15, 2024, after many weeks of delays and last-minute revisions.
The revised text of the CS3D, described by the Council as a "compromise package," is significantly toned down from earlier drafts, applying to fewer companies and featuring a staggered timeline for phase in. Nevertheless, once in force, the CS3D will impose extensive due diligence obligations on a significant number of large EU and non-EU companies.
As noted in our prior Alert, the CS3D will have far-reaching consequences, affecting not only those directly within scope, but also those outside of scope, as the due diligence and governance obligations will have extensive follow-on effects on contractual relationships with third parties.
CS3D Overview
A concise summary of the purpose of the CS3D is set out in Article 1:
This Directive lays down rules on:
- obligations for companies regarding actual and potential human rights adverse impacts and environmental adverse impacts, with respect to their own operations, the operations of their subsidiaries, and the operations carried out by their business partners in companies' chain of activities;
- liability for violations of the obligations mentioned above; and
- obligations to adopt and put into effect a transition plan for climate change mitigation which aims to ensure, through best efforts, compatibility of the business model and strategy of the company with the transition to a sustainable economy and with the limiting of global warming to 1.5°C.
Scope of Application
Companies (including regulated financial institutions) incorporated under the laws of an EU member state ("EU companies") and the laws of a third country ("non-EU companies") come within the scope of the CS3D if any of the following thresholds apply:
EU companies
- "Very large" companies that "generate" more than €450 million net worldwide turnover in each of the last two consecutive financial years and have more than 1,000 full-time employees.
- Ultimate parents of "very large" companies.
- Companies subject to franchising or licensing agreements in the EU that "generate" royalties of more than €22.5 million and more than €80 million of net worldwide turnover (individually or on a consolidated basis as the ultimate parent).
Non-EU companies
The turnover thresholds applicable to EU companies mirror those for non-EU companies, save that there is no additional threshold regarding the number of employees.
Due Diligence Obligations
In scope, companies must have effective due diligence policies to identify, prevent, and mitigate potential and actual "adverse impacts" on human rights and environmental matters within their business activities. The obligation to carry out risk-based due diligence covers the following:
- Integrating due diligence into policies and risk management systems;
- Identifying and assessing actual or potential adverse impacts;
- Preventing and mitigating potential adverse impacts;
- Remediating actual adverse impacts;
- Monitoring the effectiveness of due diligence policies and measures taken; and
- Communicating publicly on due diligence.
These obligations also extend to the activities of direct and indirect business partners. These partners include those for whom the company has a commercial agreement linked to their operations or those that still carry out business operations, even if there is no formal commercial agreement in place.
Climate Plan Obligations
In addition to carrying out risk-based due diligence, companies covered by the CS3D will be required to "put into effect" a "transition plan for climate change mitigation" that is compatible with: (i) the transition to a sustainable economy; (ii) the commitments of the Paris Agreement to limit global temperature rises to 1.5℃; and (iii) the objective of climate neutrality as established in the EU Climate Law.
Next Steps
The CS3D now needs to be formally endorsed by the Council, signed, and published in the EU Official Journal. It will then enter into force 20 days later. Member states will have two years from this date to transpose the new rules into their national laws.
The new rules (except for the communication obligations) will apply gradually to EU companies (and non-EU companies reaching the same turnover thresholds in the EU):
- 2027: Companies with over 5,000 employees and worldwide turnover higher than €1500 million;
- 2028: Companies with over 3,000 employees and a €900 million worldwide turnover;
- 2029: All remaining companies within the scope of the directive (including those over 1,000 employees and worldwide turnover higher than €450 million).
Penalties for Non-compliance
The CS3D obliges EU member states to empower a regulatory authority to enforce the CS3D and impose fines of up to 5% of the net worldwide turnover of the non-compliant company and publicly disclose the company responsible and the nature of its infringement.
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.