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Corporate Sustainability Due Diligence Directive Embedding human rights and environmental considerations in companies' operations and corporate governance

The new European Corporate Sustainability Due Diligence Directive (CS3D) is poised to intensify and accelerate improvements in supply chain due diligence, with mandatory new requirements for corporate behaviour across all sectors of the economy.

Due Diligence - what it entails

Under CS3D, companies will have a duty to identify, bring to an end, prevent, mitigate, and account for negative human rights and environmental impacts in their own operations, subsidiaries, and value chains.

The Corporate Sustainability Due Diligence Directive will require careful consideration as it passes through the legislative process is set to impose obligations upon companies to:

  • integrate due diligence into all policies — including measures to extend compliance to established supply chain relationships
  • identify actual/potential adverse impacts from company operations on human rights and the environment — within the company and its supply chain
  • act to prevent, mitigate and end any such adverse impacts — a requirement to take appropriate measures
  • establish and maintain a complaints procedure
  • monitor the effectiveness of due diligence policies
  • publicise information on their approach to due diligence — including an annual statement published on their website.

Companies will need to consider both the costs of establishing and operating the due diligence procedures and, if needed, any associated transition costs (e.g. expenditure and investments to change a company’s own operations and value chains to comply with the due diligence obligation).

Determining scope

Whilst the scope of CS3D may be subject to change, many companies will want an early understanding of whether they are in scope and what this means for them.

Direct scope

CS3D will apply directly to the following companies:

'Group 1' EU companies - EU limited liability companies with:

  • More than 500 employees
  • A net worldwide turnover of in excess of EUR150 million

'Group 2' EU companies - EU limited liability companies that:

  • Generate at least 50% of their net turnover in a defined high-impact sector (sectors with a high risk of human right breaches or harm to the environment as listed in CSDD eg. agriculture, foods, textiles, extraction of mineral resources)
  • Have more than 250 employees
  • Have a net worldwide turnover of in excess of EUR40 million

Non-EU companies that are active in the EU that:

  • Are active in the EU
  • Have a turnover generated in the EU that exceeds the net turnover threshold of group one or group two

The European Commission estimates that 13,000 EU companies and 4,000 non-EU companies will be within the scope of the CSDD as currently drafted, producing;

  • Estimated one-off compliance costs of EUR 500 to 680 million
  • Ongoing annual compliance costs of EUR 1.72 to 2.37 billion

Indirect scope

In addition to the above many other companies that are not under direct scope of CS3D (eg. subsidiaries and value chain partners) will be indirectly impacted by its requirements. For example if you are a company supplying products to a customer in direct scope of CS3D, your activities will fall within the scope of their due diligence obligations. Companies are encouraged to look at their supply chains and consider how they might be effected.

Wider benefits 

In addition to those companies that will be in scope - either directly or indirectly – the approach of CS3D can provide wider benefits for all, such as:

  • Providing a best practice approach to due diligence within supply chains, including the need for steps such as materiality assessments, supplier checks, contractual terms, complaint mechanisms etc.
  • Aligning with and enhancing your ESG/sustainability strategy, providing a framework to identify and act on environmental and human rights impacts
  • Enhancing corporate governance
  • Measuring impact and value creation, enabling communication to stakeholders

An increasing overlap with National Supply Chain Regulation?

Some countries have however already imposed human rights and environmental due diligence obligations upon companies (e.g. France, Germany and the Netherlands).

Mindful of the patchwork development of national and community-based regulation, it is important for companies within potential scope of CS3D and other national due diligence requirements to understand to nature and extent of these obligations. We can support in providing this understanding and developing the necessary those systems and processes required to ensure compliance.

If you want to understand more about how CS3D will affect your business and commence preparation for its requirements, contact Simon Colvin or Nick Barker via the details below or fill in our enquiry form and someone will be in touch.

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