On 24 May 2024, the EU Council adopted the draft Corporate Sustainability Due Diligence Directive (CS3D) (EU Council Press Release).
Background
The CS3D was first introduced in February 2022 (European Commission Press Release), with the aim of fostering sustainable and responsible corporate behaviour and embedding human rights and environmental considerations in companies' operations and corporate governance.
The Council and EU Parliament subsequently introduced a number of key changes to the text before reaching provisional political agreement in December 2023 (Council Press Release). After further political wrangling, the final compromise text was endorsed by the Council in March 2024 (Final Compromise Text: CS3D), and adopted by the Parliament in April 2024 (Parliament Press Release).
The final agreed text includes significant dilutions to the initial proposals. In particular, the thresholds determining whether companies will be subject to the CS3D have been amended, resulting in fewer companies being in scope.
Scope and transition plan
As adopted, the CS3D will apply to:
- EU companies with more than 1000 employees and a net worldwide turnover exceeding EUR 450 million;
- non-EU companies generating a net turnover exceeding EUR 450 million within the EU; and
- companies with franchising or licensing agreements in the EU with a net worldwide turnover of more than EUR 80 million where at least EUR 22.5 million was generated by royalties.
The CS3D requires in-scope companies to integrate due diligence measures into their policies and risk management systems to identify and address human rights and environmental risks that result from their own operations, as well as those of their subsidiaries and business partners.
In-scope companies will also be required to adopt a transition plan ensuring that their business model and strategy are compatible with the Paris Agreement on climate change. However, companies already subject to the Corporate Sustainability Reporting Directive (EU) No. 2022/2464 (see FC Features 16 December 2022 and 1 August 2023) are exempt from this obligation.
Member States will be required to designate a supervisory authority charged with monitoring compliance with the due diligence and climate transition plan requirements, while non-EU companies will be required to designate an authorised representative based in the Member State in which they operate who will communicate with the appropriate supervisory authorities on their behalf.
Failure to comply with the obligations set out in the CS3D could result in a fine of up to 5% of a company's net worldwide turnover.
Phased implementation
The CS3D will enter into force 20 days after publication in the Official Journal and Member States will then have two years to implement the new rules. Application of the CS3D will be phased in, with the requirements applying to in-scope companies in three phases from 2027 onwards. Specifically in relation to non-EU companies, the requirements will apply as follows.
- From 2027 – to: (a) EU companies with more than 5000 employees and a net worldwide turnover of more than EUR 1.5 billion; and (b) non-EU companies with a net turnover of more than EUR 1.5 billion in the EU.
- From 2028 – to: (a) EU companies with more than 3000 employees and a net worldwide turnover of more than EUR 900 million; and (b) non-EU companies with a net turnover of more than EUR 900 million in the EU.
- From 2029 – to all other companies within the scope of the Directive.
First published on the Corporate News Service on 24 May 2024.
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