The Corporate Sustainability Due Diligence Directive (CS3D) requires large companies to identify, prevent, mitigate and remediate on the negative impacts of their activities on human rights and the environment. Companies are then required to implement due diligence procedures to assess risks and take corrective action, ensuring transparency and accountability.
Article proposé par Giuffrè Francis Lefebvre, filiale de notre groupe Lefebvre Sarrut (traduit de l'italien en anglais).
The legislation published on the 5th of July, aims to promote sustainable and responsible corporate behavior throughout the value chain and, after the CSRD (Corporate Sustainability Reporting Directive), is one of the most important pillars within the European Union's Action Plan on Sustainable Finance to promote sustainable economic, social and environmental development.
The new Directive requires large companies to identify, prevent, mitigate and remediate on the adverse impacts of their activities on human rights and the environment, and as part of this, companies are required to implement due diligence procedures to assess risks and take corrective action (bringing to an end, minimisation, remediation), ensuring transparency and accountability.
CS3D also aims to incentivize ethical business practices, improve sustainability and protect the interests of communities and ecosystems influenced by corporate activities.
Together with the aforementioned CSRD and the related ESRS (European Sustainability Reporting Standards), the CS3D further reinforces sustainability reporting standards for environmental, social and governance aspects.
Obligated parties
The provisions of the CS3D apply only to companies of large European size, thus established in accordance with the rules of each member countries (e.g., Italian SpA or Srl), and exceeding the following size limits referring to the last fiscal year:
- more than 1,000 employees;
- net worldwide turnover of more than 450 million euros.
The Directive also applies to non European companies generating a net turnover of more than 450 million euros. It also applies to the ultimate parent company of a group that on a consolidated basis reached that threshold in the financial year preceding the last financial year.
Different limits are also provided for companies operating under franchise or license agreements that operate in the European Union with a turnover exceeding 80 million euros, of which at least 22.5 million is derived from the aforementioned franchise or license rights. Different exemptions or obligations are also provided for large companies belonging to Corporate Groups.
In short, the range of obligated parties is limited to large companies but, indirectly, it will also involve SMEs, their business partners, as the Directive imposes the obligation of Due Diligence on social and environmental risks even when they are upstream or downstream in their supply chain through (“chain of activity”).
time of application
The Directive entered into force on July 25, 2024, and member states will have two years, by July 26, 2026, to adopt and publish laws, regulations and administrative provisions to comply with the CS3D.
Already planned is the gradual and proportional implementation of the Directive, with the following sequence:
- From 26 July 26 2027 (based on year 2026), for companies with more than 5,000 employees and a net worldwide turnover of more than 1,500 million euros;
- From 26 July 2028 (also referring to the last fiscal year prior to that date), for companies with more than 3,000 employees and a net worldwide turnover exceeding 900 million euros;
- From 26 July 2029, the Directive will come into effect for all companies with more than 1,000 employees and/or a turnover exceeding 450 million euros.
What are the obligations ?
The CS3D imposes a number of obligations on companies to ensure the above-mentioned sustainable and responsible behavior along the value chain. Specifically, companies must integrate “due diligence” into their policies and risk management systems by providing:
- the description of their approach on due diligence even in the long term;
- the definition of a code of conduct outlining rules and principles to be followed by the company and direct and indirect business partners;
- the description of the company's processes put in place to integrate due diligence as well as the measures taken for the verification of compliance with the code of conduct, including by business partners.
It is also essential for obligated parties to identify and assess adverse impacts on human rights and the environment, prioritizing those that are most serious and likely to occur, such as child labor, labor exploitation, pollution, deforestation, and damage to ecosystems.
Companies should also establish reporting tools (notification mechanism) and grievance channels (complaints procedure) for individuals or organizations that do business with the company, taking measures to prevent retaliation. Effective stakeholder engagement is considered essential, through transparent consultations with employees, their representatives, communities and other groups whose rights or interests might be influenced by company activities.
Businesses must also take appropriate measures to prevent, bring to an end or minimize adverse impacts by developing prevention action plans with timelines and indicators for improvement. It is necessary, again as provided in the Directive, to modify business practices to reduce all the advsere impacts mentioned above.
The verification and monitoring of the efficacy of measures must be periodic, based on qualitative and quantitative indicators, and involve stakeholders.
Companies must report due diligence policies and measures in accordance with the CSRD Directive and the ESRS principles, ensuring transparency and accountability in their operations and along the value chain.
In case of non-compliance, the CS3D provides for a range of sanctions to be established by member states, including fines no less than 5 percent of the company's worldwide net turnover.
