What is the Corporate Sustainability Due Diligence Directive (CS3D)?
The EU’s Corporate Sustainability Due Diligence Directive (“CS3D”) is a proposed due diligence framework for companies within the EU. It aims to hold companies responsible for possible abuses of human rights and the environment in their supply chains. Companies under the CS3D must conduct the necessary due diligence procedures and alter their operations and supply chains to meet CS3D standards.
The European Union Council approved the measure on 15 March this year. It is now waiting to be formally approved by the European Parliament before becoming law.
Backlash and Concessions
Although NGOs praised the legislation as a milestone for corporate accountability, it has been significantly altered from its original form, resulting in what some describe as a “watered down” version of the original directive.
Germany has been the key player in weakening the CS3D, even though the country has been vital in pushing the directive for the last couple of years (the CS3D-originally proposed in February 2022). It initially abstained from voting to move through the CS3D in February this year. This led to unrest and further abstentions among other EU member states.
Germany’s last-minute change of heart can mainly be attributed to its Free Democratic Party (“FDP”). This economically liberal, pro-business party is part of the German coalition government.
German industrialists have raised several concerns about the CS3D. Thilo Brodtmann, managing director of the Mechanical Engineering Industry Association (VDMA), stated, ‘The EU is putting the nail in the coffin for the international competitiveness of European industry.’ This criticism reflects the fear that the CS3D could burden European companies excessively, potentially affecting their global competitiveness.
Another major industry complaint was the increased bureaucracy associated with the new regulations. Wolfgang Große Entrup, director of the Association of the Chemical Industries (VCI), claimed that “companies are already suffocating in bureaucracy” and that the CS3D “would be another blow.”
The German disruption has led to several grants of vital concessions concerning the CS3D. Here are a few:
- Non-EU companies will only have to be CS3D-compliant if they generate a turnover of €450 million (previously €150 million)
- EU companies will only have to be CS3D-compliant if they have over 1,000 employees (previously 500 employees)
- Industries that have a high impact on the environment will be subject to the same threshold as all other companies (previously, they were going to be subject to lower thresholds)
What else do you need to know about the CS3D?
Despite the CS3D’s marginally reduced scope after disruption from Germany and other members, it could still lead to significant changes for all companies that do business with the EU, significantly larger ones.
The final vote for the approval of the legislation occurs on 24 April 2024. After this, companies will begin the process of becoming CS3D-compliant.
The largest companies will be given a reasonable three years to implement corporate policies to fulfill their obligations under the CS3D. In comparison, smaller companies will have a more flexible four to five years. Each member state will decide on punishment for not fulfilling CS3D obligations, providing a clear timeline and room for adjustment.
TenIntelligence Insight
The legislation is gradually watering down. However, the new CS3D will still mean significant changes for companies doing business with the EU. To avoid issues with CS3D, it’s crucial to perform due diligence on your supply chain. Remember that CS3D requirements may expand in the future, even if compliance isn’t currently mandatory for your company. Take a proactive approach and guarantee your company is CS3D-compliant from the outset. This will help mitigate potential risks and prepare your company for future CS3D expansion.
Written by
James Weeds