As global attention increasingly turns to corporate responsibility and environmental sustainability, the European Union (EU) has taken a significant step with the Corporate Sustainability Due Diligence Directive (CS3D).
This Directive aims to standardize how companies across the EU address human rights and environmental impacts within their operations and supply chains. Now, with the Directive nearing implementation, EU Member States are preparing to transpose its provisions into national law, which will bring considerable changes to corporate due diligence requirements across Europe.
What is the CS3D?
The Corporate Sustainability Due Diligence Directive, commonly referred to as CS3D, is a groundbreaking piece of EU legislation designed to enhance accountability for human rights and environmental practices within corporate operations and supply chains. Its core objective is to foster sustainable and responsible corporate behavior throughout the EU, targeting issues such as human rights abuse, environmental degradation, and climate change.
Under the CS3D, companies will be required to identify, prevent, mitigate, and account for negative impacts on human rights and the environment in their supply chains. This includes establishing due diligence processes to ensure transparency and compliance, as well as taking corrective actions where necessary.
Who is Affected by CS3D?
The Directive stipulates that Member States must impose obligations on various companies based on criteria such as size, revenue, and operational scope:
Large EU Companies: The CS3D applies to companies with over 500 employees and a net turnover of more than €150 million worldwide. These companies will have primary responsibility for implementing due diligence processes across their global supply chains.
Mid-Sized High-Risk Companies: Companies with over 250 employees and a net turnover of more than €40 million, but whose activities fall within designated high-impact sectors (such as textiles, agriculture, and mining), will also be required to comply.
Certain Non-EU Companies: Non-EU companies that generate significant turnover within the EU and meet the above thresholds will also fall under the Directive’s scope, ensuring that any entity benefiting from the EU market upholds these standards.
Key Requirements of CS3D
The CS3D defines essential obligations that Member States must impose on companies, establishing a structured approach to due diligence. These obligations include:
Risk Assessment: Companies are required to assess human rights and environmental risks in their value chains and identify areas of potential adverse impact.
Due Diligence Policies: Corporations must develop and implement due diligence policies to manage identified risks, prevent future issues, and document actions taken to address any harm.
Monitoring and Reporting: The Directive mandates regular monitoring and transparent reporting of due diligence activities. Companies will need to publicly disclose findings and actions to keep stakeholders informed.
Grievance Mechanisms: CS3D requires companies to establish effective grievance mechanisms, allowing workers, stakeholders, and communities affected by corporate activities to report violations and seek redress.
Remediation Plans: In cases where human rights abuse or environmental damage are detected, companies are obligated to provide remedies and corrective actions to mitigate harm.
Enforcement and Sanctions
To ensure compliance, the Directive includes stringent enforcement mechanisms. National authorities will be tasked with monitoring adherence and may impose financial penalties for violations. Furthermore, companies found in breach of due diligence obligations could face lawsuits within the EU, making CS3D one of the most robust frameworks for corporate accountability.
Preparing for CS3D: Practical Steps for Companies
As EU Member States prepare to integrate CS3D into national law, companies operating in or with connections to the EU must take proactive steps to prepare for compliance:
Comprehensive Risk Assessments: Companies should assess their current human rights and environmental impacts across the supply chain to identify gaps in their existing practices.
Develop Due Diligence Policies: Businesses should establish comprehensive policies to monitor and address potential adverse impacts, ensuring they align with CS3D requirements.
Enhance Transparency and Reporting: Implementing regular reporting mechanisms to provide transparency on due diligence practices will be essential.
Establish Grievance Channels: Setting up accessible grievance mechanisms will help address issues as they arise and foster trust with stakeholders.
Plan for Corrective Action: Companies should be ready to take prompt corrective measures in response to violations, aligning their operations with the Directive’s expectations.
Broader Implications of CS3D
The Corporate Sustainability Due Diligence Directive (CS3D) establishes a harmonization of Member States' legislation concerning business activities within their territories. As such, the CS3D represents a paradigm shift in corporate governance within the European Union.
By establishing that sustainability must be a central part of business operations, the CS3D not only requires Member States to promote responsible business practices but also aims to strengthen the EU's position as a global leader in corporate sustainability.
This Directive sets a new standard for companies worldwide, encouraging other regions to adopt similar measures to address pressing issues related to human rights and environmental impacts.
The European Union's Corporate Sustainability Due Diligence Directive (CS3D) was published in the Official Journal of the European Union on July 5th, 2024, and came into effect on July 25th, 2024.
Member States are required to transpose the Directive into national law by July 25th, 2026. In Portugal, the transposition process is underway, with legislative measures expected to be adopted within the stipulated timeframe.
Why Should Your Company Prepare?
The duty of care obligation is expected to cascade through all participants in the activity chain, requiring small and medium-sized enterprises (initially not subject to direct compliance) to establish effective controls to prevent and mitigate human rights violations and environmental impacts. This shift is driven by European companies subject to the Directive, which are likely to adopt a lower risk tolerance, resulting in stricter criteria and more effective internal controls for their commercial partners.
In practical terms, companies will need to design and implement a robust due diligence system capable of identifying non-compliance and preventing both current and potential harm. This is essential not only to demonstrate compliance with the duty of care but also to prove that any adverse impact arises exclusively from the actions of the commercial partner.
Additionally, EU-based companies are expected to adopt a more proactive stance and take greater leadership in monitoring, verifying, and conducting due diligence with their suppliers. Consequently, businesses that are part of the supply chain for European companies—whether directly subject to compliance or not—will gain a competitive edge if they act early and proactively to adapt to the Corporate Sustainability Directive’s criteria.
Companies that position themselves ahead of the curve in meeting these standards will not only ensure compliance but also solidify their role as preferred partners in an increasingly demanding and sustainability-driven market.
How FiO Legal Can Assist
Navigating the requirements of the CS3D and its implications for corporate operations can be complex. At FiO Legal, our team is prepared to guide your business through the new regulatory landscape. From risk assessments to compliance strategy development, we provide tailored legal support to help you integrate sustainable practices into your operations and ensure compliance with EU standards.
For further information or to schedule a consultation, please contact FiO Legal. Together, we can help you lead the way in corporate sustainability and due diligence.
By Lidiane de Carvalho
