The Corporate Sustainability Due Diligence Directive (CS3D) is set to become EU law after the Parliament approved the final text on 24 April 2024. The new rules aim to reform value chain governance, creating new obligations for large companies based or trading in the EU to identify and address human rights and environmental risks in their value chains. Once endorsed by the Council and published in the EU Official Journal, EU Member States will transpose the Directive into domestic law and ensure larger companies will be expected to comply with the rules first before other companies fall into scope over the next five years.
Controversially, during the trilogue negotiations, approval in the Council was only secured after last-minute concessions, resulting in a considerable reduction in the number of companies required to adhere to the Directive’s requirements. The legislation will now cover EU companies with more than 1,000 employees (up from 500) and a €450m annual turnover (previously €150m) and non-EU companies with a net turnover of €450m in the EU/EEA.
Campaign groups also pushed for the legislation to label certain industries, primarily textiles, agriculture, mineral resources, metal production, and construction, as ‘high-risk’ sectors because of their vulnerability to human rights abuses and/or environmental risks in their supply chains. However, these sectors were not included in the final legislative text after political pushback. In addition, the Directive’s scope only places an obligation to assess “the chain of activities” of in-scope companies but leaves out service providers such as financial undertakings. In other words, financial undertakings focused on investment only have to carry out due diligence to the upstream part of their business (i.e. the production of goods or provision of services) but not the downstream activities of businesses that receive financing, their services and/or products.
Although the CS3D has been watered down in terms of scope and timeline, its approval marks a significant first step towards mitigating environmental risks and challenges, enhancing oversight and monitoring duties, and better data gathering and reporting across clearly defined metrics. In addition, individuals’ capacity to bring actions against companies thought to be negligent or in reckless breach of the Directive’s obligations will depend on each Member State’s implementation. As such, it will likely be a while before the mechanics and impact of the Directive are fully understood.
The Directive is likely to have an impact on UK companies. Large companies with a turnover within the legislation’s threshold that operate in the EU, and smaller companies in EU companies’ value chains that fall under the legislation’s scope will likely be affected. This could open them to legal liability concerns if found guilty of non-compliance in the EU, which raises questions about how legal disputes may be settled between both sides under the Directive.
In the UK, the House of Lords is currently considering an equivalent private members’ Bill. However, it is still in its early stages, and the government has not supported its enactment at the time of writing.