Following a turbulent political process, the European Union is on track to implement the Corporate Sustainability Due Diligence Directive (CS3D), following its approval by the European Parliament in April 2024.

Once adopted, CS3D will mandate that EU member states enact laws obligating covered companies to substantially enhance their due diligence practices regarding environmental and human rights issues in their business operations.

Due Diligence Obligations

The version of CS3D passed by the European Parliament has undergone significant revisions from the original draft presented by the European Commission in February 2022. These changes were largely driven by concerns from several EU member states over the potential administrative burdens the directive might impose on companies.

According to the Parliament-approved text, companies that fall within the directive’s scope will be required to:

  • Incorporate due diligence into their policies and risk management frameworks, ensuring that due diligence is conducted based on risk assessments;
  • Identify and evaluate actual or potential adverse environmental and human rights impacts arising from their operations, or those of their subsidiaries;
  • Implement measures to prevent, or where prevention is not feasible, mitigate potential adverse impacts on the environment or human rights;
  • Adopt appropriate actions to avoid or mitigate any actual adverse environmental or human rights impacts;
  • Rectify any adverse impacts on human rights or the environment that the company has caused; and
  • Develop and implement a transition plan for climate change mitigation, aiming to align the company’s business model and strategy with a sustainable economy and the goal of limiting global warming to 1.5°C, in accordance with the Paris Agreement.

Scope of Application

The European Parliament’s version of CS3D targets EU companies with over 1,000 employees and a net global turnover exceeding €450 million, including subsidiaries. It also applies to non-EU companies with over €450 million in EU turnover across two consecutive years. The directive includes provisions for companies below these thresholds if they engage in certain franchising or licensing agreements. Exemptions exist for the financial services sector, where certain investment managers and funds are out of scope. CS3D will be phased in over three years, starting in 2027, affecting fewer companies than the Corporate Sustainability Reporting Directive, but it will have wide-ranging effects due to global supply chains.

Enforcement, Penalties, and National Implementation

EU member states must appoint a national supervisory authority to enforce CS3D, with penalties for noncompliance set at a minimum of 5% of a company’s net global turnover. The directive introduces a civil liability framework, allowing individuals to seek damages for breaches of due diligence obligations. Before CS3D can be enacted, it requires formal approval from the Council of the European Union and publication in the EU Official Journal. Member states will have two years to integrate the directive into national law.