Agreement

On December 14, 2023, negotiators of the EU Council and the European Parliament have reached a provisional agreement on the Corporate Sustainability Due Diligence Directive (“CSDDD” or “CS3D”), which aims to enhance the protection of the environment and human rights in the EU and globally.

Obligations

The CS3D will set obligations for large companies to report actual and potential adverse impacts on human rights and the environment, with respect to their own operations, but also those of their subsidiaries and those carried out by their business partners. The CS3D will therefore have an impact on the entire business chain of activities of large companies, covering both the upstream business partners of the company and (partially) the downstream activities, such as distribution or recycling.

In this respect, the CS3D aims at increasing transparency, fostering corporate accountability, and facilitating the transition to a sustainable economy.

Scope

The CS3D’s applicability extends to:

• Large EU limited liability companies: having 500+ employees and a net worldwide turnover exceeding €150 million; and
• Non-EU limited liability companies: having a net turnover exceeding €150 million generated within the EU, starting three years as from the Directive’s entry into force. The Commission will have to publish a list of non-EU companies that fall under the scope of the directive.

For some risk sectors (textiles, agriculture, food manufacturing, trade of mineral resources, construction), the thresholds are lower.

As a consequence, the directive targets all companies active in the EU market, even if their headquarter is outside the EU.

According to the deal reached, financial services will be temporarily excluded from the scope of the Directive. There will however be a review clause for a possible future inclusion of the financial downstream sector based on a sufficient impact assessment.

Penalties

Once implemented, the CS3D’s obligations will be enforceable in two ways:

• First, victims can claim reparations from a company in a European court if they can prove that any damages they suffered through a violation of human rights or environmental standards was caused by a company’s failure to follow proper due diligence procedures; and

• Second, and maybe more effective, national supervisory bodies will be able to sanction companies if they find that the companies do not properly implement their due diligence procedures. The fines can go as high as 5% of a company’s global turnover.

Next steps

The provisional agreement reached on a political level now needs to be endorsed and formally adopted by the EU Council and the European Parliament. Once the Directive is formally adopted, it will have to be transposed into national legislation.

In this respect, EY Law stands ready to assist you in navigating the intricacies of these new requirements, ensuring that your company not only complies with the CS3D but also emerges as a leader in sustainable and responsible corporate practices.

Stay tuned for tailored insights and comprehensive guidance to help seamlessly integrate these obligations into your business operations.