The legislative work regarding the Corporate Sustainability Due Diligence Directive, also known as CS3D, is in full motion.
In December 2023, the Commission, Parliament and Council reached a preliminary political agreement on the directive. The directive, often abbreviated as CSDDD or CS3D, will likely be finally adopted during the first half of 2024 and will then be implemented in the EU member states through national legislation. After a two-year implementation period, the rules will thus come into force in 2026. The requirements of the directive will be phased in for various companies depending on certain aspects, such as the company's size and turnover. Here follows a summary of what the rules will entail. (A Swedish version of this article is available here.)
Obligation to implement due diligence regarding sustainability
According to the proposal, the directive will constitute an obligation for certain companies, primarily larger ones, to introduce due diligence processes in their operations and in their value chains. The aim is to prevent adverse impacts on human rights and the environment. This includes aspects such as forced labor, exploitation of workers and child labor, as well as environmental aspects such as emissions, deforestation and water consumption. Given that value chains are included, smaller companies will also be affected, at least indirectly, if they are part of a value chain, such as a supplier to a company that is directly covered by the rules.
What requirements will be imposed on companies?
According to the directive, the corporate management will be obliged to ensure that the company fulfils its obligations in terms of due diligence. To achieve this, the company will need to actively work on identifying adverse impacts on human rights and environment impacts and remedying these as well as following up and preventing future adverse impacts. The obligation will apply to both the company's own operations and in value chains, such as supply chains.
Companies must also have a plan to ensure that the company's business model aligns with limiting global warming in accordance with the 1,5-degree goal.
What does this mean?
The draft directive contains several steps. It involves integrating due diligence into the company's policies and implementing a specific due diligence policy. In the due diligence policy, the company must report its due diligence strategy and describe how it applies due diligence, i.e., in principle, what control and follow-up measures that are taken. There should also be a code of conduct in place for employees and subsidiaries, and the company should verify compliance with the code of conduct and show how it extends the application to business partners, e.g., subcontractors.
The due diligence work itself then involves identifying actual and potential adverse impacts on human rights and environmental aspects, both in the company's own operations and in value chains. This work includes consulting with potentially affected groups, e.g., workers.
Companies must prevent or limit potential adverse impacts that have been or should have been identified and take appropriate measures to stop actual adverse impact that have been or should have been identified. In some cases, it may be necessary to establish an action plan with clearly defined measures and deadlines, including quantitative indicators to measure improvements. It may also be appropriate to require contractual assurances of compliance from a business partner or require the business partner to develop a corresponding action plan.
What may be the consequences if the rules are not followed?
Supervisory authorities will be established that will be able to issue sanctions if the rules are not adhered to. In addition, under the proposal, individuals who have been affected as a result of the rules not being followed will be entitled to compensation.
The supervisory authorities at national level will cooperate cross-border and will have the opportunity to publish the results of inspections and criticism (so-called "naming and shaming") as well as impose sanctions of up to five percent of the company's global net turnover.
Which companies will be covered?
The legislation will apply to EU companies (i.e., companies formed in accordance with a member state's legislation) and parent companies with over 500 employees and a global turnover of more than 150 million euros. The obligations will also apply to EU companies with over 250 employees and with a turnover of more than 40 million euros, if at least 20 million is generated in any of the following sectors: manufacturing and wholesale of textiles, clothing and footwear, agriculture including forestry and fisheries, manufacturing of food products and the wholesale trade of agricultural raw materials, extraction and wholesale of mineral resources or manufacturing of related products and the construction industry. The legislation will also apply to non-EU companies and parent companies that have an equivalent turnover within the EU.
How do we prepare as a company?
Even though there is some time before the formal obligations are introduced, many companies will face challenges with preparatory work regarding CS3D. This may involve mapping of subcontractors, as well as developing and implementing policy documents and procedures for control and follow-up.
EY has a broad competence in the sustainability field and regularly conducts reviews and due diligence in the areas of climate, working conditions and human rights. EY provides control systems within the framework of CS3D that can be customized based on the company to include various aspects such as human rights, working conditions, regulatory compliance, tax legislation, as well as climate and environment.
We are happy to help you get started or further develop your sustainability work and prepare you to be in line with the upcoming requirements.
Contact information:
- Andreas Blomquist - Partner – Capital Markets, Regulatory, EU and Competition Law - 073 684 52 12
- Johan Wijk - Director - Labor and Employment Law - 070 607 32 90
- Cornelia Clarén – Associate - Financial regulations, Digital Law and Corporate Law - 072 395 69 97
