Insurance sector response to the Corporate Sustainability Due Diligence Directive

Corporate Sustainability Due Diligence Directive (“CS3D”) is a major new piece of ESG legislation with important long term internal and external implications for insurers and other companies in the insurance sector.

Introduction to CS3D

The EU Corporate Sustainability Due Diligence Directive entered into force on 25 July 2024.

Member States must adopt and publish the measures necessary to comply with the Directive by July 2026 and apply those measures to companies on a phased basis from July 2027 to July 2029.

What companies does CS3D apply to?

CS3D applies to any company formed under the legislation of a member state that:

• has more than 1000 employees and a net worldwide turnover of more than €450m;
• falls below the above thresholds but is the ultimate parent of a group that does reach the thresholds; or
• enters into or is the ultimate parent of a group that enters into, franchising or licensing agreements in the EU in return for royalties where those royalties amount to more than €22.5m annually, and where the company or its groups net worldwide annual turnover is more than €80m.

CS3D also applies to any company formed in accordance with the legislation of a third country that:

• has a net worldwide turnover of more than €450m in the EU;
• falls below this threshold but is the ultimate parent of a group that does reach the threshold; or
• enters into or is the ultimate parent of a group that enters into, franchising or licensing agreements in the EU in return for royalties where those royalties amount to more than €22.5m in the EU, and where the company or its groups net turnover is more than €80m in the EU.

What is the thrust of CS3D?

Most importantly, CS3D sets out due diligence requirements for companies (plus associated liability provisions) in respect of their actual and potential human rights and environmental adverse impacts.  Including in this are subsidiaries and upstream and downstream supply chain business partners.

CS3D also sets out the obligation for companies to adopt and put into effect a transition plan for climate change mitigation.  The plan should aim to ensure compatibility of the business model, and of the strategy of the company, with the transition to a sustainable economy and with the limiting of global warming to 1.5C.

Environmental and human rights due diligence

Member States must ensure that companies conduct risk-based human rights and environmental due diligence by:

• integrating due diligence into their policies and risk management systems in accordance with Article 7;
• identifying and assessing actual or potential adverse impacts in accordance with Article 8; and
• where necessary, prioritising actual and potential adverse impacts in accordance with Article 9.

Companies then must act on the results of the due diligence by:

• preventing and mitigating potential adverse impacts, and bringing actual adverse impacts to an end and minimising their extent in accordance with Articles 10 and 11; and
• providing remediation for actual adverse impacts in accordance with Article 12;

There are also requirements for companies to engage externally as they undertake the above by:

• carrying out meaningful engagement with stakeholders in accordance with Article 13;
• establishing and maintaining a notification mechanism and a complaints procedure in accordance with Article 14;
• monitoring the effectiveness of their due diligence policy and measures in accordance with Article 15; and
• publicly communicating on due diligence in accordance with Article 16.

The liability aspect

Member States must set out rules on penalties, including pecuniary penalties, applicable to infringements of the provisions of national law adopted pursuant to the CS3D.

Perhaps more importantly, Member States must ensure that a company can be held liable for damage caused to a natural or legal person where:

• that person is protected by rights, prohibitions and obligations enshrined in EU and international law extensively listed in the Annex to CS3D;
• the company intentionally or negligently failed to comply with the obligations around preventing and mitigating potential adverse impacts, and bringing actual adverse impacts to an end and minimising their extent; and
• as a result of the failure, damage to the person’s legal interests that are protected under national law was caused.

The liability of the company in this regard applies irrespective of any other liability that the person may establish against subsidiaries or supply chain partners.

Insurance aspects

CS3D is very relevant to the insurance sector for several reasons:

• Several companies in the sector that have substantial operations in, or do substantial amounts of business in the EU, will be directly subject to the new requirements and liability exposures that will soon to in force.
• Others may be indirectly affected. They can expect in scope companies with which they have a business relationship to ask about their affairs as those in scope companies conduct supply chain due diligence.
• The liability provisions could make certain companies a greater insurance risk. Insurers should consider how, were an insured to be claimed against using the new right of action, policies might respond.

The UK does not have an equivalent to CS3D, but the possibility that such a development may occur is far from remote.  Against the backdrop of the current willingness of UK courts to hear claims brought by overseas claimants for overseas environmental and human rights infringements, the introduction of a CS3D equivalent would be very significant.