We discuss the update on the Corporate Sustainability Due Diligence Directive (CS3D)
The ESG team at Weightmans has been closely following the progress of the EU’s Directive on Corporate Sustainability Due Diligence (Directive 2024/1760), often referred to as the “CS3D”, and the complementary Corporate Sustainability Reporting Directive (CSRD). Despite the bump in the road for the widely anticipated legislation with the delayed vote in February 2024, and following extensive negotiations, the CS3D eventually came into force on 25 July 2024.
Another acronym - what is the CS3D?
The CS3D introduces substantive due diligence obligations on large and listed companies, with incremental compliance obligations. The overarching aim is to encourage sustainable and responsible corporate behaviours and enhance the protection of human rights and the environment. Companies in scope will be required to report on the actual and potential adverse impacts of their own operations, their subsidiaries and business partners in relation to the environment and human rights, as well as mitigate and minimise these effects. The new rules will shine a light on corporate actions both inside and outside of the EU, and few companies will remain unaffected by the legislation.
Supply chain due diligence in respect of sustainability issues is nothing new. In line with international best practice and guidance (UN, OECD), many organisations are already making a real difference in this space, combining established approaches to area and new, innovative methods and technologies. The move from international soft law to hard law in the form of substantive legal obligations is, however, a watershed moment and it is anticipated that the CS3D will intensify and accelerate improvements in supply chain due diligence with mandatory requirements for corporate behaviours across all sectors of the economy.
CS3D creates increased legal certainty by harmonising the legal framework across Europe. It also sets out an obligation for large companies to adopt and put into effect a transition plan for climate change mitigation aligned with the 2050 climate neutrality objective of the Paris Agreement, as well as intermediate targets.
What is the difference between the CS3D and the CSRD?
The CS3D focuses on ensuring businesses establish due diligence practices and take responsibility for the negative impacts of their activities. The Corporate Sustainability Reporting Directive (CSRD) is a complementary framework, which requires companies to disclose their social and environmental impacts with a focus on reporting in accordance with the European Sustainability Reporting Standards (ESRS). The CS3D and CSRD are complementary mechanisms with similar aims, and companies are encouraged to apply them together.
Which companies are in scope?
The CS3D will be implemented in stages, with companies having different timelines to comply, based on their size and turnover (Article 37).
- Companies with over 5,000 employees and a EUR 1.5 billion turnover need to comply by 2027
- Companies with over 3,000 employees and a EUR 900 million turnover need to comply by 2028
- Companies with over 1,000 employees and a EUR 450 million turnover need to comply by 2029
The CSRD will also start to apply to companies as early as next year 2025 if they meet two of the following three criteria, with SMEs to follow in 2027:
- Net turnover of more than EUR 40 million
- Over EUR 20 million in assets
- More than 250 employees
Companies will not need to report under both directives, but the combined legislations means that over 50,000 companies will be in scope of disclosing their sustainability information. UK and non-EU companies that are ‘Public Interest Entities’ will also fall in scope for reporting.
What does this mean for your organisation?
Companies operating in the EU will need to ensure compliance with disclosure and reporting requirements as early as the next financial year (2025). A transition period has been agreed in recognition of the extensive reporting frameworks that companies will need to establish to comply with legislation. In preparation, organisations should start to map their supply chains, educate internal stakeholders and implement a robust strategy for improved sustainability due diligence as a matter of urgency. This may be through reviewing supply chain contracts, implementing a supplier code of conduct and preparing a comprehensive risk analysis of the company operations.
Furthermore, as the directive will likely expand to SMEs in the future and will naturally impact smaller organisations who form part of larger supply chains, all companies should consider the challenges and opportunities such due diligence brings.
How can we help?
Our team of expert ESG lawyers and specialist corporate advisers can help prepare you for CS3D and CSRD compliance. This can include:
- Full materiality assessment of your organisation and establish a disclosure and reporting framework compliant with the CS3D and CSRD.
- Review of current policies and design of a bespoke sustainability policy.
- Advice on implementation of sustainability policies, including target setting and monitoring.
- Full review of existing supplier practices (including Codes of Conduct, Contracts, onboarding processes and ongoing assurance) and advice on new legal requirements/best industry practice.
We work with key partners such as Paragon Impact who can assist with calculating carbon emissions and implementing a tech-driven sustainability strategy, and Stories Evolved who offer bespoke training across the board.
If you would like to understand more about how the EU directives will affect your business and commence preparation for its requirements, please contact our ESG team or Simon Colvin, Aidan Thomson or Nick Barker.
