The European Union recently released the final draft of the Corporate Sustainability Due Diligence Directive (CS3D), which will impose reporting requirements on EU businesses to address environmental, social, and governance standards related to climate change and human rights. The CS3D will apply both within the company and in the supply chain. It is expected to be adopted in the spring and will go into effect in phases starting in 2027.
The initial proposals for the CS3D were adopted by EU governing bodies in February 2022. According to the European Commission, the directive establishes a corporate due diligence duty that includes identifying, ending, preventing, mitigating, and accounting for negative human rights and environmental impacts. It also requires certain large companies to have a plan to ensure their business strategy aligns with limiting global warming to 1.5°C in line with the Paris Agreement.
The CS3D will work alongside the Corporate Sustainability Reporting Directive (CSRD), which was adopted in November 2022. The CSRD creates reporting obligations for publicly traded and privately held businesses in the EU. The first round of European Sustainability Reporting Standards (ESRS) was adopted in July 2023. However, the adoption of additional standards has been delayed, potentially pushing back the full implementation of the CSRD by two years.
The CS3D draft agreement was released by Axel Voss, a German European Parliament member who serves as the rapporteur for both the CS3D and the CSRD. The document includes the language of all three proposals alongside the final agreement.
There are four key takeaways from the CS3D proposal. First, companies will be required to adopt a climate plan, but compliance with the CSRD will fulfill the CS3D climate plan requirements. Second, the CS3D adopts a risk-based approach, requiring companies to identify and prioritize mitigation measures based on severity and likelihood. Third, Member States will regulate compliance and impose penalties based on a company’s worldwide net turnover. Finally, Member States will establish a process for victims of adverse impacts to seek justice and compensation through civil liability.
The implementation timeline for the CS3D is as follows: EU companies with 1000+ employees must comply by 2027, EU companies with 500+ employees and net €150 million annual turnover by 2028, and EU companies with 250+ employees, net €40+ million annual turnover, and operating in high-risk sectors by 2029. Non-EU companies will also have to comply if they meet the annual turnover threshold through revenues in the EU.
The agreement will be voted on without amendments. The European Council will vote on February 9th, and the European Parliament’s Committee on Legal Affairs will vote on February 13th. After approval by all three bodies, member states will have two years to adopt the legislation into their national laws.
