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The Corporate Sustainability Due Diligence Directive (hereinafter the “Directive”) was formally approved on 24 April 2024. This is another step toward implementing the comprehensive sustainability strategy of the EU, which has committed itself, in Regulation (EU) of the European Parliament and of the Council (2021/1119), to achieve climate neutrality by 2050 and to reduce emissions by at least 55% by 2030. Member States will have two years from the Directive’s publishing in the EU Official Journal to implement it in their national legislations.

As a result, another directive, which in short is called the CS3D (or CSDD and CSDDD), has been introduced in non-financial reporting. This Directive provides rules for corporate due diligence with regard to internal operations, the value chain and direct and indirect relationships arising from those operations, focusing primarily on the textile industry, agriculture, extraction and production. This is the first regulation that requires mandatory disclosure of decarbonisation plans in compliance with the anti-global warming strategy of the Intergovernmental Panel on Climate Change (IPCC).

The CS3D’s primary principles are similar to those provided in other EU sustainability directives and include the following:

• Incorporating due diligence in corporate policies;
• Identifying and considering real or potential adverse impacts on human rights and environment, and preventing or mitigating potential impacts;
• Terminating or mitigating effective impacts;
• Introducing and maintaining a procedure for handling complaints;
• Monitoring the policy’s and due diligence measures’ effectiveness;
• Communicating due diligence to the public; and
• Fighting climate change (by adopting and implementing a transition plan in compliance with the goals of the 2015 Paris Agreement, i.e. determining detailed methods of resolving the climate change and maintaining global warming below 1.5 °C).

The new rules (with the exception of the communication duty) will gradually apply to EU companies (as well as non-EU companies, which are reaching the same turnover thresholds in the EU):

- An entity will be obliged to report under the CS3D Directive once the entity or a group meets the CS3D criteria in two successive accounting periods.

According to the EU Commission, it will be both citizens (e.g. in terms of improved protection of human and labour rights, healthy environment, increased trust in economy, more transparent choices between products and services, better availability of justice) and the society (in terms of the harmonised legal framework in the EU, which generates legal certainty and equal conditions, bigger trust by customers, improved awareness of society’s impact on living conditions, increased attractiveness for both investors and employees, enhanced risk management) to benefit from the CS3D. Last but not least, the Directive should also be valuable for developing countries (better environmental and human rights’ protection, increased awareness of stakeholders regarding key sustainability areas, investments in sustainability, improved living conditions). Compliance with the CS3D could become another certification tool for loans and contracts.

The CS3D will be enforced at two levels (the EU):

1. At the administrative supervision’s level: Member States will designate an authority to supervise and enforce the rules, including through injunctive orders and effective, proportionate and dissuasive penalties (in particular fines). At the European level, the Commission will set up a European Network of Supervisory Authorities that will monitor compliance with applicable conditions and impose sanctions; and
2. At the civil level, enforcement primarily involves stakeholders who will have to be provided with compensation from the Member States for damage resulting from failure to comply with the conditions (e.g. NGOs will be able to sue corporations for failure to discharge ESG obligations).

On 23 February 2022, the Commission approved a draft of the CS3D Directive, on which it was subsequently working for two years. Even though the currently proposed version of the Directive was finally approved, several surprising twists occurred in connection with the CS3D: the progressive and “green” Germany first vetoed the proposal in the Brussels and it was unclear whether it will be passed. Italy then joined Germany in criticising the proposal due to unnecessary administrative burden and a too high number of affected companies. Moreover, the CS3D should replace similar existing legislation, specifically the German Supply Chain Act, in Germany. The European Commission’s Chairwoman Ursula von der Leyen criticised the proposal’s excessive number of regulations applying to small and medium-sized enterprises. The CS3D’s requirements were reduced – the implementation deadline was extended and the Directive’s scope was narrowed – and the proposal was approved in the final voting. The currently approved version covers about one half of the companies, to which the Directive was to originally apply. Chances are that representatives newly elected in the European elections in June 2024 may change the Directive’s text.

The adopted version is available here.

Please visit our blog for more information on the ESG.

Jiří Vidiečan
vidiecan@clarksonhyde.cz