A Corporate Sustainability Due Diligence Directive (CS3D | CSDDD) Explainer - Last Updated: July 17, 2024
What is the EU Corporate Sustainability Due Diligence Directive (CS3D or CSDDD)?
The Corporate Sustainability Due Diligence Directive (abbreviated as CS3D or CSDDD) is an EU sustainability and ESG (environmental social governance) standard adopted by the European Union Commission, with a final draft released 30 January 2024. The CS3D is a regulation designed to help companies and businesses identify, prevent, mitigate, and account for environmental impacts and human rights abuses from their supply chains and sourcing operations. Within the law, the Commission refers to supply chains or value chains as 'chains of activities'.
EU member states voted in favor of a slightly modified CS3D version on 15 March 2024, which removed civil liability provisions allowing trade unions to sue noncompliant firms and increased the revenue eligibility threshold.
The CS3D is a companion law to the EU Corporate Sustainability Reporting Directive (CSRD), which bears acronym and intent similarity, but represents a different set of regional sustainability reporting and disclosure requirements.
The CS3D will come into force on 25 July 2024 and apply to the following companies and sectors:
This proposal applies to a company's direct operations, subsidiaries, and their value chains (direct and indirect established business relationships). Small and medium enterprises (SMEs) are not directly impacted by the disclosure and reporting requirements this proposal, however many of these businesses are suppliers within larger corporate supply chains of companies who do meet the CS3D's supply chain due diligence reporting criteria.
As the European Commission states:
“This Directive establishes a corporate due diligence duty. The core elements of this duty are identifying, bringing to an end, preventing, mitigating and accounting for negative human rights and environmental impacts in the company’s own operations, their subsidiaries and their value chains. In addition, certain large companies need to have a plan to ensure that their business strategy is compatible with limiting global warming to 1.5 °C in line with the Paris Agreement.”
Corporate Sustainability Due Diligence Directive (CS3D | CSDDD) Implementation Timeline
CS3D is an EU directive on corporate sustainability due diligence designed to foster sustainable and responsible corporate behaviour throughout global value chains
The CS3D was first proposed by the European Commission in February 2022, and is expected to be passed in April 2024. The CS3D is expected to be adopted into law in 2024.
Based on the EU's most recent guidance, the timeline for the CS3D coming into effect is:
- 2023 - Lawmakers in the European Parliament voted 366-225 on June 1 to provisionally approve the CS3D as a regulatory mandate. From here, official negotiations between the EU Parliament and the European Council on the CS3D clarified most of the terms and provisions of the initial CS3D
- 2024 - The final draft of the Corporate Sustainability Due Diligence Directive (CS3D) was voted on by members of EU Parliament in April, then passed into EU law on 25 July 2024
- 2026 - The CS3D will be transposed into national law by the Member States by 26 July 2026
- 2027 - 2027 will be the first year large, eligible businesses in CS3D Group 1 will need to comply with the law, including its reporting and disclosure standards
- 2028 - Companies and businesses in Group 2 will need to begin their CS3D reporting and disclosure. Smaller companies may be able to delay applying the new rules by one additional year
- 2029 - Group 3 companies must begin reporting, disclosure, and compliance under CS3D
This means companies in Groups 1 & 2 (EU-based with over 3,000+ employees and €900 million+ annual revenue) should start planning and preparing to implement their CS3D compliance approach by 2026 in order to be ready for the 2027 CS3D reporting cycle to stay compliant. It's not yet known exactly how the EU Commission or specific member states will penalize businesses who fail to comply with the CS3D, but according to the Commissions’ requirements within the Directive, non-compliant eligible organizations could have their company’s goods taken off the market, face fines as high as 5% of their global revenue, or – for non-EU international companies – be banned being able to sell into the EU.
Why is the EU Introducing the Corporate Sustainability Due Diligence Directive (CS3D)?
The goal of the EU Corporate Sustainability Due Diligence Directive is to promote full economic transformation towards sustainability, including value chains. Supply chains often represent 60-90% of a company's environmental impacts and carbon emissions, which makes supply chain sustainability and due diligence critical aspects of the region's overall sustainable transition plan. Human rights protections for supply chain workers are also of great importance, falling within the scope of the CS3D as well. The EU wants to ensure all supply chain workers have access to safe, healthy, and humane work conditions.
Currently, Germany has already passed its own national Supply Chain Due Diligence Act, known in German as Lieferkettensorgfaltspflichtengesetz (LkSG). LkSG went into effect on January 1, 2023 for organizations with over 3,000 employees currently doing business in Germany. Other EU countries like the Netherlands have also proposed similar supply chain due diligence and human rights laws.
How to Comply with the Corporate Sustainability Due Diligence Directive (CS3D)'s Reporting Requirements?
In order to comply with the EU CS3D regulations, eligible companies will need to:
- Integrate sustainability and huamn rights due diligence into their procurement policies
- Identify actual or potential adverse human rights and environmental impacts in their supply chain
- Prevent or mitigate potential negative impacts in their supply chains based on the CS3D's yet-to-be-published criteria
- Bring to an end or minimize actual negative impacts
- Establish and maintain a supply chain workers' rights complaints procedure
- Certain large companies (likely group one, and possibly group three) will need to design and implement a supply chain climate transition plan aligned with the 1.5° Celsius target in the Paris Agreement
- Monitor the effectiveness of their due diligence policies and measures
- Publicly communicate and report on their supplier due diligence
Companies that are subject to the CS3D will be required to report on their due diligence findings. The reports must be published on the company's website and made available to the public. The CS3D also includes a number of other, yet-to-be-finalized compliance requirements.
Two notable compliance points about the CS3D are that, first, under the EU's current CS3D position, eligible businesses will be required to calculate and report of their Scope 3 greenhouse gas emissions. Second, CS3D rules also require companies with more than 3,000 employees to tie performance on their plan’s targets to directors’ variable compensation.
It's not yet known if and to what extent the CS3D will apply to financial services companies. Currently, the EU Council plans to give Member States the right to choose whether to apply the CS3D to domestic financial services organizations when they enact the Directive into national law, as well as which types of financial institutions and activities need to be covered. An additional open question is if and how EU CS3D reporting will be integrated with the EU's sustainability taxonomy. Like the EU CSRD, CSDDD reporting may also require third party assurance in the future.
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A Few Helpful Recommendations
Your Next Steps With CS3D Sustainability Due Diligence and Reporting
As you're likely already aware, the EU is implementing several new, major sustainability rules, laws, and disclosure requirements in 2024 and beyond, including the CS3D. For organizations in the early stages of their sustainability reporting and supply chain due diligence roadmap(s), we have a few general recommendations, additional reading, and suggested next steps:
Sustainability leadership attention and structure - Ultimately, the board and senior management have a responsibility to oversee sustainability issues, and to assess the potential sustainability and climate risks to a company’s overall strategy. The CS3D in particular carries specific clear requirements for corporate director oversight among larger entities. Clarify the board and senior management's role(s), structure, and processes around sustainability and supply chain due diligence, including which committee(s) will review and decide on sustainability matters, resources, and disclosure. Your company will likely also want to set up one or more sustainability working groups or committees (as well as formal departments), comprising management and staff, to implement action plans, collect data, track sustainability KPIs, and report to the board and senior management.
Materiality assessment - Before collecting data or thinking about preparing your first report, you need to conduct a “Materiality Assessment” to help determine what your sustainability risk exposure areas and priorities should be in order to stay compliant with and get ready for the CS3D. A materiality assessment is a project which determines and ranks the most material themes for your business based on market data, stakeholder interviews, and surveys. For example, a healthcare company might focus on healthcare access, affordability, innovation, and its supply chain. A technology company could focus on data privacy, security, data center emissions, and STEM education access. Pick and rank the right sustainability themes depending on your organization’s mission, sector, model, value chain, and ESG maturity.
Map, engage, and prioritize your top supply chain relationships - While most organizations already have a clear picture of their largest Tier 1 suppliers, it's important to start with a good data baseline across your supply chain. Who are your most strategic suppliers? Who are the highest risk? Whic suppliers have and haven't been audited? Who's responsible for sustainability and ESG due diligence at each supplier? What social compliance, ESG, or sustainability risk assessments and audits have you conducted so far (if any)? Whether your organization works with dozens of suppliers and vendors or thousands, value chain engagement on sustainability is a prioritization exercise, and also a diplomatic one. Start with your most important relationships, build capacity, momentum, and proofs-of-concept with those top partners, then scale those best practices to your other relationships through programs, policies, and standards.
Sustainability and supply chain data systems and process - While this might go without saying, in order to report your organization's sustainability performance, you need to know what it is - with a high degree of accuracy. Your materiality process can help guide you toward the main sustainability themes you may need to focus on and collect data around. Many organizations start their sustainability reporting and supply chain due diligence with relatively simple spreadsheets, surveys, and documents, but things can get complex fast - particularly for larger companies. If you're an organization with a medium-to-large or complex environmental footprint, you likely need dedicated sustainability reporting and data management software, like the kind we design here at Brightest to help organizations stay ESG compliant. Ongoing report archiving, version control, and governance are also important to think about, since you'll be reporting every year.
Further reading - Our free guide to ESG reporting provides additional, detailed guidance and insights on how to report your sustainability performance.
