European Institutions Reach Deal on EU Corporate Sustainability Due Diligence Directive
The Council of Europe and the European Parliament announced on December 14, 2023, that they reached a political agreement on the text of the upcoming European Union ("EU") Corporate Sustainability Due Diligence Directive ("CS3D").
Like the EU Corporate Sustainability Reporting Directive ("CSRD") (see our White Paper, "Who, What, When: The Impact of the EU CSRD on Non-EU Companies"), the CS3D is part of the wave of new ESG legislation in the EU Green Deal. The CS3D will require covered companies to take extensive due diligence actions, including:
- Corporate governance and operational measures;
- Due diligence of upstream/downstream value chain and related risk mapping;
- Establishment of a notification and grievance/whistleblower mechanism; and
- Climate change-related steps, including adopting a plan to transition to a business model in line with the 1.5 degree warming target.
Key aspects of the agreed text, as reported, include:
- Scope/Timing: Non-EU companies that "generate" more than €150 million of net turnover in the EU will be required to comply with CS3D. The European Commission will publish a list of these non-EU companies. With respect to EU companies, the CS3D will apply to companies with at least 500 employees and €150 million net worldwide turnover, starting on a phase-in basis after the final adoption of the CS3D.
- Liability and Private Rights of Action: "Persons affected" (including trade unions and civil society organizations) may bring claims for a period of five years (the press release does not specify how this period is calculated) against companies that are required to comply with CS3D, including with respect to their published due diligence information.
- Regulatory Injunctions and Penalties: Regulatory penalties against companies that violate the CS3D may include injunctive measures as well as fines of up to 5% of the company’s annual net turnover.
- Financial Sector: Although the financial sector reportedly will be temporarily "excluded" from the scope of CS3D, the meaning and scope of this exclusion is not clear.
The agreed draft now requires formal approval by the European Parliament, which is considered a formality and is expected in early 2024. Once published in the EU Official Journal, EU Member States will have two years to transpose the CS3D into national law. We will be closely monitoring progress of the CS3D at the EU level.