The EU’s Corporate Sustainability Due Diligence Directive is now in force

After a long and eventful legislative journey, the Corporate Sustainability Due Diligence Directive (CS3D) came into force on 25 July 2024. Member States now have two years to adopt the necessary laws, regulations and provisions to comply with the CS3D. From 26 July 2027, the CS3D will start to apply to companies on a staggered basis. Importantly, it will apply to non-EU companies as well as EU companies, if they generate sufficient turnover in the EU. 

The CS3D mandates a new regime for in-scope companies, requiring them to identify, assess, prevent, mitigate, bring to an end and remedy specified adverse human rights and environmental impacts. This is in respect of their own operations, those of their subsidiaries and their business partners. They must develop systems of due diligence and integrate these into their internal policies, taking account of their upstream partners’ production of goods and provision of services, and downstream partners’ distribution, transport and storage of products (known as their “chain of activities”). If a company identifies an adverse impact by a business partner, it will need to take steps to address them, and ultimately may have to terminate the relationship if the impact is severe and cannot be brought to an end. The CS3D also mandates development of transition plans. 

For more information on how to get ready for the CS3D, please see our Getting Ready briefing here.

Next steps in preparing for the CS3D

Notwithstanding that it will be several years before the CS3D takes effect, mapping out where the relevant risks are and putting in place the policies, procedures and governance to meet its requirements are likely to take significant preparation time. It will also involve those companies within scope of the CS3D working with those in their chain of activities to address adverse impacts. This can mean that there may be value in considering whether an entity might be in scope of the CS3D sooner rather than later.

A number of companies that will be within scope of the CS3D are also likely to be within scope of the Corporate Sustainability Reporting Directive (CSRD), which has started to apply this year on a staggered basis, and potentially other due diligence-related legislation, such as the EU’s Deforestation Regulation. When thinking about how to comply with the EU’s due diligence requirements, an approach that is able to encompass the CSRD, the CS3D in due course and any other relevant requirements may limit the need to rework the approach over the next few years.

The CS3D will apply to companies on a staggered basis

The provisions in the CS3D will start to apply to the largest companies within scope from 26 July 2027, starting with:

From 26 July 2028, it will apply to:

From 26 July 2029, the CS3D will apply to:

Each of the above can in the alternative include the ultimate parent company of a group that meets the relevant turnover and/or employee thresholds on a consolidated basis; or, in the case of companies which enter into franchising or licensing agreements, the ultimate parent of a group that entered into such an agreement.

Most of the companies within scope are given at least 5 months (or longer depending on when their financial year begins) between when they have to start complying with the CS3D and when they have to start reporting on it, i.e. from 26 July in one year to 1 January in the following year. 

However, companies that come within scope from 26 July 2029 appear to be required to start reporting before they are subject to the CS3D’s requirements - from financial years starting on 1 January 2029. This point may fall to be clarified in due course. One potential clarification may be that the reporting requirement would commence from 1 January 2030, consistent with the cadence applied to other companies within scope of the CS3D.