The European Union has moved to approve and implement its Corporate Sustainability Due Diligence Directive. With a final vote due on 24th April, companies working within the EU will have to prepare for a raft of new sustainability obligations for their suppliers and supply networks.
Companies operating within the EU already face a high regulatory burden, complicated by individual countries implementing similar legislations with different requirements. These requirements are especially onerous for small- or medium-sized businesses, which don’t have the resources to absorb the cost of compliance. Therefore, the Corporate Sustainability Due Diligence Directive, or the CS3D, aims to strengthen the EU’s position on sustainability measures, while streamlining existing legislations and narrowing the burden of current measures.
Save yourself the trouble of reading through the EU’s legislative text. Here’s a handy guide to the EU Corporate Sustainability Due Diligence Directive, including the scope, key dates, and potential next steps for your supply chain operations.
What is the EU’s Corporate Sustainability Due Diligence Directive?
At its heart, the Corporate Sustainability Due Diligence Directive is aimed at incentivizing large organizations operating within the EU to fully understand the scope and impact of their entire supply chain networks through their due diligence practices. With this knowledge, businesses are incentivized to influence their supply chain network to adopt more sustainable practices, or penalized for their lack of due diligence or action.
Large businesses are dependent on a complicated web of suppliers and partners that make up their value chains, creating an inherent web of sustainability risks. These risks can range from human rights abuses to carbon net-zero considerations and more, all of which have been increasingly thrust into the spotlight by governments and consumers alike.
Under the proposed legislation, large businesses will be responsible for conducting enhanced sustainability due diligence throughout their entire value chain, implementing a process that can be tracked and measured. Based on their findings, they must use their influence to prevent or mitigate any sustainability risk events, and publish an annual statement for full transparency. Finally, they must also implement an ongoing complaints procedure.
Who does EU’s Corporate Sustainability Due Diligence Directive impact?
The scope of the Corporate Sustainability Due Diligence Directive is purposefully specific, targeting the EU’s largest businesses. Small- and medium-sized businesses don’t necessarily have the influence or resources that their larger counterparts do. Moreover, the EU believes that the pressure and support from larger businesses and the EU itself will aid in preventing sustainability issues across all companies within a value chain, regardless of size.
Companies that fall within the scope of this legislation are:
- EU companies with over 1000 employees and a net turnover of more than €450 million worldwide
- Parent companies with over 1000 employees and a net turnover of more than €450 million
- Non-EU (third-country) companies with over 1000 employees and a net turnover of more than €450 million
- Franchises with a net turnover of over €80 million, if at least €22.5 million of that turnover was generated through royalties
High-impact sectors such as agriculture are affected slightly differently, placing these companies within scope if they have a net turnover higher than €300 million. These sectors are specifically defined by the EU, so it’s worth double checking if your business falls into this category.
These businesses will be required to put several policies in place in order to create more sustainable value networks. For example, businesses must clearly define and implement a climate-conscious plan, in accordance with the Paris Agreement, including targets, investments, and more. Furthermore, contracts with potential suppliers must clearly state compliance expectations in regard to sustainability. Companies under scope are also given various examples of financial support options that they can offer their at-risk suppliers to help maintain their compliance. This facet of the Directive illustrates the EU’s belief that top companies can create sustainable change within their value networks. In fact, companies under scope are encouraged to help non-compliant suppliers become compliant, rather than immediately cut ties.
When will EU’s Corporate Sustainability Due Diligence Directive be implemented?
The EU will vote on passing the Corporate Sustainability Due Diligence Directive on 24th April. Once passed and enacted, EU member countries will have two years to implement the new legislation into their individual national laws.
The Directive will then take effect for companies with over 5000 employees and a net turnover of €1500 million in 2027; companies with over 3000 employees and a net turnover of €900 million in 2028. And, finally, in 2029, the Directive will go into full force, with all companies in scope officially beholden to the new legislation.
What are your next steps?
Two years is not a long time to implement brand-new policies, especially when there are significant repercussions for noncompliance. Fines can go up to 5% of a business’ worldwide net turnover. Additionally, the Directive introduces civil liability, allowing individuals and communities to complain about and be compensated for any detrimental consequences of a business’ activities.
- Start thinking about the sustainability policies your business currently has in place. Does your company currently have a plan in place to match the Paris Accord goals? If not, it’s time to understand what shifts your company needs to make to hit these sustainability targets while still meeting your business KPIs.
- Consider your value network. How accurate and up to date is the data you receive from your suppliers? And how effective are your current risk mitigation actions? Point-in-time data will not be enough to comply with the Corporate Sustainability Due Diligence Directive. In fact, the only way to truly perform sufficient due diligence is through continuous risk monitoring, allowing your company to assess ongoing or upcoming risks and act accordingly.
- Reach out to start evaluating your suppliers. Begin the process of to identifying and documenting where they are on their sustainability journey, and what you can do to support them in compliance.
Like it or not, sustainability legislations are coming into full force. Even if your company doesn’t fall under the scope of the EU’s Corporate Sustainability Due Diligence Directive, it’s worth looking at your practices to make sure you’re not scaring away potential business partners. For larger organizations impacted by the Directive, get your policies, data monitoring and assessment capabilities, and environmental sustainability plans in place as soon as possible.