If for some reason you have managed to stay away from the European stage for the past 5 years on this topic it is time you now join the conversation and know that last Wednesday, April 24th MEPs have voted and formally approved the CORPORATE SUSTAINABILITY DUE DILIGENCE DIRECTIVE “CS3D” deal. The debate and negotiations that followed the request from the European Parliament (“EP”) to the European Commission in 2021, to step up the game and bring forward, what at the time was the “Sustainable Corporate Governance Initiative”, are now over and a gamechanger awaited by many pieces of legislation is (almost) out here. Coincidently, the Parliament’s vote in Strasbourg took place on the 11th anniversary of the tragic collapse of the Rana Plaza building in Bangladesh, which killed 1,138 garment workers and injured over 2,000 others – one of the major Business and Human Rights disasters of all times.

Let me be clear on this: the above does not mean we have reached the finish line yet. For that EU Member States still need to give the ultimate sign-off on the 15 & 23 May and then (finally!) this piece of legislation will be published, enter into force (20 days after publication) and start its 2 year transposition period into national law – and we all know better than to take anything for granted when it comes to political agreement.

However, despite the huge disappointment for many with the watered-down version of the Directive that we were left with from the last-minute political resistance to it at the European Council that preceded the vote last Wednesday at the EP, the good news is that now there is very little room for complaint, especially, when facing such a huge and diverse group of supporters endorsing the Directive: large companies across sectors, SMEs, business organizations, BHR practitioners, academic experts, NGOs, and other multistakeholder groups, all united in their support for the directive. While the current Directive has been very criticised for being restricted in various ways (e.g., limited scope, no director duties), I prefer to see it as a huge milestone and remind myself its effects can be widened in the future, and that it is a pioneer starting point on the field of “hard law” sustainability due diligence, offering a legal platform to continue this discussion everywhere.

So, being highly unlikely at this point that the Directive will not go through, the reason you should be reading this is because for in-scope companies and companies in their value chain the CS3D will be a game changer in terms of way of doing business. It will no longer only be a matter of reporting as with other pieces of EU ESG Legislation like the CSRD, SFDR or the EU Taxonomy. When we have the CS3D in place, companies will also need to look into and most likely change or craft new corporate processes and policies. They will also need to reflect on their main business relationships in order to identify human rights and environmental harms, and take action to prevent, mitigate and address them. If they don’t do so and something goes wrong, the Directive brings in a new layer of corporate accountability at many levels, including where supervisory authorities in charge of monitoring, investigating and imposing penalties will be able to apply fines up to 5% of the companies’ worldwide turnover and victims will have a right to full compensation.

In practice, this will mean new roles and responsibilities for certain employees, as well as top down and cross company training to understand a new lens to be applied to corporate risk-based due diligence. It will also require the revision of contracts, especially, in global supply chains, with the ultimate goal of ensuring shared allocation of risk and responsibility between purchaser and supplier in matters of human rights and environmental impacts, responsible purchase practices and victims´ access to remedy first. Changes will also translate into new concerns in mergers´ and acquisitions´ due diligences, as well as updating your checklist of questions when hiring a strategic business partner or supplier and auditing him from time to time.

These rules will be applicable to EU companies, including parent companies, that have a workforce exceeding 1000 employees and a turnover of more than 450 million euros, and also to non-EU companies that reach the same turnover thresholds in the EU. Although we are talking of only roughly 5400 EU companies covered by the Directive, one must not forget that this number does not include non-EU companies and that there are similar national legislations already in place on this matter in some member states (including France and Germany) with a wider scope of application.

Many have concerns about the harmful effects of competition of such (an allegedly) burdensome piece of legislation for European companies that have to compete with US or Chinese companies not subject to similar local requirements. However, the fact that it applies to EU and non-EU companies helps create a level playing field between companies of different geographies that reduces these harmful effects.  

Entrance into force will be gradual between 2027 – companies with more than 5000 employees and 1500 million turnover; 2028 – companies with more than 3000 employees and 900 million turnover; and 2029 – companies with more than 1000 employees and 450 million turnover. When looking at these dates and numbers just bear in mind that even if you do not expect to grow this much in the near future, chances are you might become a supplier or a relevant business partner of an in-scope company… any time.

So, my advice? Look at this beyond a compliance perspective and stay ahead of the game! The CS3D is not reinventing the wheel, and its due diligence requirements are not emerging from a vacuum, they substantially align with the United Nations Guiding Principles on Business and Human Rights (“UNGPs”) and the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct, so companies do not need to wait for the EU legislation to come out to get started.

So, stay tuned, sure, but get started and start smart by focusing on and prioritizing your salient human rights and environmental risks!

Have a great and impactful week!

Maria Folque
ESG Enthusiast;
Business and Human Rights Advocate;
Social Economy (NGOs) Law Specialist;
Social Innovation Addic