The Corporate Sustainability Due Diligence Directive

Sustainability goes beyond just climate, and the role that businesses play in protecting both the environment and supporting broader issues such as human rights has caught the attention of politicians, investors, consumers, and other stakeholders. In December 2023, the European Council and Parliament reached a provisional agreement on the  Corporate Sustainability Due Diligence Directive (CS3D), after an 18-hour session.

Almost two-thirds of manufacturers have Environmental, Social and Governance (ESG) targets for their business, a 48% increase since 2021. However, four in ten are not aware of how their suppliers are performing against these conditions.

The CS3D is mandatory human rights due diligence legislation which aims to enhance the protection of the environment and human rights in the EU and globally. This new legislation will apply to EU companies with 500+ employees and a worldwide turnover of more than €150m, as well as smaller companies in a select few ‘high-risk’ sectors, including food manufacturers and traders of raw agricultural material if they have 250+ employees and a worldwide turnover of over €20m in that sector. It will also apply to non-EU companies with equivalent turnover in the EU.

What this means for our clients:

Companies must identify potential and actual negative human rights and environmental implications connected to their operations, subsidiaries, and business partners operating within their supply chain. If real and/or potential impacts are identified, companies must take measures to prevent or mitigate potential impacts, as well as end or minimise impacts.

The agreement reinforces the access to justice for persons affected. It establishes five years to bring claims by those concerned by adverse impacts (including trade unions or civil society organisations). It also limits the disclosure of evidence, injunctive measures, and cost of the proceedings for claimants.

As a last resort, companies that identify adverse impacts on the environment or human rights by some of their business partners will have to end those business relationships when these impacts cannot be prevented or ended.

For companies that fail to pay fines imposed on them in the event of a violation of the directive, the provisional agreement includes several injunction measures and takes into consideration the turnover of the company to impose pecuniary penalties (i.e. a minimum maximum of 5% of the company’s net turnover). The deal includes the obligation for companies to carry out meaningful engagement including a dialogue and consultation with affected stakeholders, as one of the measures of the due diligence process.

“E3 Recruitment, in alignment with its commitment to ethical and professional recruitment practices, collaborates closely with key organisations such as the Association of Labour Providers, Responsible Recruitment Toolkit, Stronger Together, and the Gangmasters Labour Abuse Authority.

This strategic engagement ensures that the company remains at the forefront of ethical recruitment and labour supply. By adhering to the guidelines set forth by these entities, E3 Recruitment provides assurance to its clients that their recruitment supply chain is compliant with both UK and EU legislation, safeguarding against any violations of Human Rights or Labour Exploitation laws.”

– Joe Brownbill, Head of Legal & Compliance

Next steps

The final text of the directive must be agreed upon and then endorsed and by both the Council and Parliament. The Directive is expected to be signed before EU elections, which take place in June 2024.

Once signed, the Directive needs to be transposed into national law by the EU member states. The member states are expected to have two years for transposition. Therefore, it is expected that company obligations will begin in 2027.

Even though these rules aren’t expected to apply until 2027 – there is a lot that can be done now to ensure compliance when that time comes.

Faye Skelton, Head of Policy at Make UK said: “Manufacturers are raising their ambitions and commitments to ESG as the issue moves beyond solely issues relating to human capital. Customers, suppliers, investors, and employees are now increasingly expecting that companies make the issue as core to their strategy as any other business objective.

“It’s now clear that ESG is becoming more than a ‘nice to have’ and rapidly rising the boardroom agenda. As a result, those companies getting ahead of the game will have a competitive advantage and those who have yet to take action risk being shut out of supply chains.”

Clients can begin by heat mapping key environmental and human rights risk areas, then assess their current due diligence processes, how they onboard suppliers etc. This will help identify red flags early on, and ensure suppliers comply with a code of conduct prohibiting certain activity, and allow the business to terminate the relationship if environmental and human rights risks can’t be mitigated.

Key Takeaways

• CS3D is a mandatory legislation focusing on human rights due diligence for EU companies with 500+ employees and specific high-risk sectors, including food manufacturers.
• The CS3D not only applies to EU companies but also extends its reach to non-EU companies with equivalent turnover in the EU, emphasising a global approach to environmental and human rights protection.
• Companies must proactively identify and address potential negative human rights and environmental implications within their operations, subsidiaries, and supply chains. If adverse impacts are identified, measures must be taken to prevent, mitigate, or, as a last resort, terminate business relationships.
• The agreement establishes a five-year period for affected parties to bring claims, enhancing access to justice. It also imposes penalties, including pecuniary penalties based on company turnover, for those failing to comply with the directive, reinforcing accountability.
• Despite the directive taking effect in 2027, clients can take proactive steps now. Initiatives such as heat mapping key risk areas, evaluating current due diligence processes, and ensuring supplier compliance with a code of conduct will help identify and address potential issues early on, ensuring smooth compliance in the future.

The Corporate Sustainability Due Diligence Directive represents a significant step forward in ensuring that businesses are prioritising the protection of both the environment and human rights.

The directive emphasises the importance of proactive identification and mitigation of potential negative impacts on human rights and the environment throughout the entire supply chain. By holding companies accountable for their actions and imposing penalties for non-compliance, the CS3D reinforces the notion of corporate responsibility and accountability.

Although the directive is set to take effect in 2027, the importance of early action cannot be overstated. Clients are encouraged to begin assessing their operations and supply chains, identifying key risk areas, and implementing necessary measures to ensure compliance with the CS3D. By taking proactive steps now, businesses can demonstrate their commitment to ethical and sustainable practices, ultimately contributing to a more just and environmentally conscious global economy.