European Commission seeks input on CS3D implementation

The consultation, announced on 12 June and open until 24 July, seeks stakeholder views on a range of issues that will help to inform the Commission’s guidelines on the practical implementation of the CS3D. This includes matters such as due diligence policies and processes; identification of adverse impacts; risk assessment; stakeholder engagement; remediation measures; operational challenges in conflict-affected and high-risk areas; model contractual clauses; information sharing; third party verification; and other compliance related matters.

The CS3D imposes a duty on in-scope EU and non-EU companies to identify, address and mitigate both actual and potential adverse human rights and environmental impacts within their own operations, those of their subsidiaries, and across their “chains of activities”.

The directive came into force on 25 July 2024, with the regulatory obligations originally due to come into effect from 26 July 2027. EU member states were originally given two years to transpose the directive into their domestic legislation. However, following the 'Omnibus simplification' process, transposition of the CS3D by member states was postponed to 26 July 2028, with the application deadline a year later, requiring in-scope companies to begin complying with the directive on 26 July 2029.

The Commission said it will issue guidelines that provide support to companies on how to fulfil their due diligence obligations, to authorities in each member state on how to implement and enforce the framework, and to stakeholders on “how to pursue their rights”. The Commission intends to issue these guidelines in the first quarter of 2027.

Large EU companies are in scope of CS3D if they have more than 5,000 employees on average during the financial year and a net worldwide turnover of above €1.5 billion as at financial year end, including on a consolidated basis for ultimate parent companies of groups.

Large non-EU companies are also in scope if they have a net turnover in the EU of at least €1.5 billion. The CS3D may also affect non-EU businesses with franchising and licensing arrangements with a lower turnover threshold.

Smaller companies that do not meet the CS3D net turnover thresholds, including small and medium enterprises (SMEs) are generally not in scope, but parts of the business may be affected indirectly by the CS3D. The Commission encourages smaller companies that “are linked to the supply chains of companies with obligations under the Directive” to respond to the consultation.

Member states will lay down their own rules on penalties, however penalties are to be “effective, proportionate, and dissuasive”. The maximum limit for pecuniary penalties is set at 3% of the company's net worldwide turnover.

Climate and sustainability expert Sharon E. Smith of Pinsent Masons said: “As companies prepare for CS3D compliance and implementation, the Commission’s guidelines, when published, are likely to play an important role in clarifying regulatory expectations, including for in-scope companies on how to fulfil their due diligence obligations, and as regards how member state authorities implement and enforce the CS3D. They are also likely to influence how the CS3D is interpreted and applied in practice.”

Laura Ayre, a supply chain expert with Pinsent Masons, said the consultation provided a critical opportunity to provide input at this early stage in the guidelines’ development. “Businesses and other impacted stakeholders should use this opportunity to inform the guidelines, as well as prepare ahead and develop their own plans for compliance.”

James Hay, a climate and sustainability expert at Pinsent Masons, said the CS3D regime may also create some conflict of law issues with non-EU jurisdictions with differing supply chain due diligence rules and requirements. “CS3D is an example where compliance with one legal system may result in tension with the other, and there is currently no established multilateral framework for reconciling the two,” he said. “As such, businesses will increasingly need to make carefully considered, risk-based judgments when navigating between legal systems, and early engagement with the issues will be important.”

“This has been identified by the Commission as a problem area and it invites companies to submit evidence relating to this issue in the consultation,” he added.

Hay said there was already some evidence that conflict of law issues with Chinese law may make it increasingly challenging for businesses to obtain information needed to comply with the EU’s new sustainability obligations.