European Commission seeks input on CS3D implementation

The consultation, announced on 12 June, aims to support businesses, both large EU companies and non-EU companies with significant EU activity, to meet the new requirements within the EU Corporate Sustainability Due Diligence Directive, or CS3D.

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 comply with the directive by July 2029.

Ahead of this, the consultation seeks to gather evidence and feedback from stakeholders to inform future guidelines that will support the effective implementation and enforcement of the directive across all EU member states. The consultation closes on 24 July.

The Commission said the guidelines will 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”.

Large EU companies are in scope of CS3D if they have at least 5,000 employees and an annual turnover of above €1.5 billion in the EU, including on a consolidated basis for ultimate parent companies of groups.

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

Smaller companies, such as small and medium enterprises (SMEs) and small mid-cap companies, are generally not in scope, but parts of the business may be affected indirectly by the directive. The Commission encourages smaller companies that “are linked to the supply chains of companies with obligations under the Directive” to respond to the consultation.

The maximum limit for pecuniary penalties under national law transposing the directive is 3% of the company's net worldwide turnover for the most serious breaches.

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 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.