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The EU Corporate Sustainability Due Diligence Directive

By GAN Integrity

In June 2023, the European Parliament officially adopted its position with respect to the proposal for a corporate sustainability due diligence directive (“CS3D”) originally introduced by the European Commission in February 2022. Among other things, the draft CS3D would officially obligate EU member states to implement due diligence measures that have the primary aim of requiring companies to ‘identify, end, prevent, mitigate, and account for, adverse human rights and environmental impacts’ in their own operations (including the operations of their subsidiaries), as well as their extended value chains.

What is the European Corporate Sustainability Due Diligence Directive (“CS3D”)?

CS3D is a legislative proposal introduced by the European Commission in February 2022 that imposes new due diligence requirements concerning human rights and environmental impacts on certain EU and non-EU based companies (as discussed in greater detail below). CS3D accomplishes this objective primarily by requiring member states to ensure that companies integrate sustainability-oriented considerations into the corporate policies of all affected companies.

Pursuant to Article 5 of the CS3D, such due diligence policies must include a description of the company’s overall approach to due diligence; a code of conduct setting forth the rules and principles to be followed by the company’s employees and its various subsidiaries; and a description of the processes put in place to “implement due diligence”—including, but not limited to, the identification of measures taken to “verify compliance with the code of conduct and to extend its application to established business relationships.” Article 5 further requires that such due diligence policies be reviewed and updated by covered organizations on an annual basis.

What companies will be affected by the CS3D?

The proposed due diligence requirements extend to all EU-based companies, regardless of sector, with more than 250 employees and a worldwide turnover of at least EUR 40 million and to parent companies with over 500 employees and a worldwide turnover of more than EUR 150 million. Even non-EU companies with a turnover of higher than EUR 150 million, where at least EUR 40 million are generated in the EU, are subject to the due diligence obligations imposed by CS3D.

What are the CS3D's requirements for businesses?

The draft CS3D requires companies operating in the EU to conduct due diligence and subsequently identify “adverse” environmental and human rights impacts. This obligation is intentionally broad and encompasses a host of undesirable social and environmental outcomes as is more specifically delineated in the accompanying Annex to the directive. Specifically, the Annex equates “adverse environmental impacts” with violation of longstanding international prohibitions enshrined in no less than fourteen (14) international treaties and conventions broadly addressing environmental pollution and degradation, the proper disposal of hazardous waste, limitations on the use of mercury and mercury compounds in manufacturing practices, and prohibitions with respect to certain identified ‘ozone depleting’ compounds.

The draft CS3D defines “adverse human rights impacts” in equally ambiguous—and sweepingly broad—terms. For the purposes of the CS3D, such impacts specifically include violations of internationally-recognized human rights norms, including but not limited to, those rights contained in specifically designated “human rights and fundamental freedoms conventions” like the Universal Declaration of Human Rights, the International Covenant on Civil and Political Rights (“ICCPR”), and the Convention against Torture, and other Cruel, Inhuman or Degrading Treatment or Punishment (“Torture Convention”), among a host of others. Notably, “adverse human rights impacts” also include the recognition of prohibitions on the use of forced labor and other forms of slavery and serfdom, human trafficking, and practices that infringe upon the rights of the worker to unionize and participate in collective bargaining activities.

But the identification of adverse human rights and environmental impacts is only part of the overall equation. The real substance of the CS3D resides in its insistence that companies have a responsibility to mitigate such impacts, and where feasible, to bring such consequences to as swift an end as possible. Thus, CS3D Article 7 obligates companies to mitigate adverse human rights and environmental impacts where wholesale cessation is not possible. This duty of mitigation requires that companies: (1) develop and implement a mitigation action plan containing “clearly defined timelines” for action and qualitative and quantitative indicators for measuring improvement; (2) seek contractual assurances from all business partners with whom the company has a direct business relationship that ensures adherence to both the company’s code of conduct, and where necessary, the mitigation action plan itself; (3) make appropriate investments into management or production processes in furtherance of the mitigation action plan; (4) provide “targeted and proportionate support” for small and medium sized enterprises (“SMEs”) with whom the company has an “established business relationship,” where compliance with the code of conduct and mitigation action plan would jeopardize the viability of such SMEs; and (5) collaborate with others, consistent with EU competition law, to increase the company’s ability to bring the adverse impact to an end.

CS3D Article 8—addressing a company’s obligation to end adverse impacts—largely mirrors the substantive provisions contained in the preceding article with the notable exception of a requirement that a company completely neutralize an adverse impact or work vigorously to minimize its extent. This obligation extends to the payment of damages to affected persons and financial compensation to affected communities, proportionate to the “significance and scale” of the identified impact and the company’s overall contribution to that impact.

Finally, the draft CS3D also adopts new obligations for corporate directors. Pursuant to Article 25, EU member states are required to ensure that, in fulfilling their responsibilities to act “in the best interests of the company,” directors remain cognizant of “sustainability matters,” including human rights abuses and climate change and environmental consequences in the “short, medium and long term.” These provisions are supplemented by Article 26’s requirement that the directors themselves be responsible for “putting in place and overseeing the due diligence actions” referred to elsewhere in the draft CS3D.

How will the new CS3D rules be enforced?

On 1 June 2023, the European Parliament officially adopted a position statement with respect to the draft CS3D, directing that a series of amendments be proposed to the committee responsible for inter-institutional negotiations. Pursuant to the proposed amendments, companies may be liable not only for damages imposed by national supervisory authorities of up to five percent of net worldwide turnover, but also complete withdrawal of goods from EU markets and potential ineligibility to participate in public procurement activities. Notably, the European Parliament has insisted on expanding the exterritorial reach of the proposed CS3D by requiring that even non-EU companies comply with the due diligence requirements or forfeit their right to participate in any public procurement activities within the EU generally.

What is the current state of the CS3D?

Following adoption of suggested amendments to the original European Commission proposal by the European Parliament in the summer of 2023, the CS3D remains pending on an inter-institutional basis as a legislative proposal. Negotiations between the various institutions responsible for the promulgation of policy on an EU-wide basis continue. These negotiations are likely to result in a subsequent iteration of the CS3D that will be acted upon by the European Parliament at a later date.

What should businesses be doing now?

The promulgation of CS3D—and its popularity among members of the European Parliament—is a strong indicator that companies will soon be subject to more stringent due diligence requirements respecting human rights and environmental considerations than they have historically been accustomed to. This evolution of sustainability concerns into a concrete set of due diligence requirements is likely a sign of things to come outside of the EU as well. Thus, both EU and non-EU companies should take heed of these developments and ensure that their organizations are poised to adopt more robust due diligence parameters.

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