In today’s ever-evolving regulatory environment, understanding compliance updates can become daunting even for businesses that are already following the regulations. Among the latest updates, the CS3D, the Corporate Sustainability Due Diligence Directive, has significant implications for the corporate world. The CS3D has undergone some significant changes, with the latest updates creating some challenges for compliance. These changes affect businesses both inside and outside the EU, and they are aimed at preventing and mitigating potential adverse impacts stemming from high-risk sectors, such as textiles, agriculture, basic metal products, and more. These updates can also open new opportunities, and it’s essential to be up-to-date with the regulations. In this comprehensive guide, we will break down the latest updates for the CS3D and what they mean for companies.
Scope and Thresholds of CS3D Compliance
The latest updates on the CS3D address concerns about thresholds for compliance requirements. Under the previous regulations, companies with more than 1,000 employees and €300 million net worldwide turnover were required to comply with the CS3D. However, the current draft now suggests a more stringent criterion, lowering the threshold to 500 employees and net worldwide turnover above €150 million. Alternatively, companies with under 500 employees and a net worldwide turnover of over €40 million, with at least €20 million generated in high-risk sectors, will also be subject to compliance.
Two Groups of EU Companies
The new regulations specify two groups of EU companies: Group 1 includes EU companies with 500+ employees and €150 million+ in net worldwide turnover, while Group 2 includes other limited liability companies operating in high-impact sectors with 250+ employees and €40 million+ net turnover worldwide. The high-impact sectors covered include the manufacture and wholesale trade of textiles, clothing, leather, footwear, agriculture, forestry, fisheries, food products, beverages, mineral extraction, basic metal products, and construction. Non-EU companies that operate in the EU must also comply with turnover thresholds aligned with Group 1 and 2 criteria. There is one more group that falls within the scope of the Directive, that is the companies that are active within the EU with turnover thresholds similar to those outlined in Groups 1 and 2. This classification helps simplify the compliance process for companies falling under the three groups.
Preventative Action and Collaborative Obligations
The focus of the CS3D is to prevent and mitigate potential adverse impacts from high-risk sectors. Companies must develop and implement a preventative action plan in consultation with stakeholders that covers the parent and any subsidiary companies. This requirement applies to all companies that fall within the scope outlined above. Companies must collaborate with sustainability experts to curb negative impacts. The CS3D requires that companies seek contractual assurances from direct and indirect business partners to ensure compliance with their code of conduct and prevention action plan. Due to this requirement, companies are encouraged to provide support for SMEs in their value chain to facilitate compliance.
The compliance deadline for the CS3D is 3 years from the date of the directive’s entry into force. It is estimated that the first CS3D obligations could start applying in 2027. This may seem like enough time, but it’s essential to start preparing for compliance now. It’s a complex process that requires comprehensive identification of risks and prioritization based on severity and likelihood. Companies must have a due diligence policy, code of conduct, and update them every 24 months.
The enforcement mechanism of the CS3D has been adjusted to dissuasive penalties, civil liability, and the right to full compensation for damage. Companies can be held liable for damages if they fail to comply with obligations or if their actions contribute to adverse impacts. Directors of EU companies have a duty of care and responsibility for overseeing due diligence actions, including reporting to the board of directors. Member states must designate supervisory authorities to ensure compliance and establish a European network of supervisory authorities for cooperation.
Stricter Penalties and Compensation Liability
Despite being a directive rather than a regulation, the CS3D holds companies to strict penalties for non-compliance, with civil liabilities and the right to full compensation for damages in case of failure to comply with obligations or contribution to adverse impact. This heightened risk of penalty and compensation liability reinforces the company’s need to comply with the directives.
The latest updates to the CS3D introduce more stringent regulations aimed at preventing and mitigating potential adverse impacts from high-risk sectors. The changes in thresholds, scope, and penalties reinforce the need for companies to comply with the directive’s requirements, including developing and implementing preventative action plans. The classification of EU companies into the three groups also helps simplify the process of compliance.
Companies must seek contractual assurances from direct and indirect business partners and take measures to transition their business model and strategy into a sustainable economy. Further, compliance with the CS3D requires integrating due diligence into policies, identifying and addressing adverse impacts, establishing complaints procedures, and monitoring effectiveness, sustainable practices benefit companies, the environment, and society as a whole. The new regulations aim to prevent and mitigate potential adverse impacts, encourage collaboration, and facilitate compliance for SMEs. Companies must also adopt a plan to ensure their business model and strategy are compatible with the transition to a sustainable economy to limit global warming, 1.5 °C, in line with the Paris Agreement.
How can Ardea International help?
Ardea International understands that businesses must ensure that they establish robust due diligence procedures. We support our clients by helping them identify how to manage human rights impacts and risks, ensuring they meet legal compliance obligations and integrate best practices into their policies and procedures.
Ardea International has developed a number of effective compliance solutions, including a human rights and environmental disclosure legal register. The legal compliance due diligence register allows businesses to track incoming legislation as well as current laws they may be subject to. We can also assess your business’s compliance with human rights regulations, including preparedness to comply with new legislation. In addition, Ardea can examine your business’ due diligence procedures and provide priority steps to improve performance.
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