EU Corporate Sustainability Due Diligence Directive to Take Effect Soon
The EU's Corporate Sustainability Due Diligence Directive (CS3D) is expected to be officially promulgated in the near future, directly affecting large US enterprises with annual EU business volumes of $300 million or more. The directive requires companies to conduct due diligence on the environmental and human rights impacts of their supply chains, complementing regulations such as CSRD. This article, written by Makersite CEO Neil D'Souza, explores CS3D compliance key points, audit resource gaps, and recommended corporate responses.
Editor's note: This article is written by Neil D'Souza, CEO of SaaS ESG startupMakersite, a company focused on driving smarter supply chain decisions. The views expressed in this article are solely those of the author.
Large U.S. companies are expected to be affected by the European Union's Corporate Sustainability Due Diligence Directive (CS3D). The directive was agreed upon by EU institutions at the end of last year and is expected to be officially enacted soon.
CS3D requires companies to assess the environmental and human rights impacts of their supply chains. Its scope includes both large EU companies and U.S. companies with annual business in the EU of at least $300 million.
The core of the due diligence directive
The core of CS3D lies in due diligence. It underpins other directives in several core EU regulations, including the Articles of Association, and places responsibility at the board level. Therefore, while many other directives and regulations focus on reporting and disclosure, CS3D focuses on the due diligence aspect of these activities.
The directive includes multiple principles, but the core requirement revolves around conducting due diligence on companies' operations and supply chains. This means companies must not only examine their direct suppliers but also look at the upstream sourcing of these supply chain partners.
Linkage with CSRD
CS3D builds on another EU directive, the Corporate Sustainability Reporting Directive (CSRD). CSRD covers disclosure and operational requirements, requiring companies to examine their carbon footprint, impacts on human rights and labor laws, and other ESG goals.
By establishing CS3D, the EU has gained a verification mechanism to ensure these ESG initiatives are implemented in subsequent execution. For example, if a company claims to have taken measures to reduce environmental impact, CS3D will ensure it actually does so. CS3D is a legal obligation to perform due diligence, not merely to generate reports and make declarations.
Therefore, CSRD and CS3D complement each other. Additionally, CS3D supports due diligence under other regulations and directives, such as the Global Reporting Initiative, the Carbon Disclosure Project, and the Sustainable Finance Disclosure Regulation.
Compliance and adoption challenges
Currently, provisions regarding penalties and violations, conditions affecting companies, and threshold categories such as revenue size and employee numbers have not yet been determined. These details remain under discussion until the final version of the directive is released. Official statements on when these obligations will begin have also not been issued.
For CS3D to succeed, a large number of auditors, verifiers, and corresponding resources are urgently needed, and these resources do not currently exist. These regulations are still nascent, and the EU will inevitably go through a trial-and-error process before determining how to verify corporate claims. This is uncharted territory.
Until the skills of auditors and verifiers are developed, affected companies will inevitably dispute how these directives are implemented. After all, these auditors, verifiers, and their teams will be responsible for verifying the supply chains of thousands of products globally. In the early stages of new directive implementation, there is significant room for divergence.
A product-centric approach
As companies begin to prepare, the best practice is to build a holistic view of their supply chains and adopt a product-centric perspective to examine the product lifecycle. From this perspective, companies should start upstream and trace each product downstream, thereby gaining a full picture of the supply chain. This will help companies achieve greater success in aligning these regulatory requirements with their own practices in the future.
As for compliance timing—CS3D compliance requirements are expected to begin taking effect around 2025. But companies should start mastering their supply chain status now.
Although the $300 million revenue threshold is relatively high, as these initiatives become more widespread, the threshold will gradually lower, and more companies will be required to comply. Therefore, in the long run, it can be expected that initiatives such as CSRD and CS3D will impact your business.