EU Corporate Sustainability Due Diligence Directive

In mid-March 2024, the final text of the Corporate Sustainability Due Diligence Directive (CS3D) was formally adopted by the Council of the EU and by the European Parliament. The CS3D will require large companies to conduct risk-based human rights and environmental due diligence by:

• integrating due diligence into their policies and risk management systems,
• identifying and assessing actual or potential adverse impacts and, where necessary, prioritising potential and actual adverse impacts
• preventing and mitigating potential adverse impacts, and bringing actual adverse impacts to an end and minimising their extent
• providing remediation to actual adverse impacts caused only or jointly by the company,
• carrying out meaningful engagement with stakeholders;
• establishing and maintaining a notification mechanism and complaints procedure by persons who are affected
• monitoring and publishing an annual statement on due diligence on their website (unless they are subject to sustainability reporting requirements under the CSRD – Corporate Sustainability Reporting Directive).

The final text of CS3D limits the scope of the companies required to comply with the new obligations by increasing the employee (<1000 employees) and turnover (<EUR 450 million) thresholds. The CS3D is a horizontal Directive, and it covers the financial sector in its scope. It limits, however, the scope of application for financial undertakings by excluding downstream activities from the due diligence obligations. The European Commission will have to publish a report two years after the entry into force of the Directive, which will assess the need for any additional due diligence requirements tailored to regulated financial undertakings (credit institutions, investment firms, AIFMs, UCITS, IORPs, insurers, crypto-assets providers, etc). The final CS3D also deletes from its scope the category of smaller companies that carry out activities in the so-called high-risk sectors (which was included in the initial European Commission proposal).

Following the European Parliament’s approval of the legislative resolution at plenary session in April 2024, the Council formally approved the CS3D in late May 2024. The agreed text will now be published in the EU Official Journal, and it will enter into force on the twentieth day following its publication. However, several Member States continue to express serious concerns about the applicability and the scope of the CS3D. Leaseurope is monitoring closely the EU and national developments on this policy file. The interaction between the CS3D and the CSRD will need to be further studied.

The application of the new due diligence rules will happen gradually, as follows:

a) a 3-year application period (from entry into force) for companies with more than 5000 employees and EUR 1500 million turnover,

b) a 4-year application period (from entry into force) for companies with more than 3000 employees and EUR 900 million turnover,

c) a 5-year application period (from entry into force) for companies with more than 1000 employees and EUR 450 million turnover.