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The CS3D framework is designed for businesses operating in the EU to integrate human rights and environmental considerations into their operations and throughout their entire activity chain. It mandates a risk-based due diligence process to identify, prevent, mitigate, and report adverse impacts. Businesses must also establish effective governance and management systems. Violations can lead to civil liability and allow victims to claim damages.
Implementation Timeline:
- By 2027: Large EU companies (over 5,000 employees and €1.5 billion turnover) and non-EU companies (€1.5 billion EU turnover).
- By 2028: Mid-sized EU companies (over 3,000 employees and €900 million turnover) and non-EU companies (€900 million EU turnover).
- By 2029: Smaller EU companies (over 1,000 employees and €450 million turnover) and non-EU companies (€450 million EU turnover).
Additionally, certain companies operating under franchise or licensing models will be covered from January 2029. Nonoperational holding companies are exempt unless they apply for it. The scope includes regulated financial institutions concerning their upstream sourcing only.
Scope of CS3D Obligations:
The obligations extend to a company’s operations and their entire chain of activities, from upstream suppliers to downstream partners. This includes companies that are directly or indirectly involved in the company’s operations, products, or services. The diligence covers all tiers of suppliers and partners, ensuring comprehensive oversight.
Unpacking the Diligence Obligations of the CS3D
The recent negotiations among EU institutions have reshaped the diligence obligations under the Corporate Sustainability Due Diligence Directive (CS3D). This change primarily narrows down the interpretation of the “chain of activities” linked to in-scope companies. Let’s delve into what these obligations entail and their implications for businesses.
The term “chain of activities” now falls into two main categories. The first category concerns the upstream business partners of a company. This includes a wide array of activities related to the company’s production or service provision, such as design, extraction, sourcing, manufacturing, transportation, storage, and the supply of raw materials and product parts. Also, it encompasses the development of the products or services.
The second category involves the downstream business partners who handle the distribution, transportation, and storage of the company’s products. These partners must be engaged in these activities either for the company or on its behalf. So, it is important to note that activities involving licensed distribution, transportation, and storage of products under strict export controls, such as weapons or munitions, do not fall under this directive.
The CS3D aims to create comprehensive oversight across the entire supply chain. It extends beyond primary suppliers to include various “business relationships.” These relationships can be direct, where the company has a commercial agreement with the partner, or indirect, involving partners who engage in business operations related to the company’s products or services but without a direct commercial agreement.
CS3D: Elevating Corporate Responsibility Through Comprehensive Supply Chain Accountability”
By defining these obligations, the CS3D ensures that not only the in-scope company’s operations are scrutinized but also those of its entire network of partners, from suppliers and manufacturers to distributors and other collaborators.
It presents a structured approach to sustainability and responsibility in business operations, encouraging companies to look deeper into their supply chains. Thus, this directive not only promotes ethical business practices but also holds companies accountable for their entire network of operations, setting a new standard in corporate responsibility.
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