Of interest.

Directive on Corporate Sustainability Due Diligence (CS3D)

The European Parliament has approved the Directive on Corporate Sustainability Due Diligence (CSDDD) or CS3D (the “CS3D”)[1] . The CS3D sets out rules for the conduct of large corporations with respect to human rights in their operations, including production, employment and subcontracting chains.

About CS3D in general
CS3D obliges companies to mitigate the negative impacts of their activities on human rights and the environment. It specifically addresses issues such as child labour, exploitation of workers, threats to biodiversity, pollution and destruction of natural heritage. As a result of the interconnectedness of today’s global business world, the activities of companies reverberate far beyond their immediate operations and thus have an impact around the world.

CS3D also complements the Regulation on the prohibition of products from forced labour on the EU market[2] . Both of these approved standards are the result of the EU’s efforts to address the issue of forced labour. It should also redress the disadvantage of domestic producers who have higher costs compared to their competitors. The latter often use foreign producers who do not comply with labour and environmental conditions, thus incurring lower costs.

Impact of the German LkSG
The German supply chain law “Lieferkettensorgfaltspflichtengesetz” (the “LkSG“), which is effective from 2023, has become an important precursor for CS3D.

Both legal frameworks, LkSG and CS3D, focus on holding companies accountable for their global business activities. Companies must conduct thorough risk analysis, implement preventive measures, monitor compliance with standards and take corrective action when violations are identified. This process includes collaboration with suppliers, transparency, and regular reporting on achievements.

The German LkSG and CS3D represent a significant step towards a more sustainable and responsible business that respects human rights and protects the environment on a global level. These legislative initiatives set new standards for corporate responsibility and can serve as a model for other countries and regions.

The implementation of the LkSG took place in two phases. From 2023, the law applies to companies with more than 3,000 employees. This step affects approximately 1,000 German companies, which are now required to conduct “due diligence” in their supply chains. This includes identifying and mitigating risks related to violations of human rights and environmental standards. From 2024, the law will be extended to companies with more than 1,000 employees, affecting approximately 5,000 German companies.

CS3D rules
The CS3D regulation will apply to EU companies (companies incorporated under the laws of a member state) with more than 1,000 employees and a worldwide turnover exceeding
EUR 450 million.

However, these rules will not apply to companies outside the EU either. Parent companies and companies with franchise or licensing agreements in the EU that reach the same turnover thresholds in the EU will also have to incorporate the CS3D agenda into their policies.

The difference between the requirements is justified by the following facts:

  • EU linkage for third country companies: taking into account only the part of the turnover that was achieved in the EU territory is considered justified as this threshold ensures a territorial link between third country companies and the EU and serves as a sufficient basis for the subsidiary application of EU law.
  • Methodology for calculating net turnover: for third country companies there is already a methodology for calculating net turnover based on the Country-by-Country Reporting Directive (amendment to the Accounting Directive). In contrast, there is no such methodology for calculating the number of employees for third country companies.
  • Experience with the French law: the experience gained from the implementation of the French due diligence law shows that in the absence of a common definition of an employee, it is difficult to determine the number of employees worldwide. This leads to problems in determining which third country companies fall within the scope of the rules and, as a result, makes it difficult to enforce the rules effectively.

The above process thus ensures that third country companies are covered fairly and effectively by the directive, while also taking into account the specific challenges associated with their regulation.

All companies to which the regulation applies will aim to invest accordingly, seek contractual guarantees from their partners, improve their business plan and support small and medium-sized business partners. They will also need to adopt a transition plan to demonstrate that their business model is compatible with the 1.5 °C global warming target set by the Paris Agreement.

Other legal obligations
The obligations arising from CS3D will also extend to the area of civil liability. In particular, if a company deliberately or negligently fails to comply with the requirements under CS3D and thereby causes harm to another person. Damage caused to a person’s protected legal interests will be interpreted in accordance with national law. In doing so, the limitation period shall not be shorter than the limitation period under the relevant national general civil liability regime.

Another thorny issue is how to navigate the various layers of environmental, social and governance (ESG) compliance. Companies subject to national supply chain rules will have to wait for guidance from national governments on how to “translate” compliance with existing regulations into new regulations. Companies reporting under the CSRD will be deemed to have complied with the reporting obligation under the CS3D, but some questions remain about the relationship between the two sets of rules and their independent phasing-in.

In addition, member states will be obliged to establish or designate a supervisory authority to inspect companies and, in the event of non-compliance, to impose fines according to the nature and seriousness of the breach. This may include, for example, publication of the offences or fines of up to 5% of the company’s net worldwide turnover.

Next procedure
The CS3D has already been formally approved by the EU Council and signed by the Presidents of the EU Council and the European Parliament on 13 June 2024. It is now awaiting publication in the Official Journal (probably later in 2024). It is expected to enter into force 20 days after that, with member states having two years thereafter to transpose it into national law. This is likely to happen during 2026.

In conclusion – the importance and future perspectives of CS3D
The adoption of CS3D is a significant step by the EU towards more responsible business behaviour and an end to the exploitation of people and the planet by unscrupulous companies, which often occurs with hidden impacts at the end of the supply chain. This will be complemented in the future by further legislation such as the regulation on the banning of products from forced labour. We will continue to monitor developments on ESG issues for you.

More detailed information can be found here.

If you have any questions about non-financial reporting or the context of the CS3D, please do not hesitate to contact us, our PEYTON legal team is at your disposal.

[1] Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937, available at: eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52022PC0071

[2] Regulation of the European Parliament and of the Council on the prohibition of products of forced labour on the Union market (COM(2022)0453 – C9-0307/2022 – 2022/0269(COD)), available at: IMMC.COM%282022%29453%20final.ENG.xhtml.1_EN_ACT_part1_v9.docx (europa.eu)


Mgr. Jakub Málek, managing partner – malek@plegal.cz

Rachel Kouklíková, legal assistant – kouklikova@plegal.cz

Tereza Hrudková, legal assistant – hrudkova@plegal.cz




20. 6. 2024