DWF’s True Diligence thought leadership report reveals the complexities of compliance with the EU Corporate Sustainability Diligence Directive (‘CS3D or the Directive’).
The report compiled opinion research amongst 1,200 C-suite leaders from companies with a minimum global turnover of at least €150m based in France, Germany, Italy, Poland, Spain, and the UK, covering private equity, transport and logistics, insurance, energy, real estate and consumer and retail sectors.
The CS3D entered into force in July 2024 and makes mandatory the obligation to perform due diligence. It is enforceable through administrative supervision implemented by Member States with penalties of up to 5% of net worldwide turnover. Businesses must identify, assess, mitigate, prioritise and terminate adverse impacts of activities on human rights and the environment.
The purpose of CS3D
The Directive aims to foster sustainable corporate behaviour in companies’ operations, their subsidiaries and across their global value chains. Unlike the Corporate Sustainability Reporting Directive (‘CSRD’) which is focused on transparency and reporting, CS3D mandates active due diligence. Notably, CSRD and CS3D are akin to fraternal twins, closely linked yet distinct. Both necessitate detailed reporting on sustainability impacts and due diligence processes. Setting targets is essential but no longer adequate. Today, the CS3D drives home that it’s not just about disclosing information, implementation is also critical. Accountability is paramount, requiring rigorous adherence to risk-based environmental and human rights due diligence obligations.
CS3D addresses the lack of a harmonised legal framework for human rights and environmental due diligence in the EU. According to True Diligence, 65% of leaders identified the lack of harmonisation as a significant barrier to impact assessment. The CS3D marks a new era of corporate responsibility for businesses that drives a global shift towards more sustainable and ethical business practices. The risk-based approach aligns with current, recognised frameworks such as the UN Guiding Principles on Business and Human Rights, the UN Sustainable Development Goals as well as the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct.
CS3D impacts those companies which are not directly in scope but in the global value chain of those that are, including small and medium-sized enterprises. Those companies within direct scope will cascade its informational and other requirements onto their business partners.
Why CS3D needs focus now
Businesses who aspire to act with integrity and fulfil their pledges to promote environmental sustainability will need to ensure climate resilience and uphold human rights. However, this requires careful strategic planning and purposeful implementation. With regards to human rights specifically, True Diligence shows that almost two-fifths of organisations have not yet developed an action plan for mitigating adverse human rights impacts (39%).
Businesses are being confronted with a tsunami of new ESG and sustainability-related regulations that they must comply with. Identifying priorities and planning ahead will be increasingly important for economic success and driving transformation to ensure a future-proofed value chain and sustainable long-term value creation. Bridging knowledge gaps among C-suite executives, including in-house lawyers, regarding the rationale behind regulations and the benefits of compliance is essential for driving meaningful change. In fact, True Diligence reported only 27% of C-suite leaders stated that their organisations understood how CS3D applies to their business. Businesses must focus on careful strategic planning, without which there will remain a clear integrity gap.
How companies can start to prepare
It’s time for human rights, environmental sustainability, and climate to share centre stage. Businesses should begin by assessing potential impacts as early as possible in the lifecycle of an activity or relationship. Identification and assessment of risks are not one-off exercises, benefitting from an iterative process to maintain a true picture of risks over time, taking into account changing circumstances.
The CS3D ushers in a new era of corporate responsibility, moving companies from words and commitments to action. Implementing these changes will require a systemic and cultural shift, offering a chance for businesses to lead and avoid the high costs and penalties of non-compliance. Genuine action reflects integrity and commitment to human rights, climate change and environmental sustainability. Businesses must look beyond their immediate operations to their global value chain and beyond short-term goals. Achieving progress does not necessitate perfection; incremental steps can pave the way for transformative change.
The Directive represents a significant step towards corporate responsibility by embedding environmental sustainability, climate-related and human rights considerations into the core operations of businesses and their subsidiaries and in their global chain of activities with business partners. CS3D’s far reaching scope and broad subject matter coverage, mandatory requirements, and stringent enforcement mechanisms and potential liabilities will undeniably transform how global companies approach their responsibilities towards people and the planet.
Are you ready for this new era of corporate responsibility? Here are seven essential steps to start to prepare for effective CS3D implementation:
- Use DWF’s complimentary CS3D digital tool to self-assess your readiness.
- Create a taskforce of your key internal stakeholders.
- Map your value chain with your subsidiaries and business partners.
- Highlight the human and social value impact of the requirements across the value chain.
- Identify what you are already doing.
- Undertake materiality assessments for both environment and human rights.
- Design and implement a climate mitigation transition plan, and develop your prevention and remediation plans to address to actual and potential adverse impacts identified.
DWF’s True Diligence report
To find out how you can prepare for a new era of corporate responsibility, read DWF’s True Diligence report.