As the European Union continues to advance its sustainability agenda, the Corporate Sustainability Due Diligence Directive (CS3D) is set to become a transformative piece of legislation for businesses across the EU, including Ireland.
The CS3D, which received its final EU approval at the end of May, aims to ensure companies conduct thorough due diligence on their supply chains, focusing on human rights and environmental impacts. Here’s what Irish companies need to know about the CS3D, how to prepare for its implementation and the consequences of non-compliance.
Understanding the Corporate Sustainability Due Diligence Directive
The CS3D mandates that large companies undertake due diligence to identify, prevent, mitigate and account for human rights and environmental abuses in their operations and supply chains. The directive applies to:
- EU Companies: All EU companies with more than 1,000 employees and a net turnover exceeding €450 million in the last financial year.
- Non-EU Companies: Non-EU companies with a net turnover exceeding €450 million in the EU.
- Licencing: Companies with franchising or licensing agreements where royalties amount to at least €22.5 million in the last financial year, with a net worldwide turnover of €80 million in the last financial year.
SMEs are not directly within the scope of the new directive but it does provide supports and protective measures if indirectly affected as business partners in the chain of activities of larger companies.
Key Requirements of the Directive
Due Diligence Obligations: Companies must integrate due diligence into their policies, identify adverse impacts, establish and maintain a complaints procedure, monitor the effectiveness of their due diligence policies and measures and publicly communicate on due diligence.
Action Plans: Companies need to develop action plans to prevent, cease, or mitigate potential or actual adverse impacts identified.
Stakeholder Engagement: Engagement with affected stakeholders is crucial to effectively address and mitigate identified impacts.
Impact on Irish Companies
Large Irish companies will need to comprehensively review their supply chains to ensure they are free from human rights violations and environmental harm. This involves:
Policy Integration: Developing robust policies that embed sustainability into the core business strategy.
Supply Chain Transparency: Implementing systems to trace and verify the origins of raw materials and the conditions under which they are produced.
Reporting and Accountability: Enhancing transparency through detailed public reporting on due diligence activities and their outcomes.
How Companies Can Prepare
Conduct a Gap Analysis: Assess current policies and practices against the requirements of the CS3D to identify areas needing improvement.
Develop a Comprehensive Due Diligence Framework: Establish policies, procedures, and tools to conduct thorough due diligence.
Train Employees: Ensure all relevant employees understand the directive and are trained in due diligence practices.
Engage with Stakeholders: Build strong relationships with suppliers, customers, and other stakeholders to facilitate cooperation and compliance.
Monitor and Report: Develop mechanisms for continuous monitoring and public reporting of due diligence activities.
When will it apply to my large organisation?
The directive will apply on a phased basis from its entry into force:
3 years (from 2027)
- EU companies with over 5,000 employees and a net worldwide turnover of more than €1,500 million,
- Non-EU companies with over €1,500 million net turnover generated in the EU in the year preceding their last financial year.
4 years (from 2028)
- EU companies with over 3,000 employees and a net worldwide turnover of more than €900 million,
- Non-EU companies with over €900 million net turnover generated in the EU in the year preceding their last financial year.
5 years (from 2029)
- EU companies with more than 1,000 employees and EUR 450 million net worldwide turnover
- Non-EU companies with more than EUR 450 million net turnover generated within the EU.
Consequences of Non-Compliance
Non-compliance with the CS3D can lead to significant consequences. Where a violation of obligations is identified, companies will have to take the appropriate measures to prevent, mitigate, bring to an end or minimise the adverse impacts arising from their own operations, those of their subsidiaries, and those of their business partners in their chain of activities. If they fail to do so, companies can be held liable for the damages caused.
Member States are obliged to designate a ‘National Supervisory Authority’ to enforce the directive, investigate wrongdoing, and impose financial sanctions on non-compliant companies which can be up to 5% annual turnover.
Other consequences include reputational harm, losing consumer trust and market share as well as the potential of facing legal actions from affected stakeholders or consumer groups.
Conclusion
The Corporate Sustainability Due Diligence Directive represents a significant step towards more sustainable and ethical business practices within the EU. For Irish companies, including SMEs, this directive not only mandates compliance but also offers an opportunity to enhance their sustainability credentials, thereby gaining a competitive edge in an increasingly conscientious market. By proactively preparing for the CS3D, companies can mitigate risks, safeguard their reputation, and contribute to a more sustainable future.
For further guidance and support on implementing the CS3D, contact our team at Ayrton Group where we provide comprehensive training and consultancy services tailored to your business needs.
