The CS3D in Perspective

Sustainability and corporate due diligence

On May 24, the Council of the European Union (EU) approved the Directive on corporate sustainability due diligence regarding sustainability (the "CS3D"). It establishes the duty of companies to prevent, mitigate, correct and remedy adverse human rights and environmental impacts resulting from their operations, those of their subsidiaries, and those carried out by their “chain of activities,” i.e., their business partners in a global market. This is what corporate due diligence on sustainability means. See: Legal Flash | The Due Diligence Directive enters the final stretch.

With the aim to identify and present the variety of issues raising from t the corporate due diligence obligations, Cuatrecasas is launching a series of posts in which we will regularly share our reflections on CS3D. We believe it can be a useful exercise throughout the transition period CS3D gives companies to adapt their operations and relations in their chain of activities to the due diligence standard of conduct on sustainability.

In this post we explain how the sustainability due diligence standard of conduct is already present in different European laws and how it applies to a wider spectrum of companies than those within the scope of the CS3D.

Lawmakers usually use three categories of regulatory measures in order to establish a due diligence duty for companies in relation to adverse impacts on human rights and the environment resulting from their operations, or the operations in their chain of activity (or supply or value chains):

• Reporting, transparency and information rules: these oblige companies to explain what risks their activities poses for human rights and the environment, and how these risks are managed.
• Commercial measures: these measures prohibit importation of products that are a result of, for example, child or forced labor.
• Rules that set a mandatory standard for business conduct, which is broken down into interconnected and regularly performed duties: these aim to identify and prevent potential adverse impacts, and to remedy, mitigate and repair actual adverse effects.

The EU already developed regulations in each of these three categories. Therefore, strictly speaking, CS3D is not a new development, nor is it a directive that operates in isolation.

In relation to reporting and transparency rules, the EU passed the Corporate Sustainability Reporting Directive (CSRD) and the Taxonomy Regulation. The aim of both is to improve the quality of corporate sustainability reporting, including human rights. The European Sustainability Reporting Standards on Social matters (ESRS-S1 to S4) cover the risks and impacts on (i) rights of own workforce and rights of workers in the value chain, (ii) rights of affected communities, and (iii) rights of the consumers and users of the companies’ products and services. Although the CSRD creates a reporting obligation, it is evident that the consequences of this directive go beyond merely reporting, and companies will want and must put in place due diligence processes in order to manage these risks and impacts in their value chains. See: Legal Flash | Corporate Reporting on Sustainability: CSRD Directive.

CS3D, on the other hand, creates a mandatory standard of business conduct and falls into the third category. It establishes a mandatory standard of conduct for companies based on a risk approach and is aligned with the structure of the Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises. In this category we would also include the Conflict Minerals Regulation and the Batteries Regulation: both require importers and manufacturers to have a due diligence system in the supply chain that covers the raw materials affected by these regulations.

The EU, in this respect, also implemented commercial measures, such as:

• The Forced Labor Regulation approved by the European Parliament in April 2024, will start applying in 2027, banning products made with forced labor from entering the EU market.
• The Regulation on Deforestation-free products approved on May 31, 2024 and which will start applying from the end of 2024, and that prohibits both the commercialization and exportation in the EU market of products associated with deforestation, and applies to cattle, cocoa, coffee, palm oil, rubber, soya and wood.

Both regulations impose due diligence obligations on companies going beyond CS3D by not limiting the due diligence to a risk assessment but establishing specific measures, e.g., geolocation of raw materials and absolute obligations in the form of prohibiting commercialization.

The Forced Labor Regulation and the Regulation on Deforestation-free products together with the CSRD, broaden the subjective scope of the corporate sustainability due diligence standard of conduct. Firstly, a greater number of companies fall within the scope of the CSRD compared to CS3D. Secondly, both the Forced Labor Regulation and the Regulation on Deforestation-free products apply with reference to the product or part of the product, independently from the size of the companies importing or exporting from the European market differently to CS3D that defines in-scope companies depending on their size.

In addition, the due diligence standard of conduct is not always symmetrical amongst the different EU measures. For example, the CSRD definition of "value chain" is broader in scope than the definition of “chain of activities” in CS3D chain of activities (i.e., the former, includes distributors, consumers, end-users and end-of-life of products and services.) The Forced Labor Regulation and the Deforestation-free products Regulation, on the other hand, incorporate absolute prohibitions, and the later includes specific due diligence measures leaving a small margin for discretion to the relevant company.

We, therefore, advise against subscribing to the common misconception that corporate due diligence on sustainability is an obligation solely relevant to large companies with global and complex chains of activities.

In our next post we will speak about CS3D’s subjective scope and which companies are affected.