Trialogue: CS3D passing Council agreement

On 15 March 2024, the Belgian Council Presidency successfully brokered an interinstitutional agreement on the Corporate Sustainability Due Diligence Directive (CS3D), presenting a compromise text that garnered the required Qualified Majority Voting. Initially met with opposition from several member states, including Germany, Italy, and France, who argued it would overly burden businesses and jeopardize European competitiveness, the compromise eventually gained support. France, Italy, and other smaller member states withdrew their opposition.

While the agreed text maintains the primary goal of mandating human rights and environmental due diligence in supply chains for large companies, it underwent significant revisions to address the regulatory burden or alleviate it.

The threshold of the scope for EU companies has been revised in the latest agreement. Now, companies must have at least 1,000 employees (up from 500 in the provisional agreement reached on 14 December 2023) and a net worldwide turnover of EUR 450 million (compared to EUR 150 million initiallyproposed by the Commission and EUR 300 million in a later concession text). This adjustment is anticipated to encompass approximately 5,000 EU companies, a decrease of around 60% from the original proposal, which would have affected nearly 13,000 companies. For non-EU companies, compliance with the directive is now required only if they generate a net turnover of EUR 450 million within the Union, a change from the EUR 150 million threshold in the provisional agreement.

Civil liability provisions have undergone additional refinement in the recent agreement. The original agreement limited companies’ liability, asserting that a company should not bear sole responsibility for damages caused by its business partners within its chain of activities. However, under the agreed text, member states now have the flexibility to establish the conditions under which trade unions, NGOs, or national human rights institutions can initiate collective redress mechanisms on behalf of claimants. Specifically, language allowing such bodies to file claims “in their own capacity” has been removed, with the option for third-party intervention in support of victims explicitly outlined. Moreover, it’s clarified that the directive doesn’t compel member states to extend their national laws on representative actions to claims under the directive, as defined in the Representative Actions Directive (i.e., as actions brought by qualified entities before national courts or administrative authorities on behalf of groups of consumers to seek injunctive or redress measures, or both).

In the European Parliament, the JURI Committee voted in favour of the amended CS3D framework on 19^th of March, with 20 votes in favour, 4 against and no abstentions. The bill will now also need to be approved in Plenary, which will likely take place during the last session of this term (22-25 April). If approved, the directive will be adopted, and the Member States will begin the transposition into national law. Subsequently, a phased implementation plan is foreseen for companies depending on their employees and annual turnover:

• 3 years for companies with over 5000 employees and an annual turnover exceeding EUR1500 million.
• 4 years for companies with over 3000 employees and an annual turnover exceeding EUR900 million.
• 5 years for companies with over 1000 employees and an annual turnover exceeding EUR450 million.

The compromise text on the CS3D marks a substantial progression of the EU Commission’s goal in establishing a regulatory framework for sustainable corporate governance in Europe. The revised regulations uphold the fundamental principle of mandatory sustainability due diligence, compelling companies to identify, prevent, halt, or mitigate adverse impacts on human rights or the environment stemming from their global “chain of activities.” Non-compliance could result in monetary penalties and civil liability. These obligations extend not only to EU-based companies but also to non-EU firms operating within the EU and meeting relevant turnover criteria, thus extending the directive’s influence beyond European borders.

It remains to be seen how this may link into the collective dispute and redress mechanisms. This would also depend on the national transpositions in the EU member states after a likely final approval in April 2024 in the plenary of the European Parliament.