On March 15, 2024, the EU Council gave its approval to the Corporate Sustainability Due Diligence Directive (CS3D). This decision follows a period of contention, particularly regarding the December 2023 version, which was initially touted as the final iteration but faced significant opposition. The latest version has undergone further revisions, notably softening its requirements.
Key Changes
Several significant changes have been made and, herein, the focus is on three major revisions. Firstly, there has been a notable increase in compliance thresholds, with employee counts rising from 500 to 1000, and global turnover thresholds from EUR 150 million to EUR 450 million. Additionally, the original proposal to encompass firms operating in high-impact sectors like textiles, agriculture, and mineral extraction has been discarded. Consequently, the directive's application has seen a significant reduction, now affecting approximately 5,500 firms compared to the initially projected 13,000.
Secondly, the initial proposition entailed due diligence requirements for both upstream (supplier side) and downstream (customer side) segments of value chains, encompassing all direct and indirect relationships within a company's value chain. The updated proposal has scaled back the downstream component by eliminating references to a firm's product disposal.
A third critical issue for firms revolved around the civil liability clause. While the previous version of CS3D had already limited liability exposure, stipulating that companies couldn't be solely accountable for damage caused by their business partners within the value chain, the new version clarifies that individual EU member states are responsible for determining the application of this rule.
Impact of Excluding High-Risk Sectors
The overarching objective of CS3D is to safeguard individuals within value chains who are most susceptible to human rights abuses and environmental harm. The fast fashion industry, notorious for such violations, also boasts significant innovation potential, particularly within its supply chain. However, few firms leverage this capacity to enhance conditions upstream unless compelled by major events, scandals, or regulatory pressure. Here lies a considerable untapped potential for impact within the European Union. Nevertheless, the revised CS3D retains the flexibility to address high-risk sectors in the future.
Bureaucracy Concerns
Critics of CS3D often cite its perceived bureaucratic nature. However, unlike its German counterpart, which relies heavily on disclosure requirements, the EU's approach emphasizes enforcement through liability. In Germany, companies are obliged to complete an exhaustive annual survey, a process deemed cumbersome by many firms. In contrast, the EU's mechanism employs the threat of legal sanctions, resulting in a less bureaucratic framework. Consequently, the EU version presents an opportunity for the German government to alleviate the burden on local firms.
References
Brunetti, A. 2024. Scope of EU supply chain rules cut by 70% ahead of key Friday vote. Accessed: 20 March 2024, https://www.euractiv.com/section/economic-governance/news/scope-of-eu-supply-chain-rules-cut-by-70-ahead-of-key-friday-vote/?_ga=2.12400372.1754500509.1710904817-1186971903.1710904817.
Council of the European Union. 2024. Proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937. Analysis of the final compromise text with a view to agreement. Accessed: 20 March 2024, https://www.vbw-bayern.de/Redaktion/Frei-zugaengliche-Medien/Abteilungen-GS/Sozialpolitik/2024/Downloads/RS44_Anlage.pdf.
European Commission. 2023. Corporate Sustainability Due Diligence. Fostering sustainability in corporate governance and management systems. Accessed: 30 May 2023, https://commission.europa.eu/business-economy-euro/doing-business-eu/corporate-sustainability-due-diligence_en.
Hartmann, J. 2021. Toward a more complete theory of sustainable supply chain management: the role of media attention. Supply Chain Management: An International Journal 26 (4): 532-547.