Corporate Sustainability Due Diligence Directive
A company's environmental impact and carbon emissions are largely attributable to its supply chains. Global supply chains are sometimes increasingly criticized for human rights violations. The Corporate Sustainability Due Diligence Directive, CS3D or CSDDD for short, was adopted by the EU to promote compliance with human and environmental rights.
When does the directive have to be implemented by companies?
The European directive must be transposed into national implementing legislation by the member states. Integration into national law must take place by 26.07.2026 at the latest. Exactly one year later, on 26.07.2027, the CS3D comes into force.
Which companies are covered by the directive?
Legal entities are taken into account. All common legal forms were included, with the directive focusing on large companies with the following transition periods
- > 5,000 employees and > 1.5 billion euros in turnover from 2027
- > 3,000 employees and > 900 million euros in turnover from 2028
- > 1,000 employees and > 450 million euros in turnover from 2029
- The law also applies to top-level group parent companies that exceed the thresholds on a consolidated basis.
- Franchise companies with license fees of > EUR 22.5 million in the last financial year and if the company or its ultimate parent company generated a global turnover of > EUR 80 million in the last financial year
- Third-country companies (outside the EU) with a turnover of > EUR 450 million generated within the EU. The number of employees is negligible in these cases.
To which part of the supply chain does the directive apply?
CS3D refers to the value chain shown as an “activity chain”, as the company's own business area is also taken into account.
The upstream supply chain includes direct and indirect suppliers. The downstream supply chain is limited to direct contractual relationships in the areas of storage, transportation and distribution.
Scope of the activity chain (Aktivitätenkette) according to CS3D
What measures do companies need to take?
According to CS3D, there is an obligation to make every effort to fulfill due diligence obligations, i.e. appropriate steps must be taken. These are listed below. At the same time, it is not assumed that efforts can eliminate all negative effects.
All due diligence obligations only apply on a risk basis. Thus, the scope of influence on direct suppliers will be higher and depends on the specifics of the respective business relationship. Under no circumstances - contrary to many myths - are all suppliers to be continuously and comprehensively checked with regard to the legally protected values. Sending out questionnaires to all suppliers is therefore not very effective.
To what extent are SMEs affected by CS3D?
Due to the broad scope of the chain of activities, obligated companies will pass on their responsibility to suppliers, and thus also to SMEs. The requirements must be designed appropriately and attention must be paid to practical feasibility to ensure that the burden on SMEs is not exceeded. Large companies and member states are obliged to support them.
What penalties can be imposed?
The Directive provides for administrative penalties of up to 5% of global turnover and claims for damages against companies covered by the law. The exact details will result from the respective national law.
What are the next necessary steps?
Use ESG synergy effects from your direct corporate environment and include the supply chain in your strategy!
The first companies will be required to report according to CSRD in 2024, most of them will follow in the next few years. Many blind spots can already be identified in the upstream supply chain. In preparation for CS3D, which goes beyond a mere reporting obligation, and in order to exploit synergy effects - also in relation to other directives such as the EUDR - it is advisable to integrate ESG criteria into supplier management in good time. This can be achieved through appropriate integration into the risk management approach u.
It is not advisable to consider regulations and reporting obligations separately, especially with regard to the integration and use of risk management tools. The effort required for integration depends on the size of the company and the scope of the supplier base. For companies covered by CS3D, more extensive projects will be necessary, whereas SMEs can make do with just a few workshops to integrate measures.
CSRD: Corporate Sustainability Reporting Directive
EUDR: EU Deforestation Regulation
CSDDD/CS3D: EU Sustainability Due Diligence Directive
For further information: Lydia Schwarhofer
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