European Council approves the Corporate Sustainability Due Diligence Directive – CSDDD or CS3D

The CS3D Directive is part of several rules that have been implemented in the countries of the European Union (EU), also considering the launch of the Green Deal, or the European Green Deal, in 2019, which aims to achieve the energy transition in these countries in order to accomplish climate neutrality by 2050, in accordance with the Paris Agreement.

The Directive creates significant obligations and impacts for companies that are part of the EU or are active in such countries. Although it has been reduced compared to what was agreed at the end of 2023, the order brings significant changes for these companies, business partners and their value chain, as well as penalties in the event of non-compliance with the established rules.

According to CS3D, the covered companies must adopt and implement effective due diligence policies to identify, prevent, mitigate and terminate actual and potential “adverse impacts” on human rights and environmental issues in their own operations, in the operations of their subsidiaries and in certain operations of their business partners.

These “adverse impacts” are defined on the basis of international treaties ratified by member states. Adverse environmental impacts include impacts resulting from, for example, pollution, deforestation, excessive water consumption or damage to ecosystems. Adverse human rights impacts are defined as impacts resulting from (i) a violation of human rights enumerated in various listed international instruments or (ii) other abuses involving human rights based on minimum conditions intended to ensure legal certainty. Typical examples include child labor, slavery and illegal labor exploitation.

The policies to be adopted and implemented will have to go beyond the traditional scope of corporate social responsibility. In addition to their own operations and the operations of the companies they control, these policies will have to cover the impacts that arise, or may arise, from the operations of the company’s direct and indirect business partners and in its value chain.

In order to be covered by the directive, companies governed by EU standards must comply with the following requirements: (i) have more than 1,000 employees on average and a net worldwide turnover of more than 450 million euros in the last fiscal year; (ii) have concluded franchising or licensing agreements in the Union in exchange for royalties with independent third-party companies, where such agreements ensure a common identity, a commercial concept and the application of uniform commercial methods, or where the royalties amount to more than 22.5 million euros in the previous fiscal year; (iii) or where the company has a worldwide net turnover of more than 80 million euros in the last fiscal year.

Companies governed by the rules of other jurisdictions must, in turn: (i) generate a net turnover of at least 450 million euros in the EU in the tax year preceding the last tax year; (ii) have entered into franchising or licensing agreements in the Union in exchange for royalties with independent third-party companies, where these agreements guarantee a common identity, a common commercial concept and the application of uniform commercial methods, and where these royalties exceed 22.5 million euros in the Union in the tax year preceding the last tax year; (iii) the company must have had a net turnover of more than 80 million euros in the Union in the tax year preceding the last tax year.

Companies covered by the directive must also adopt a Climate Transition Plan, which must be updated every 12 months in order to provide details on the progress made by the companies, considering time-bound targets related to combating the effects of climate change for 2030 and in 5-year stages until 2050, based on scientific evidence, a description of the levels of decarbonization identified, changes in the company’s product portfolio and the adoption of new technologies, as well as a description of the role of administrative, managerial and supervisory bodies in relation to the Plan.

In the event of non-compliance with the rules, member states must establish the penalties to be applied, including financial penalties, which must be less than 5% of the company’s worldwide net turnover in the fiscal year preceding the decision to impose the fine.