Europe continued its leadership in sustainability policy with the approval of the Corporate Sustainability Due Diligence Directive (CS3D) late last week. The new policy requires companies to identify and mitigate adverse environmental and social impacts in their supply chains. 

While this directive was expected to be finalized back in January, support faded as the backlash against over-regulation in Europe grew. After 45 days of intense negotiations, a majority of EU member states approved a substantially modified version of the policy. An 11th-hour switch from Italy was enough to get the ‘qualified majority’ of over 15 member states, representing more than 65% of the EU population. 

Here are the key aspects:

Phased in applicability: 

• 2027: EU companies with > 5,000 employees and global revenue > €1.5 billion; Non-EU companies with a net EU revenue > €1.5 billion.
• 2028: EU companies with > 3,000 employees and global revenue > €900 million; Non-EU companies with a net EU revenue of > €900 million.
• 2029: EU companies with > 1,000 employees and global revenue > €450 million; Non-EU companies with a net EU revenue of > €450 million.

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Due diligence obligations:

• A due diligence policy will have to be established in consultation with employees
• Identify, assess, and prioritize adverse impacts 
• Address and remediate adverse impacts 
• Engage with stakeholders for the identification and mitigation of adverse impacts
• Establish a grievance mechanism 
• Ongoing monitoring of the effectiveness at least every 12 months and after significant changes or new risks emerge.
• Publish an annual statement on due diligence on matters unless they are covered by reporting under the Corporate Sustainability Reporting Directive
• Retain documentation for at least five years
• Fines of up to 5% of companies’ global revenue can be levied for noncompliance

The bill passed its next hurdle on Tuesday with a lot less duress, clearing The European Parliament’s Legal Affairs Committee by a 20-4 vote. It will now go onto a full plenary vote in Parliament in April, where it is expected to easily pass.

This Smart Read article is contributed by Tim Mohin, Global Sustainability Leader, BCG. Every week ESG News delivers smart commentary from ESG practitioners and experts to unpack issues of the week. Submit your ESG Smart Read to [email protected]

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