CS3D a due diligence drama

What’s happening is beyond anyone’s expectations, almost like a due diligence drama. We’re discussing the Corporate Sustainability Due Diligence Directive or CS3D, a crucial and transformative proposal that will truly make a difference for the environment and for people working in supply chains.

Will it pass in this legislative term?

CS3D – What Happened

The bill, already politically agreed upon in December 2023, was supposed to gain approval from member states on Friday, February 9th.

However, something went wrong: last-minute news of a possible “abstention” by Germany and Italy caused its postponement to Wednesday, February 14th. But it doesn’t end there, as news of a second postponement arrived with the vote being removed from the agenda of this week’s meeting.

The news of the second delay suggests that the Belgian presidency still lacks the necessary support for the proposal to be approved.

What is CS3D Exactly?

The Corporate Sustainability Due Diligence Directive (CS3DD) set a standard on sustainability issues for businesses operating in the EU in environmental matters, climate change, and human rights.

The new due diligence requirements apply not only to the company’s direct actions but also to its subsidiaries and supply chain. EU-based companies, as well as non-EU companies conducting a certain level of activity in the EU, thus become responsible for their suppliers’ actions.

The proposed due diligence standard adopts a risk-based approach, where companies must identify the risks where they are most severe or where they are most likely to occur to prevent their operations, those of their partners, and the supply chain from having negative effects on human rights, such as child labor and worker exploitation, and on the environment, such as pollution and loss of biodiversity.

To comply with CS3D obligations, companies would need to identify, assess, prevent, mitigate, cease, and remedy their negative impact and that of their partners, upstream and downstream of their supply chain, on people and the planet.

Failure to act will result in regulatory liability by member states, in addition to opening them up to civil litigation by those affected.

Who doesn’t want it?

Some countries, led by Germany, have abstained from the vote, showing they no longer wish to proceed with CS3D.

Despite Germany being one of the countries that have already introduced legislation on due diligence in supply chains, the German objections concern the fact that the EU is over-regulating the area, leading to an excessive burden on businesses, particularly small and medium enterprises.

In particular, it is the minority governing party Freie Demokratische Partei (FDP) that is leading this battle: FDP ministers have expressed opposition to the introduction of CS3D based on concerns about the potential “administrative burden” it could entail, at a time when both the EU and national governments claim to be seeking to reduce bureaucracy.

The CS3D liability regime “represents a greater burden” than the German law on supply chain due diligence, which does not contain a liability regime, and suggested that CS3D would impose an additional burden on companies.

The Companies Response

In this climate of chaos, companies have stepped forward urging the government to adjust the negotiated and harmonized legislation on due diligence. For clarity, to know what to work on, and that the efforts already made will make sense in the future.

“In light of the likely German abstention in the EU Council vote on the Corporate Sustainability Due Diligence Directive (CSDDD), 24 companies and networks, including ALDI SÜD, Bayer, Primark, Mars, Tchibo, KiK, Ritter Sport, VAUDE, FRoSTA, and the Global Network Initiative jointly urged the German Chancellor to secure the compromise reached in December 2023. The statement was first published on 6 February; additional signatories joined since then.”

“As large, medium-sized and small companies and their networks, we are very concerned that German support for the Corporate Sustainability Due Diligence Directive (CS3D) could still be withdrawn in the final approval process.

“The political compromise on the CS3D from December last year is based on the UN and OECD standards and thus builds on guidelines that responsible companies have been using as a reference for years. In our view, the requirements of the CS3D are appropriate and feasible….”

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Fake News

Two inaccuracies are circulating on the web and in newspapers regarding the CS3D:

❌ Misconception: CS3D would result in increased costs for European companies to the detriment of non-EU companies.

✅ Fact: The directive is part of a European and international framework where several countries have already adopted norms on transparency and due diligence concerning global supply chains. One of the main objectives of the directive is to harmonize the standards that companies must adhere to, not only at the EU level but also beyond (a phenomenon known as the Brussels effect).

❌ Misconception: CS3D would disadvantage SMEs (Small and Medium-sized Enterprises).

✅ Fact: The directive does not apply directly to SMEs. SMEs are often victims of predatory contracts, commercial practices, and market dynamics that can foster violations of human rights, labor rights, and environmental standards. CS3D aims to prevent and manage such dynamics by requiring large companies to consider how they contract with their suppliers.

Next Steps

Last opportunity for MEPs in the European Parliament to vote on CS3D is the Plenary session during 22 – 25 April. Before that MEPS must vote in the Legal Affairs Committees , but all of this can only happen after the Council of the European Union can find a majority to support CS3D.

That gives the Belgian Presidency of the Council of European Union possibly two weeks to find a majority. Key dates for EU member states to meet & agree can be found here LINK.

Conclusion

These delays could be more than a temporary setback for CS3D. The 2024 European Parliament elections are scheduled for early June, and there’s a possibility that the body’s composition may change on this issue, removing majority support for CS3D and other directives.

For real change to happen, all actors, including politicians, must play their part, but while on one side there are companies paving the way for truly sustainable business models, aiming to do good and to do more, on the other there are political and power games.

Do you want to learn more about the CS3D?
Click here and read the main points.