Since our last article, the Corporate Sustainability Due Diligence Directive (“CS3D”)[1] was published in the EU’s Official Journal on 5 July 2024, and it officially entered into force on 25 July 2024.

EU Member States are required to transpose the Directive into their national laws by 26 July 2026.

By way of reminder, CS3D creates:

  1. Obligations for companies regarding actual and potential human rights adverse impacts, with respect to their own operations, the operations of their subsidiaries, and the operations carried out by their business partners in the chains of activities of those companies;
  2. Liability for violations of the obligations as referred to in point (a); and
  3. The obligation for companies to adopt and put into effect a transition plan for climate change mitigation which aims to ensure, through best efforts, compatibility of the business model and of the strategy of the company with the transition to a sustainable economy and with the limiting of global warming to 1.5oC in line with the Paris Agreement (Article 1).

This article – which focuses on which companies will be caught by the Directive – will be the first in a series to dive deeper into each of the provisions of CS3D.

CS3D applies to large companies (including the ultimate parent companies of groups) formed in the EU or generating revenue or involved in franchising/licensing in the EU above certain thresholds.

However, it is important to note that while CS3D may not directly apply to smaller entities, these organisations could still be indirectly affected if they are part of the value chains of larger companies that are subject to CS3D’s requirements.

The scope of CS3D is covered by Article 2, which prescribes that it applies to:

  1. EU Companies
    • Companies with over 1,000 employees and a net worldwide turnover of more than EUR 450 million.
    • Ultimate parent companies of groups meeting the above thresholds on a consolidated basis.
    • Companies or ultimate parent companies involved in franchising/licensing in the EU with royalties over EUR 22.5 million and a net worldwide turnover over EUR 80 million.
  2. Non-EU Companies
    • Companies with a net turnover EUR 450 million in the EU.
    • Ultimate parent companies of groups meeting the above threshold on a consolidated basis.
    • Companies or ultimate parent companies involved in franchising/licensing in the EU with royalties over EU 22.5 million
  3. Exemptions
    • Ultimate parent companies holding shares without management roles can be exempt if a subsidiary in the EU fulfils certain conditions.
  4. Additional Conditions
    • Part-time employees are counted on a full-time equivalent basis.
    • Conditions must be met for two consecutive financial years.
    • Specific rules apply for determining the competent Member State for regulation.
  5. Exclusions
    • The Directive does not apply to Alternative Investment Funds (AIFs) or Undertakings for Collective Investment in Transferable Securities (UCITS).

    It is estimated[2] that approximately 7,000 companies (~6,000 EU limited liability companies and partnerships and ~900 large non-EU companies) will have obligations under CS3D.

    Although micro companies and SMEs are not covered by the rules, CS3D provides supporting and protective measures for SMEs whereby in scope companies are expected to provide targeted and proportionate support including by providing or enabling access to capacity-building, training or upgrading management systems where proportionate and financial support if compliance would jeopardise the viability of the SME (Articles 10 and 11).

    The restriction to large companies represented something of a compromise when CS3D was brought in, but it opens the door to future scope enlargement in the EU, as well as copycat legislation in other jurisdictions such as the UK, where the Modern Slavery Act 2015 is in the process of review.[3]


    [1] Directive – EU – 2024/1760 – EN – EUR-Lex

    [2] Corporate sustainability due diligence – European Commission

    [3] Independent review of the Modern Slavery Act: final report – GOV.UK