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Highlights
- CS3D enforces consideration for human rights and the environment throughout supply chains.
- Companies will need effective due diligence to comply with this new regulation.
- Non-compliance may result in sanctions such as fines and compliance orders, and there’s potential for civil liability.
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A new directive
The Corporate Sustainability Reporting Directive (CSRD) has strengthened how organisations report on the social and environmental risks they face. Now the Corporate Sustainability Due Diligence Directive (or CS3D) is about to transform the regulatory environment once more by enforcing consideration for human rights and the environment throughout supply chains.
Businesses and individuals alike are striving to change their behaviour and attitudes to protect our planet. Regulation also plays an important role in holding organisations to account. CSRD, which came into force in January 2024, requires large companies to regularly report on the social and environmental risks they face.
On April 24, 2024, the European parliament also voted on—and passed—CS3D, which is designed to enforce consideration for human rights and the environment throughout supply and value chains. The main objective of CS3D is to foster sustainable and responsible corporate behaviour and accelerate progress toward sustainability goals.
A mandatory approach
While a patchwork of voluntary and issue-specific due diligence laws currently exists across EU member states, addressing concerns such as low wages, child labour, and specific materials, it lacks true bite. CS3D will be different: It aims to transform corporate sustainability with a comprehensive and mandatory approach, requiring large companies to conduct due diligence to identify, prevent, mitigate, and account for adverse sustainability impacts in their operations and value chains. CS3D also seeks to unify and strengthen existing regulations.
To understand the game-changing impact that CS3D could have, it is important to explore potential scenarios from different sectors:
Scenario 1, manufacturing: Imagine a large toy manufacturer with global factories operating under mandatory CS3D regulations. Proactive due diligence uncovers a branch using toxic chemicals that are polluting water sources, a clear violation of CS3D’s human health and environmental protection standards. The business swiftly acts by collaborating with the factory to switch to safer practices and aiding the community in water clean-up. This scenario exemplifies how CS3D’s mandatory framework compels responsible corporate behaviour, ensuring that companies identify and actively address potential harms.
Scenario 2, banking: A ‘green bank’ that provides sustainable finance solutions to its customers conducts rigorous due diligence on potential investments under CS3D. This uncovers a loan application for a project linked to deforestation, a violation of CS3D’s environmental protection mandates. Legally bound by the directive, the bank cannot proceed with the loan. Instead, it engages with the applicant, exploring alternative funding options aligned with sustainable practices. It also advises the applicant on exploring renewable energy sources, promoting the responsible use of resources as outlined by CS3D. This scenario illustrates how CS3D acts as a catalyst for responsible banking, with the organisation—obligated by law—actively preventing potential environmental harm and thus setting a precedent for a more sustainable financial landscape.
Pros and cons
CS3D is a complex and ambitious proposal with many benefits and challenges. Among the benefits are:
• Comprehensive and structural approach to due diligence around the supply/value chain and other stakeholders
• Ecosystem creation with other organisations and collaboration for positive impact
• Better and clearer visibility around the value chains of participating organisations
• Better awareness of impact
• Supply/Value chain modernisation
• Better risk management and mitigation
• An opportunity for employees and stakeholders to share knowledge and grow
Potential challenges are:
• The scope of the regulation is too wide and needs clarification
• Execution issues and potential inaccuracies linked to robust parameters about sustainability reporting
• High cost of compliance and transition
• Sensitive nature of information, leading to unintended and malicious consequences
• Potential cost increase in goods and services
• Non-compliance leading to fines of up to 5% of the company’s global net turnover
• Non-readiness of organisations and countries in implementation
Need for discussion
Despite its good intentions, CS3D has sparked significant concerns from various stakeholders. This has raised the need for potential amendments to balance its vision with practical implementations for businesses.
• Industry group BusinessEurope, which represents European businesses, has expressed concerns that CS3D would impose excessive costs and administrative burdens on companies, potentially stifle innovation, and undermine competitiveness. BusinessEurope also calls for a workable and clear CS3D that does not weaken the internal market.
• The Centre for European Policy Studies, a think tank, has said “there might be ground for corporate panic” and that CS3D may be asking too much of the private sector.
• The European Environmental Bureau (EEB), an advocacy group, has called for stronger enforcement mechanisms and a clearer focus on the most pressing sustainability challenges. EEB also published an open letter on behalf of 20 organisations, calling for “effective environmental protection in the CSDDD”.
Despite these setbacks, following the EU Council’s vote on March 15, 2024, the European parliament passed the CS3D proposal on April 24. The directive will be formally adopted by the summer and EU member states will then have two years to transpose the legislation into national laws.
The clock’s ticking
This is the timeline for bringing CS3D into law:
• 2027: For organisations with over 5,000 employees and a turnover of EUR 1.5 billion
• 2028: For organisations with over 3,000 employees and a turnover of EUR 900 million
• 2029: For organisations with over 1,000 employees and a turnover of EUR 450 million
For non-EU companies, the same revenue thresholds apply to the phased implementation, but with no employee thresholds. All other businesses within the scope should prepare to meet the requirements from 2030. Non-compliance may result in sanctions such as fines and compliance orders, and there is also potential for civil liability.
How TCS can help
CS3D isn’t just compliance, it’s a strategic shift. Companies will need to approach their strategy and execution through the lens of risk management in the entire supply/value chain, so they can better understand what goes into their products and services.
This deeper understanding will unveil inefficiencies and outdated practices, prompting innovative solutions and targeted investments. In essence, CS3D will demand new sustainable business models across industries to tackle pressing challenges.
Considerable areas of CS3D still need clarification. In the meantime, organisations should start to prepare their strategy, plans, and responses with active actions to accelerate preparations.
This should include:
• Internal assessment on awareness and readiness for CS3D
• Mapping existing due diligence policies and supply and value chains
• Identifying business partners
At Tata Consultancy Services (TCS), we are closely following CS3D developments, contributing to EU stakeholder consultations and policy papers, and preparing ourselves from the internal strategic planning and actions points of view.
With our bespoke advisory and consultancy services, we are ready to help our clients prepare for the implementation of the directive and to guide them towards a more sustainable corporate future.
