Tag Archives: Sustainability

New Obligations for Companies Under the Proposed CS3D

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The proposed Corporate Sustainability Due Diligence Directive, so-called CS3D, may set new rules binding large EU or non-EU companies aimed at preventing adverse impacts on the environment and human rights resulting not only from their own operations, but also from those of their business partners.

CS3D has been criticized for its strong impact on the whole supply chain. While only large companies are in scope, vendors of such obligated entities will need to comply with such entities’ policies inspired by CS3D.

What Are the Proposed Obligations?

New due diligence requirements are supposed to be established by CS3D and may subsequently be implemented by each member state. According to the text under discussion, companies will have to identify, prevent, stop, mitigate and account for the adverse impacts on the environment and human rights caused by their activities. In addition, they will need to have a plan to ensure that their business strategy is compatible with limiting global warming to 1.5°C in line with the Paris Agreementand the climate neutrality goals set by Regulation (EU) 2021/1119.

Which Companies are In Scope of CS3D?

CS3D would apply to European companies that:

  • have, on average, more than 250 employees and a global net turnover of more than EUR 40 million in the last financial year for which the annual accounts were drawn up;
  • even if they do not meet the minimum thresholds, are the parent company of a group that had 500 employees and a global net turnover of more than EUR 150 million in the last financial year for which the annual accounts were drawn up.

It would also applty to third-country companies that:

  • generated a global net turnover of more than EUR 150 million, provided that at least EUR 40 million of that turnover was generated in the European Union in the financial year preceding the last financial year, including turnover generated by third-country companies with which the company and/or its subsidiaries have concluded a vertical agreement in the Union in exchange for licensing rights;
  • even if they do not meet the minimum thresholds mentioned in point (a), are the parent company of a group that had 500 employees and a global net turnover of more than EUR 150 million, of which at least EUR 40 million was generated in the European Union in the last financial year for which the annual accounts were drawn up, including turnover generated by third-country companies with which the company and/or its subsidiaries have concluded a vertical agreement in the Union in exchange for licensing rights.

When Will It Enter into Force?

CS3D is still under discussion. The proposal for the Directive was presented by the European Commission on February 23, 2022, and the Parliament adopted the amended text on December 14, 2023. The proposal must be formally approved by the Commission, the Parliament and the Council before it can officially enter into force.

New Rules on Corporate Sustainability Reporting

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On November 28, 2022, the European Council approved the corporate sustainability reporting directive (CSRD). The CSRD strengthens the existing sustainability reporting requirements under the EU legislation and broadens their scope of application. It does so by modifying directives and regulations containing the current sustainability reporting rules, including the Non-Financial Reporting Directive (“NFRD”).

Under the CSRD a company must report the company’s impact, as well as how its development, performance and position is affected by sustainability matters. Such information shall be included in a dedicated section of the management report.

The CSRD requires an increasing number of companies to report sustainability information. While the NFRD reporting requirements are currently mandatory for large public-interest companies with more than 500 employees, the CSRD enlarges the list of entities subject to those requirements to:

  • companies with more than 250 employees and a turnover of 40 million euros (so called large companies);
  • all companies listed on regulated markets, including SMEs and with the sole exception of microenterprises; and
  • non-EU companies generating a net turnover of 150 million euro in the EU and which have at least one subsidiary or branch in the EU exceeding certain thresholds.

In light of the above, the CSRD is expected to impact nearly 50,000 companies in the EU, compared to the approximately 11,000 companies already covered by the NFRD.

The new requirements will not be immediately mandatory, as the CSRD provides that the new sustainability reporting requirements will be implemented in a four-stage process here below summarized:

Starting dateFinancial YearEntities subject to reporting requirements
January 1, 2025Financial years starting on or after 2024Companies already subject to the NFRD
January 1, 2026Financial years starting on or after 2025Large companies that are not currently subject to the NFRD
January 1, 2027Financial years starting on or after 2026Listed SMEs (with the sole exception of micro undertakings) and the remaining European companies that fall under the CSRD application
January 1, 2029Financial years starting on or after 2028Non-EU companies that fall under the CSRD application

The European Commission, with the technical support of the European Financial Reporting Advisory Group (EFRAG), will adopt sustainability reporting standards.

The CSRD still needs to be signed and published in the Official Journal of the European Union and will enter into force 20 days afterwards. After that, each Member State will need to implement the CSRD into local law within 18 months.