EU Corporate Sustainability Due Diligence Directive – Which Asian companies will need to comply?

On 15 March 2024, the EU Council approved the text of the EU Corporate Sustainability Due Diligence Directive (CS3D).  The EU Parliament is due to vote to approve the directive on 24 April 2024, after which it will be transposed into national law throughout the EU.

CS3D will make it mandatory for large companies to carry out due diligence to identify avoid, and remediate adverse environmental and human rights impacts.  Importantly, the directive has extra-territorial effect and will apply to certain Asian companies with significant turnover generated in the EU, as we discuss further below.

CS3D will also impact many Asian companies indirectly as a result of the new due diligence obligations to be imposed on EU and other companies, which are likely to see closer attention being paid to potential adverse human rights and environmental impacts caused by the operations of Asian companies which are part of EU value chains.

A snapshot of the CS3D

What

In-scope companies must systematically conduct – and report on – due diligence processes that assess adverse impacts on the environment or human rights arising from (i) their own operations, (ii) those of their subsidiaries and (iii) upstream and downstream business partners.

The CS3D is significant in also requiring companies to take substantive and active steps to mitigate and remedy any adverse impacts identified.  Companies must: create and maintain notification systems and complaints procedures;  monitor and review the effectiveness of their due diligence policy and measures; and conduct engagement with affected stakeholders. As a last resort, companies may put in place remediation plans, or look to suspend or, eventually, terminate business relationships if the adverse impacts cannot be prevented.

Finally, in-scope companies will be required to adopt and put into effect a transition plan.  This includes time-bound emissions reduction targets and disclosure as to how the plan is aligned with Paris objectives and capping global warming to 1.5 degrees.

All reporting is to be independently verified e.g. by an auditor.

Who

Importantly, the test for whether a company will be obliged to comply with CS3D is not based on its place of incorporation or registration.  The CS3D will apply to:

• companies incorporated in the EU, and which in the last financial year had more than 1000 employees and EUR 1500 million net worldwide turnover.
• companies incorporated outside the EU with at least EUR 450 million turnover generated in the EU in the last financial year.
• parent companies where the relevant corporate group's consolidated turnover generated in the EU was at least EUR 450 million. In the context of corporate groups, the due diligence obligations will apply to the ultimate parent company, or where the parent company is a holding company, each of the operational subsidiaries closest in the chain of control to the parent company.

When

In-scope non-EU companies will have between 3 to 5 years to conform, depending on the nature of their business, after which penalties will apply for non-compliance, as follows:-

Enforcement and penalties

EU national authorities will be responsible for enforcement against companies who fail to comply with the CS3D and can:

• initiate inspections and investigations;
• impose fines up to 5% of the entity's worldwide turnover, taking into account the parent company's consolidated turnover; and
• other injunctive measures, including orders to cease identified conduct or undertake remediation.

Compliance with the due diligence obligations may also be used as part of the award criteria for procurement of public contracts and concessions.

In scope non-EU companies will be regulated by EU national authorities most closely connected with their branches of operation within the EU and/or where the majority of their turnover is generated.

Potential Civil liability

Under the CS3D, victims of a company's failure to identify, assess or address adverse impacts will have no less than five years to pursue civil action for damages in the relevant Member State.

A provision which would have required member states to ensure that third parties (such as trade unions, NGOs or National Human Rights Institutions) could bring claims to enforce victims' rights has been deleted in the approved text, although member states will be permitted to introduce provisions for these sorts of representative actions if they wish to.

Speak to our key contacts to understand:

1. whether your organisation falls within the scope of CS3D.
2. what your organisation may need to do to ensure it is in a position to comply with the due diligence obligations.