Corporate Sustainability Due Diligence Legislation Passed in Parliament
The European Parliament has taken a significant step forward in promoting corporate sustainability by adopting the Corporate Sustainability Due Diligence Directive (CS3D). This directive, the result of two years of intense political discussions and negotiations, aims to address sustainability issues within businesses and their supply chains.
One of the key challenges companies face in implementing CS3D is the lack of supply chain transparency. This directive, however, recognises the need for companies to prioritise mitigation efforts, with firms explicitly required to prioritise mitigation efforts based on risk assessment.
The final text of CS3D has notable improvements compared to the initial proposal tabled in February 2022. One such improvement is the enhanced role of sector initiatives, which have been strengthened in CS3D. This provision is expected to foster collaboration and best practices among industry peers, aiding in the effective implementation of CS3D.
Stakeholder engagement and responsible disengagement provisions in CS3D introduce contradictory requirements for businesses. While engaging with stakeholders is crucial, the directive also emphasises the need for responsible disengagement when partnerships are not aligned with sustainability goals.
Another challenge for companies is the limited control over indirect suppliers. To address this, the European Commission and supervising authorities are providing guidance to help companies identify and mitigate potential sustainability risks in their supply chains. This guidance includes simplified ESG standards and voluntary standards like the VSME for non-CSRD obligated companies.
The forthcoming guidance is intended to help with CS3D implementation. It also includes measures like 'stop-the-clock' for reporting deadlines and raising thresholds for reporting obligations, aiming to balance regulatory requirements with practical implementation.
The adoption of CS3D aligns more closely with international standards, demonstrating the EU's commitment to global sustainability efforts. The European Commission and supervisory authorities are also supporting large companies, SMEs, civil society organisations, trade unions, and other stakeholders across Europe to facilitate the implementation of CS3D.
Implementation of CS3D will be a significant challenge for businesses, but with the support of the European Commission, supervisory authorities, and sector initiatives, businesses can navigate this transition towards more sustainable practices. The final text of CS3D reduces legal uncertainty, providing a clear framework for businesses to adopt sustainable practices and contribute to a more sustainable future.
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