A new ‘due diligence’ directive will oblige large companies from the European Union or those doing business in the bloc’s countries to audit their activities to prevent, mitigate and eliminate human rights and environmental violations found at any point in their supply chains. .
The Corporate Sustainability Due Diligence Directive (CS3D), as it was called, was approved by the European Parliament on Wednesday, 23. It obliges companies from all sectors of the economy to verify their value chains, from the extraction of raw materials distribution of the final product.
“The ripple effect of this rule is enormous and impossible to quantify. It is not possible to know the scale of the impact”, says Bruno Galvão, lawyer at the Blomstein firm, in Berlin.
The measure will apply to European companies that have more than a thousand employees and global revenues above €450 million. Foreign companies that exceed the same revenue level within the bloc will be subject to the same rules.
They will have to monitor and use best practices to understand the risks present from one end of their chain to the other. This even involves producers and suppliers who, in principle, do not have a direct commercial relationship with Europe.
“A meat, soy or cotton producer in Brazil who sells his product to large Brazilian companies does not sell directly to Europe. But these large companies, in turn, export to European companies, which will have to monitor their supply chain and look at all their products, including the top end”, explains Galvão.
Brazilian subsidiaries of large European companies will also have to verify their chains to report to the headquarters.
Each of the 27 EU member countries will have to create specific legislation that meets the minimum requirements established by the directive. Where laws on corporate sustainability already exist, such as France and Germany, they will have to be adapted to European parameters.
Countries will have two years to put the laws into force. From then on, CS3D will be implemented in three phases, between 2027 and 2029, depending on the size of the company. The first to be subject to the new rules will be those with more than 5,000 employees and global revenue exceeding 1.5 billion euros in 2027.
“In our assessment, this time is enough for Brazilian companies to organize themselves to meet the demands that may arise”, says Roberta Danelon Leonhardt, partner in the environmental law area at Machado Meyer, a law firm.
How will it work
The European Commission, the EU’s executive body, will also issue a series of guides with recommendations, best practices and guidelines for the transition plan and information sharing.
Companies will have to create a structure that shows that they are attentive to the supply chain and possible risks, says Galvão. “They will monitor and request information about respect for human rights and the environment, and follow up so that, if there is a problem, they can identify and work to resolve it. It’s different from when an accusation or violation occurs and is punished. It’s about work prior to the event, monitoring the activity, recognizing that the risk exists.”
Those subject to the directive will have to map the risks and create a shared reaction program with suppliers, for example. It will also have to adopt a climate mitigation plan, with a strategy in line with the Paris Agreement objective of limiting global warming to 1.5ºC.
“This directive confirms a movement that was already happening voluntarily. But now it will be more comprehensive, reaching all large companies”, says Leonhardt.
CS3D will be supervised by competent national authorities in the Member State in which the company is headquartered or where the majority of its revenue comes from. In addition to the investigation, these agencies will be responsible for applying penalties. In the most serious cases, the fine may correspond to 5% of the company’s revenue.
The directive has yet to be formally adopted and published in the EU Official Journal.
For now, what companies can do is identify their current situation in relation to the new requirements, identify the different parties that can assist in due diligence efforts and involve them, and define those responsible within each organization to comply with CS3D, recommends EY consultancy, in analysis.
One more step
The new directive is an EU advance in line with the European Green Deal, and was proposed in 2022. After two years of negotiations between countries, the text was approved with two main changes: the specific rules for the financial market were dropped, and the size of companies subject to the law increased, both in terms of number of employees and revenue.
“It was a game of politics to reach a consensus”, says Galvão, “We are in election time here in Germany. Some political parties believed that there would be a very large bureaucratic burden on German industry. Even though, curiously, large companies in the country were in favor of the measures.”
CS3D is complementary to a series of European rules established in recent years to encourage the green economy – with direct and indirect repercussions for Brazilian exporters and their suppliers.
Companies are preparing for the carbon border adjustment mechanism, known by the acronym CBAM in English, which defines a carbon tax embedded in products containing cement and iron, for example. The rule that prohibits the sale of agricultural products associated with deforestation in the EU will also require adaptations from Brazilian companies.
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