On May 24, 2024, the European Council announced the approval of the Corporate Sustainability Due Diligence Directive (“CS3D”) by the Member States. This marked the final step in the adoption of the law, which imposes mandatory obligations on large companies to address their negative impacts on human rights and the environment throughout their value chains.
The final adoption of the CS3D followed uncertainty after the previous version was not approved by Member States in the European Council, necessitating revisions that significantly reduced the number of companies covered and extended the full implementation timeline. Initially proposed by the European Commission in February 2022, the CS3D requires companies to identify, assess, prevent, mitigate, address, and remedy impacts on people and the planet, ranging from child labor and slavery to pollution and emissions, deforestation, and harm to ecosystems, across both upstream parts of the supply chain and certain downstream activities such as distribution and recycling.
Additionally, the CS3D mandates that companies adopt transition plans to align their operations with the Paris Agreement’s goal of limiting global warming to 1.5°C and requires Member States to establish oversight authorities to investigate and sanction non-compliant entities.
Although the European Parliament and the European Council reached an agreement on the new legislation in December 2023, the approval vote in the European Council was delayed in January due to Germany’s concerns over the bureaucratic and potential legal impacts on companies. Italy also withdrew its support, and France’s efforts to significantly reduce the scope of the new rules to only the largest companies in the EU led to further uncertainty by the end of February.
After significant compromises in the CS3D, the European Council finally approved the revised directive in March. One major change was raising the thresholds from 500 to 1,000 employees and from 150 million euros to 450 million euros, significantly reducing the number of companies covered by the CS3D by approximately two-thirds. The lower thresholds for high-risk sectors were also removed, to be reconsidered in the future.
Additional changes to the CS3D include a phased implementation. The law will start in 2027 with companies having over 5,000 employees and revenues exceeding 1.5 billion euros, followed by companies with over 3,000 employees and revenues over 900 million euros in 2028, and all other covered companies by 2029. The revised CS3D also removed the requirement to incentivize the implementation of companies’ climate transition plans through financial incentives.
How Will Due Diligence and Requirements Be Met?
Due diligence encompasses the processes companies must undertake to identify, prevent, mitigate, and explain how they address actual and potential negative human rights impacts within their operations, supply chains, and other business relationships. All companies, regardless of size or sector, have the same responsibility to respect human rights and prevent potential adverse impacts.
Human rights due diligence covers all of a company’s activities and business relationships throughout the supply and value chains. International and national legislation on business and human rights outlines the responsibility of companies to respect human rights across their supply and value chains. The key difference between these two complementary concepts is that the supply chain focuses on material procurement and delivery of goods to customers, while the value chain centers on the value created throughout this process.
According to the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct, companies in the supply chain include those providing goods or services that contribute to the company’s own activities, products, or services, or those taking, licensing, or using the company’s goods or services.
Under the UN Guiding Principles on Business and Human Rights: An Interpretive Guide, the value chain encompasses activities that add value by transforming inputs into outputs. This includes entities that: a) Provide products or services contributing to the company’s own products or services, or b) Take, license, or use the company’s products or services.
The rising global agenda on business and human rights, along with binding regulations adopted in European countries and the US, Australia, the UK, Japan, Canada, and New Zealand, will soon impact the growing number of export companies in Turkey. Companies within the scope of the CS3D in the EU will need to comprehensively evaluate human rights and labor rights practices carried out by their business partners within their value chains. Consequently, companies in Turkey that are part of the supply or value chains of companies covered by the CS3D will be directly or indirectly affected by these regulations.
Companies covered by the CS3D and relevant national laws may prefer to work with suppliers adhering to the same standards to meet due diligence requirements. They may request the following from suppliers, including Turkish exporters:
- Sharing relevant information
- Following a similar process of assessment, prevention, and remediation
- Undertaking remediation activities for specific adverse impacts
- Adding new terms, monitoring mechanism requirements, and training obligations to contracts
- Being subject to external audits
To enhance their competitive edge in the short term and maintain competitiveness in the long term, companies, particularly Turkish exporters to the EU market, need to integrate due diligence and human rights and environmental considerations into their company policies. The steps companies should follow include:
- Creating a policy commitment for due diligence
- Conducting risk assessments for negative human rights impacts
- Implementing preventive measures for potential human rights violations
- Taking corrective measures for existing human rights violations
- Establishing a feedback and complaint mechanism for human rights impacts
- Documenting and reporting on due diligence activities