December 22, 2023 Corporate Sustainability Due Diligence Directive (CS3D)

CEO Neil Dsouza breaks down the EU’s CS3D & how it’ll impact US companies, with tips for building a compliant supply chain.

by Neil Dsouza, CEO of Makersite

Executives and decision makers, as well as entire companies, are going to be impacted by current and upcoming changes in regulations in the new year. Companies who adapt their operations to be compliant with the new laws in the US and abroad will prove to be at the top of the success ladder, ultimately moving their supply chains forward.

The new Corporate Sustainability Due Diligence Directive (CS3D) from the European Union (EU) is perhaps the most timely piece of the conversation as we close 2023.

The Due Diligence Directive

CS3D is all about due diligence. It underpins a lot of the European directives within some of the more core European regulations such as the Articles of Association of the EU, and it sets accountability at the director level. So while many of the other directives and regulations focus on reporting and disclosure, CS3D focuses on the due diligence aspect of those activities.

There are multiple tenets of CS3D, but really this boils down to the due diligence around business operations and the supply chain. Where it stands right now, businesses that do $300 million or more in revenue of business in Europe will be forced to comply – whether you’re located in Europe or not – which will ultimately include most of the large multinationals within the United States.

So it’s these types of companies who will be encouraged and eventually forced to develop a deeper understanding of their supply chains – meaning not just whom they buy from, but who those people buy from as well – ensuring complete transparency and compliance with CS3D in just a few short years.

Building on CSRD

The Corporate Sustainability Reporting Directive (CSRD) is all about disclosure and company operations, such as carbon footprint, human rights and labor laws, and other broad ESG disclosures. But within CSRD, there is nothing that monitors these directives or ensures they are actually being upheld. This is the role of CS3D – to check in and ensure these initiatives are being enforced as time goes on. For example, if you claim to make a reduction measure in environmental impacts, CS3D will ensure you are actually doing it. CS3D is the legal obligation to perform the due diligence, not just create a report and claim it.

So in this way, CSRD and CS3D go hand-in-hand. But CS3D also supports the due diligence of a slew of other regulations and directives as well, such as the Global Reporting Initiative (GRI), Carbon Disclosure Project (CDP), and the Sustainable Finance Disclosure Regulation (SDFR) among others.

Compliance and Adoption

As it stands in these early phases, of its empirical nature, CS3D says companies simply need to prove what they’re stating – and there should not be much pushback there as it’s fairly straightforward. But once organizations provide feedback, some pushback may occur within the conversations of penalties and violations for not complying, the conditions around the impact on companies and the categories that separate where a company falls in regards to impact (such as revenue size and number of employees). These are all things that are still open for debate before the final version of the directive is published, as well as official statements around when these obligations are to begin.

For CS3D to be successful, there is a huge need for verifiers and resources that don’t currently exist. These regulations are relatively still very new and much of the expectations around these directives is uncharted territory. So inevitably, there will be some trial and error figuring out exactly what to validate against.

Until skills are developed with auditors and verifiers, there will inevitably be pushback from affected companies on just how these directives are enforced and upheld. Afterall, these individuals and teams will be responsible for validating supply chains for thousands of products all across the world.

A Product-centric Future

As the companies who will be impacted by CS3D begin to prepare, the best thing they can do is to map out and put together a holistic view of their supply chains along with a product-centric view of the lifecycle of their products – meaning starting upstream and following each product all the way downstream. This will better set companies up for success when aligning efforts with these regulations when it comes time.

As for when that will be – compliance for CS3D should begin to take effect around 2025, but these are a few of the basic things that companies need to do right now as they prepare for the future.

Though the revenue thresholds for impact are quite large currently, as these initiatives become more common, these thresholds will continue to go down and more and more businesses will be required to be compliant with these regulations and directives – so when looking out into the longer-term future, you can expect to see initiatives like CSRD and CS3D become industry standards.

Neil D’Souza is the CEO and founder of Makersite, a company that uses AI, data, and apps to power sustainable product and supply chain decisions at scale. Formerly CTO at Thinkstep AG, Neil started his career helping companies understand how what you make and where you buy have an impact on issues such as cost, compliance, risk, and sustainability. Working with over 200 companies across multiple sectors, Neil found that the approaches we are using would never scale to the problem at hand. He solved that scaling problem by creating Makersite in 2018.

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