Energy Minute: A Shift Towards Mandatory Due Diligence on Sustainability in the EU

In this Energy Minute episode, Dana Dohse and Steven Goldman jump into the European Union's Corporate Sustainability Due Diligence Direction (or CS3D for short) recently passed by the European Parliament. While the CS3D is not a regulation -- meaning member states will have several years to develop their own respective national laws on implementing the directive -- it still holds significant weight, and will impact both EU-headquartered companies as well as non-EU firms exporting goods via the EU or with significant operations in the EU.

Compliance with the due diligence requirements will involve various jurisdictions and mechanisms, making it a complex endeavor for companies, meaning companies need to pay close attention as EU member nations issue their own regulations to better understand the impacts to their operations. The directive will have significant implications for corporations' sustainability planning, alignment with the Paris Agreement, and require a greater understanding of supply chain risks. 

Listen in as Dana and Steven dig into this environmental and human rights legislation and its implications for companies operating in the EU, and explore the potential costs and benefits for companies in different high-impact sectors, the role of due diligence in risk management and the impact on local communities.

Key Takeaways

1. The EU is imposing a higher level of diligence than other parts of the world, which means that non-EU firms exporting goods via the EU or linked to EU companies will be impacted. Compliance with due diligence requirements will involve various jurisdictions and mechanisms, creating new costs and uncertainties for companies.

2. The CS3D is a piece of legislation passed by the European Parliament that requires EU and non-EU companies to comply with due diligence requirements to operate in EU markets. This directive applies to companies based on their headcount or turnover thresholds, depending on if they operate in a high impact sector. This means that companies need to have a clear understanding of their eligibility for the requirements of CS3D and properly classify their business to meet the criteria during two consecutive financial years.

3. The directive will lead to changes in internal controls and business procedures that companies will need to put in place to comply with the directive. Companies will bear the cost of establishing and operating due diligence procedures as part of their business procedures, and may have to pay up to 5% of their global turnover as damages in case of non-compliance. These costs are significant and will add up over time, causing a financial incentive for companies to comply.

Resources: 

• European Union information page on the CS3D: https://commission.europa.eu/business-economy-euro/doing-business-eu/corporate-sustainability-due-diligence_en
• KPMG on the CS3D: https://kpmg.com/xx/en/home/insights/2023/02/the-eu-corporate-sustainability-due-diligence-directive.html