Clifford Chance

The new EU Corporate Sustainability Due Diligence Directive (Directive (EU) 2024/1760, "CS3D" or the "Directive") entered into force on 25 July 2024. It imposes extensive new obligations on in-scope companies inside and outside the EU.

Here, we explain the criteria to determine whether companies are within scope of the CS3D and the timetable for compliance.

Which companies are in scope?

The CS3D applies to EU/EEA companies as well as non-EU/EEA companies that meet certain threshold criteria. While at first glance these criteria appear to be fairly straightforward, closer examination reveals a number of areas that are quite unclear.

To fall in scope of the CS3D, the entity must (i) qualify as a "company", (ii) meet the applicable threshold on turnover and (where applicable) employee headcount and (iii) not be subject to a relevant exemption. For further information on the CS3D's impact on U.S. companies, please refer to our blog post here.

(i)  Under the CS3D, the term "company" includes

• a EU/EEA legal person constituted in one of the legal forms listed in Annexes I and II to the EU Accounting Directive (Directive 2013/34/EU), or

• a non-EU/EEA legal person, i.e. outside the EU/EEA Member States, constituted in accordance with the law of a third country in a form comparable to those listed in Annexes I and II to the EU Accounting Directive.

• Regulated financial undertakings, regardless of their legal form, e.g credit institutions as well as insurance and re-insurance undertakings; however Alternative Investment Funds and Undertakings for Collective Investments are explicitly excluded.

(ii)  The CS3D will apply if the following thresholds are met in two consecutive financial years:

• EU/EEA companies will be in scope if they fulfil one of the following conditions:

• On an entity basis:

• More than 1,000 employees on average AND

• A net worldwide turnover of more than EUR 450 million in the last financial year; or

• If the company does not meet these thresholds on an entity basis, but is the EU/EEA ultimate parent company of a group that reached those thresholds in the last financial year for which the annual financial statements have been or should have been adopted on a consolidated basis; or

• The company entered into or is the ultimate parent company of a group that entered into franchising or licensing agreements in the EU in return for royalties with independent third-party companies, where those agreements ensure a common identity, a common business concept and the application of uniform business methods, and where those royalties  amounted to more than EUR 22.5 million in the last financial year for which annual financial statements have been or should have been adopted, and provided that the company had or is the ultimate parent company of a group that had a net worldwide turnover of more than EUR 80 million in the last financial year for which annual financial statements have been or should have been adopted.

• Non-EU/EEA companies will be in scope if they fulfil one of the following conditions:

• On an entity level: The company generated a net turnover of more than 450 million in the EU in the financial year preceding the last financial year; or
If the company did not reach this threshold at entity level but is the ultimate non-EU/EEA parent company of a group that on a consolidated basis reached that threshold in the financial year preceding the last financial year; or

• The company entered into or is the ultimate parent company of a group that entered into franchising or licensing agreements in the EU in return for royalties with independent third-party companies, where those agreements ensure a common identity, a common business concept and the application of uniform business methods, and where those royalties amounted to more than EUR 22.5 million in the EU in the financial year preceding the last financial year; and provided that the company generated, or is the ultimate parent company of a group that generated, a net turnover of more than EUR 80 million in the EU in the financial year preceding the last financial year.

(ii)  There are exemptions for ultimate parent companies that function solely as holding companies. While these companies remain in scope of the CS3D, they may apply to be exempt from carrying out the due diligence obligations set out in the CS3D if one of their subsidiaries established in the EU is designated to fulfil the due diligence obligations on behalf of the ultimate parent company.

When will companies have to comply with the CS3D requirements?

The CS3D requires in-scope companies to (i) undertake human rights and environmental due diligence (Articles 5 – 15) and report on the matters covered by the Directive (Article 16); and (ii) adopt and put into effect a transition plan for climate change mitigation and report on the plan.

As a directive, the CS3D must be transposed into national law by the EU's Member States. This transposition must occur within 2 years from its entry into force, i.e. by 26 July 2026. The CS3D provides for a staggered commencement of the obligations imposed, depending on the size of the companies. In addition, different timing applies to the due diligence obligations and the reporting obligations respectively.

(i)  Due diligence obligations

(ii)  Reporting obligations

The CS3D acknowledges the intersection between the CS3D's reporting obligations and those set out in the Corporate Sustainability Reporting Directive ("CSRD") and seeks to avoid double reporting. Companies that fall in scope of both directives and report in accordance with the requirements set out in the CSRD, are deemed to have complied with their reporting obligations under the CS3D.

Calculation of the thresholds

The thresholds determining the CS3D's scope of application as well as the timing of entry into force for in-scope companies must be met for each of the last two consecutive financial years.

As outlined above, when it comes to the determination of whether a company is in scope, the net turnover threshold is calculated either on an entity basis or on a consolidated basis if the company is the ultimate parent company of a group.

However, it is unclear how the relevant turnover is to be calculated when it comes to the question as when due diligence obligations apply to the ultimate parent company of a group. In particular, it is not clear whether the threshold refers to the ultimate parent company's net (EU) turnover on an entity level or on a consolidated basis. As outlined above, the latter will be the case when it comes to the general scoping exercise. While the CS3D's articles state that, where the CS3D applies to an ultimate parent company, net turnover must be calculated on a consolidated basis, the recitals point out that thresholds should be calculated on an individual basis where not specified otherwise. Contrary to the scoping criteria, the criteria for the entry into force do not explicitly refer to the net turnover on a consolidated basis. It remains to be seen how the Member States will adjust to this contradictory wording and how they will transpose the CS3D into national law within their margin of discretion, i.e. whether the net turnover should be calculated on an entity or on a consolidated basis, will be decisive when determining the date from when the obligations in the CS3D apply.

What's next?

Member States need to transpose the CS3D into national law by 26 July 2026. As the first EU Member State the Netherlands have already published a draft transposition bill in December and refrained from gold-plating the obligations set out in the CS3D. For further insights, please refer to our blog post (here).

Determining whether a company is in scope and how group of companies are affected is an initial necessary step. The implementation of the CS3D's substantive obligations then requires significant forward planning to be ready to comply in due course. We recommend EU and non-EU companies to conduct an initial in-scope analysis as soon as possible in order to then prepare for the upcoming new due diligence and reporting obligations.