Greenwashing, new directives and corporate sustainability

Answer

This article was first published on 2 April 2024.

There have been increased instances of companies being accused of ‘greenwashing’. This may occur when a company represents itself as sustainable but is providing false or misleading information about its practices.

The proposed Directive on Corporate Sustainability Due Diligence (CS3D) aims to bring together both human rights and environmental impacts into a harmonised approach to due diligence, creating consistency among existing national frameworks that vary and overlap.

Another key aim is to promote tangible action with a focus on actual and potential adverse impacts on human rights and the environment that are caused by a company's own operations, the operations of its subsidiaries or through the chain of activities of its business partners.

Why?

The CS3D came about as part of the European Commission's "just and equitable economy" package in February 2022. It responds to a lack of a harmonised legal framework on corporate due diligence obligations across Europe. It aims to foster sustainable and responsible corporate behaviour throughout global value chains.

Potential benefits for both citizens and companies include increased trust, greater transparency and sustainable investment.

Who does it apply to?

The legislative framework will apply to companies with a presence in the EU, both EU companies and non-EU companies operating in the EU internal market that meet mainly certain turnover thresholds. For example, the CS3D applies to companies established in the EU with more than 1,000 employees and a net worldwide turnover of €450 million.

The exact thresholds have been subject to considerable amendments. The CS3D is expected to be introduced in a staged approach over the next three to five years.

Although small and medium-sized enterprises wouldn’t be directly in scope, they could be affected as contractors or subcontractors to large EU or non-EU companies (and would therefore be required to provide information about their environmental and human rights impacts, for example by completing due diligence questionnaires).

What is it?

Once adopted, the CS3D will create a predictable framework that helps companies to identify, prioritise, assess and manage risks and impacts with respect to core human rights (eg, child labour and exploitation of workers) and environmental risks (eg, pollution and biodiversity loss) across their value chains.

The CS3D requires companies to take appropriate measures to broadly assess the impacts of their operations, those of their subsidiaries and the chain of activities of their business partners, enabling the identification, assessment and prioritisation of actual and potential adverse impacts. There’s a further requirement on companies to prevent or, where prevention isn’t possible, mitigate or cease the action causing such adverse impacts.

Companies will therefore be required to:

• develop and implement a transition plan, aligned to the 1.5°C Paris Agreement temperature goal and the transition to a sustainable economy;
• integrate environmental and human rights due diligence in all corporate policies and risk management – due diligence steps to be taken include identifying where these impacts are most likely to occur and their severity, subsequently conducting in-depth assessments of prioritised operations, subsidiaries and the chain of activities of business partners to determine their specific nature and extent;
• develop and maintain a notification and complaints mechanism, which could be in the form of a functional channel for employees or stakeholders to raise concerns, such as a hotline or email address to report actual or potential cases of adverse harm (there must also be a process to investigate and address those concerns); 
• monitor, review, assess and verify the effectiveness and implementation of their due diligence policy and measures – companies should ensure that processes are up to date and reflective of any change, such as to operations or its suppliers operations or chain of activity of its business partners, as well as consideration of social, political or economic risks;
• disclose and report – companies must be transparent about their due diligence processes and publicly report, including making information available through an annual statement on their website.

How will it be enforced?

The proposed CS3D would be enforced by member states through administrative supervision. Member states will designate an authority to supervise and impose penalties, including fines and compliance orders. The commission has proposed the creation of a European Network of Supervisory Authorities to ensure a coordinated approach.

An alternative enforcement route is civil liability. The CS3D will give consumers the right to bring claims within a five-year period in relation to the adverse effects.

Outside of the formal channels of enforcement, the requirement for transparency will likely mean that companies will also be held to account by suppliers, vendors, stakeholders and consumers. Inevitably, this could lead to brand impact or reputational concerns.

What’s the current status?

It’s rapidly changing! As of 15 March 2024, and after much deliberation, the CS3D was endorsed at European Council.

The next step is to seek approval of Members of the European Parliament.

What does it mean for companies?

There appears to be an agreement from many companies that this harmonised approach is welcomed, as it’ll avoid much of the current uncertainty. However, there remains a significant amount of work to do to successfully implement the CS3D. It’s not only work by companies to ensure their own compliance, but from regulators too. To effectively implement the required measures and practices, companies will also require practical advice and tools.

Many companies have started to take steps in the right direction, particularly in respect of their sustainability reporting and transparency. This investment to get ahead of the curve will undoubtedly serve them well in the future, not only to ensure compliance with CS3D, but to also build further trust and increase transparency for consumers. If that’s not motivation enough, the cost of inaction will soon become apparent once enforcement action begins.

Sophie Broome is a trainee solicitor (apprenticeship route) at DWF Group Limited.