SMEs should not lose sight of the CS3D as Belgium implements the CSRD

The European Union's Corporate Sustainability Due Diligence Directive, known as the CS3D, introduces new rules aimed at ensuring that companies consider the impact of their activities on human rights and the environment.

In March this year, the Council of the EU agreed to a watered-down CS3D, following blocking efforts from individual countries, with new compliance challenges for larger companies to promote sustainability. While small and medium enterprises (SMEs) are not directly targeted, they will need to understand how these changes might affect their business.

The CS3D was adopted on 24 May  and came into force on 25 July. Member States have until 26 July 2026 to transpose it into national law. The Corporate Sustainability Reporting Directive (CSRD) entered into force in 2023 and was implemented within Belgian law on 28 November. It imposes wide-ranging environmental, social and governance (ESG) reporting disclosures as part of the European Green Deal and the third pillar in the EU's sustainability reporting framework.

The CS3D has, however, a different objective to the CSRD. While the CSRD focuses on transparency and detailed reporting, the CS3D aims to prevent and address adverse impacts on human rights and the environment.

Implementation timeline

The CS3D rules will be phased in based on company size. Firstly, from 26 July 2027 for companies with more than 5,000 employees and a net turnover over €1.5 billion, then from 26 July 2028 for companies with more than 3,000 employees and a net turnover over €900 million and from 26 July 2029 companies with more than 1,000 employees and a net turnover over €450 million.

For non-EU companies, the same turnover thresholds apply without the employee requirement.

'Chain of activities'

The obligations do not just apply to a company's own operations and their subsidiaries but also cover their upstream and downstream business partners – that is, the company's "chain of activities" that are defined by the CS3D.

Activities of upstream business partners are those that are related to the production of goods or provision of services by the company, including design, extraction, sourcing, manufacture, transport and development of products or services. Downstream business partners relate to the distribution, transport and storage of products, which are undertaken for the company or on its behalf. However, the disposal of products, as well as activities of a company's “downstream” business partners related to the services of the company, are excluded.

Business partners encompass entities with which the company has a commercial agreement – direct business partners – and entities that conduct business operations related to the company's operations, products or services – indirect business partners.

Scope of application

The CS3D applies to EU companies with more than 1,000 employees on average and a net worldwide turnover of more than €450 million, parent companies of groups meeting this criteria; and EU companies or groups with franchising or licensing agreements in the EU generating royalties over €22.5 million and a net worldwide turnover of more than €80 million.

It also applies to non-EU companies with a net turnover in the EU of more than €450 million – with no employee requirement – and parent companies of groups meeting this criteria; as well as non-EU companies or groups with franchising or licensing agreements in the EU generating royalties over €22.5 million and a net turnover of more than €80 million in the EU.

For both EU and non-EU companies, these thresholds must be met for at least two consecutive financial years.

There is, however, an exemption for ultimate parent companies whose main activity is holding shares and that do not engage in management, operational, or financial decisions affecting the group or their subsidiaries. Some formalities must be respected in order to benefit from this exemption. Moreover, the CS3D is not applicable to alternative investment funds or undertakings for collective investment in transferable securities.

CS3D obligations

One of the primary obligations for companies under the CS3D is the integration of due diligence into policies, management systems and internal controls. They also need to identify risks and assess potential adverse impacts on human rights and the environment from their activities and their subsidiaries and business partners.

The CS3D also requires companies to mitigate, prevent or eliminate risks. Notably, in-scope companies will need to offer targeted and proportionate support to SMEs that are business partners. A climate transition plan will also be required in line with the 2015 Paris Agreement on climate change.

A complaints procedure will need to be set up for anyone in the supply chain to report issues to the in-scope company, along with regular assessments to review the effectiveness of these measures and public reporting that annually communicates the progress in meeting due diligence obligations. Companies already reporting under the CSRD are, however, exempt from the requirement to publish an annual statement on their websites with details of how they have discharged their obligations under the CS3D.

Supervisory authorities

The EU Member States will appoint supervisory authorities to enforce the directive. In Belgium, this is likely to be the Financial Services and Markets Authority. The authorities can request information, conduct investigations and impose fines. Fines will be proportionate and dissuasive, with a maximum limit of at least 5% of the company's worldwide net turnover. Companies can also be held civilly liable for damages from failing to carry out due diligence, with the CS3D setting a limitation period of at least five years from when the infringement ceased and the claimant became aware (or should have reasonably been aware) of it.

Member States must ensure that "reasonable conditions" are in place that enable an alleged injured party to authorise a trade union, non-governmental organisations, such as for human rights or the environment, or other national institution to take legal action on their behalf to enforce their rights.

Indirect impact

Although the CS3D primarily applies to larger companies, there could still be an indirect impact on SMEs. Larger companies that fall under the directive may require upstream and downstream SME business partners to comply with the new standards.

SMEs should be prepared to meet these expectations to maintain business relationships, as those that are in the value chains of in-scope companies can expect increasing sustainability-related information requests, contractual requirements and climate-related transition requests.

SME preparation checklist

Even though SMEs are not directly targeted, they will need to start preparing for potential changes. Actions they should consider are:

• Understand the position and determine if business partners are likely to be affected by the CS3D.
• Review practices and conduct a self-assessment of current policies and practices related to human rights and environmental impact.
• Engage with partners and communicate with larger business partners to understand their expectations and how to align with their due diligence requirements.
• Stay informed and up to date with developments related to the CS3D and other relevant rules.

Osborne Clarke comment

SMEs could consider additional actions around human rights and environmental due diligence, climate transition planning, remediation and stakeholder engagement, and monitoring and reporting.

They should be aware that in-scope companies will need to develop due diligence policies, identify and assess risks around human rights and the environment and take measures to prevent and mitigate adverse impacts. They will also need to be aware that in-scope companies will need to adopt a climate transition plan, which may influence their supply chain requirements.

In-scope companies will also be required to provide remediation for adverse impacts and engage meaningfully with stakeholders, which could include SMEs in their supply chain. Regular assessments and public reporting will be required, and SMEs may need to provide relevant information to their larger partners.

While the CS3D primarily targets larger companies, SMEs should be aware of the potential indirect impacts. By understanding the new requirements and preparing accordingly, SMEs can ensure they remain valuable partners in the supply chain and contribute to a more sustainable business environment.

If you have any questions or need further assistance in understanding or complying with the CS3D, please do not hesitate to contact the authors.