What does the EU Corporate Sustainability Due Diligence Directive (CSDDD, CS3D) mean for Australian Businesses?

18 Nov

On the 12 November 2024, we held a webinar with Prof. Justine Nolan and Dr Ingrid Landau to discuss the CS3D, other EU policies, and how they all impact Australian business.

Watch the webinar below.

Key Takeaways

What is CS3D?

The CS3D is a European Union policy focussing on risks posed to people and the planet in the supply chains of complying companies. It requires these companies to undertake risk-based due diligence and report on their findings and mitigation processes yearly.

Given that Australia has close ties with the EU market, we can anticipate that Australian companies will need to comply in (but not limited to) the following circumstances :

Businesses may fall directly in scope of the CS3D.
Businesses may be owned by an EU-based parent who falls in scope.
Australian businesses may supply goods and services to in-scope companies
The CS3D sets a clear expectation for company due diligence. Companies outside of the scope may decide to meet reporting requirements to ensure future competitiveness

How does CS3D connect with the ecosystem of emerging EU legislations and the global context?

First, it is important to understand that sustainability-focussed policies are designed to compliment each other and provide the direction for companies to follow. There are many stand-alone policies that can be seen as components that will help companies to comply with the larger CS3D.

We see the European Union Deforestation Regulation (EUDR), that requires traceability of compliant goods (cocoa, coffee, beef, palm oil etc) to prove that no deforestation has occurred in its production.

Another key policy is the Corporate Sustainability Reporting Directive (CSRD). This requires an annual report that has a similar risk-based approach to CS3D. The key difference is the application of double materiality - considering risk under both financial and non-financial lenses - looking at people, planet, and financial risk.

Further policies include the Conflict Minerals Regulation that bans conflict minerals from being exported to the EU, the upcoming Forced Labour Regulation banning the importation of goods produced with forced labour, and the Raw Critical Materials Act that seeks to strengthen sustainable raw material supply chains.

Therefore, we can see that the CS3D is a culmination of these different concerns, where complying companies must collate and report this information publicly.

How will it be implemented and enforced?

The CS3D is currently in force, however the first reports will be published within 2-3 years, given that it will take time to identify and implement the processes needed to complete the report. In-scope companies will publish their first annual report in either 2027, 2028, or 2029, depending on the size of the company.

The main enforcement body will be auditors. They will have the power to undertake investigations of non-compliance. There are a few groups that will support the auditors in undertaking these investigations.

Member states of the EU will have their own advisors and network around the various aspects of the CS3D, while civil society are able to collaborate and hold companies publicly responsible for liabilities and damages.

Non-compliance can result in fines or other punishments, as seen fit by the auditing board.

Consequently, we can understand that enforcement is likely to be collaborative, where auditors will seek insights from the people and organisations that know the different areas of the CS3D best.

What does it mean for Australian businesses that might be impacted? What does it mean for Australian businesses that want to do best practice? What can Australian businesses do to get ready?

Australian businesses will need to consider their supply chains and whether they may fall in scope. The are a few different processes that Australian companies can implement now to help ensure compliance, or good practice, in future. This includes:

Reading the CS3D policy and understanding what it requires
Review current company processes such as complaints mechanisms, grievance mechanisms etc
Assess the effectiveness of these mechanisms and then begin reporting on them
Integrate processes that help you to ‘verify’ your claims around good practice
Undertake a GAP analysis to identify areas of improvement under the CS3D lens
Identify impacts occurring beyond a company’s own operations and seeing what occurs within their supply chains
In the case of falling in scope, ensuring strong communication with EU counterparts to see what information they will need

What is due diligence? And what isn’t it?

Due diligence is a risk-based assessment. It is a process that helps companies to identify risks and their associated likelihood, severity, and impact. This has often been applied with financial risk, however the same process can be used to identify environmental and social risk. This is both risk to a company’s operations and the risk that they may pose to people and the planet through their operations.

Due diligence will look different for every company, and will differ greatly among industries, however critical parts of due diligence include:

Identification of a due diligence procedure that is collaborative and actively engages with stakeholders (investors, employees, suppliers, customers etc)
Create processes that monitor the effectiveness of due diligence and the applied mitigation strategies throughout operations. This includes collaborating with vested stakeholders
Ensuring that the scope includes both upstream and downstream of the supply chain
Ensuring that it takes a 360 degree view of the company
Ensuring that it takes a long-term approach

Due diligence is NOT:

A transaction or a one-off procedure. It is cyclic and constant, where a company will continue to review and modify due diligence as needed
Knowing 100% of a supply chain and every single person employed within it. Supply chains change, and knowing 100% of them is not a reality. This is where due diligence is useful, as companies can begin to focus on risk areas and direct attention where it is most needed.
New. Many forms of due diligence already exist in the Australian market. They may not be in the form of a policy, but we see them popping up in tenders, trade agreements, public contracts and contract clauses. Leaning on these existing processes can help companies to build on what they already have

Guest Speaker Profiles

Dr Ingrid Landau

Dr Ingrid Landau is a Senior Lecturer at Monash Business School, and a member of the Labour, Equality and Human Rights (LEAH) Research Group. She teaches and researches in the areas of transnational labour regulation, business and human rights, and socially responsible procurement. Her book Human Rights Due Diligence and Labour Governance has recently been published with Oxford University Press (UK).

https://research.monash.edu/en/persons/ingrid-landau

Professor Justine Nolan

Justine Nolan is the Director of the Australian Human Rights Institute and a Professor in the Faculty of Law and Justice at UNSW Sydney. She is an internationally recognised expert in modern slavery and human rights issues relating to business practices. For more than 25 years, Professor Nolan has provided advice and training to business, civil society, government and the UN on business and human rights and her career is notable for its collaborative approach and its strong and sustained engagement with diverse stakeholders. She has been a key driver of the Australian and global business and human rights movement.

https://www.unsw.edu.au/staff/justine-nolan