The indirect effect of the Corporate Sustainability Due Diligence Directive (2024/1760) (CS3D) on MSMEs
The indirect effect of the Corporate Sustainability Due Diligence Directive (2024/1760) (CS3D) on MSMEs
Member States have to transpose the Directive into national law and communicate the relevant texts to the Commission by 26 July 2026. One year later, the rules will start to apply to the first group of companies which are:
26 July 2027 - EU companies with more than 5 000 employees and €1 500 million worldwide turnover, as well as non-EU companies with more than €1 500 million turnover generated in the EU.
26 July 2028 - EU companies with more than 3 000 employees and €900 million worldwide turnover, as well as non-EU companies with more than €900 million turnover generated in the EU.
26 July 2029 - All other companies in scope which are:
- Large EU limited liability companies & partnerships: +/- 6,000 companies – >1000 employees and >EUR 450 million turnover (net) worldwide.
- +/- 900 companies - > EUR 450 million turnover (net) in EU.
Why would SMEs be indirectly affected by the CS3D?
The European Commission states that “Micro companies and SMEs are not covered by the proposed rules. However, the Directive provides supporting and protective measures for SMEs, which could be indirectly affected as business partners in value chains.”
Due to the soon to be regulatory compliance on large corporations to report on their entire supply chain's ESG impact, SMEs which are in those supply chains may be asked to provide information and documentation which will show compliance with policies of large companies. SME suppliers without aspects such as risk assessments, ESG strategies, or their own supply chain due diligence assessment will be at risk of being considered a “high-risk partner” and could consequently be removed from the supply chain of large companies. Therefore, SMEs may also have to comply with specific policies of large companies to maintain their position within the supply chains, as well as show they are reliable business partners.
How does the CS3D aim to support SMEs?
Article 46 of the Directive states that “Companies should also provide targeted and proportionate support for a small and medium-sized enterprise (SME) which is a business partner of the company, where necessary in light of the resources, knowledge and constraints of the SME, including by providing or enabling access to capacity-building, training or upgrading management systems, and, where compliance with the code of conduct or the prevention action plan would jeopardise the viability of the SME, providing targeted and proportionate financial support, such as direct financing, low-interest loans, guarantees of continued sourcing, or assistance in securing financing. The notion of ‘jeopardising the viability of an SME’ should be interpreted as possibly causing a bankruptcy of the SME or putting the SME in a situation where bankruptcy is imminent,”.
Article 69 of the Directive states that “.... In order to support SMEs, Member States, with the support of the Commission, should set up and operate, either individually or jointly, dedicated user-friendly websites, portals or platforms, to provide information and support to companies, and Member States could also financially support SMEs and help them build capacity… Companies whose business partners are SMEs are also encouraged to support them to comply with due diligence measures and use fair, reasonable, non-discriminatory and proportionate requirements vis-à-vis the SMEs,”.
What are the benefits of the CS3D?
Conclusion
Even though the CS3D will only apply to large companies, SMEs may be indirectly affected due to the necessity for compliance of large companies with the regulations which will be proposed by member states, as well as the requirements of the directive.
A proactive approach to supply chain due diligence of SMEs will enable them to be sustainable on the market for the long-term. By prioritizing ESG and risk management, SMEs can position themselves as responsible partners and gain a competitive advantage, as well as contribute to the global range of benefits of the CS3D. The CS3D requires large companies to have the best interest of the SME as part of their supply chain due diligence.
Disclaimer:
Project Number: 2023-1-PL01-KA220-VET-000158937
Co-Funded by the European Union. Views and opinions expressed are however those of the author(s) only and do not necessarily reflect those of the European Union or the European Education and Culture Executive Agency (EACEA). Neither the European Union nor EACEA can be held responsible for them.
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References:
https://www.lexology.com/library/detail.aspx?g=bab18efa-618f-4b45-a41f-2c28c5f6d1a3