Start Thinking About Human Rights and Environmental Impact of Subsidiaries and Value Chains

The impending EU Corporate Sustainability Due Diligence Directive (“CS3D”) means most EU and some non-EU life sciences companies should begin to assess their wider human rights and environmental impacts and rethink compliance programmes. Michele Tagliaferri explains.

On 1 June, the European Parliament voted to adopt a negotiating position on CS3D which aims to expand its ambit to a larger number of companies. Trilogue negotiations on the legislation are continuing between the EU institutions. The Parliament’s position is that CS3D ought to apply to companies with over 250 employees, as opposed to the European Commission’s proposal that it only apply to companies with over 500 employees.

The ongoing trilogue negotiations about CS3D will focus not only on whether the legislation should apply to companies with 250+ or 500+ employees, but on which net turnover thresholds ought to apply for EU and non-EU companies to be subject to CS3D. The thresholds for employees and net turnovers are complex and the subject of ongoing negotiations.

What is clear, however, is that most pharma companies based in the EU, or with operations in the EU, will be affected. With this in mind, it makes sense for pharma companies to start thinking now about compliance with CS3D. The legislation is expected to be adopted in early 2024, with EU member states then having two years to transpose it into national law.

There is already substantive consensus on the core human rights and environmental due-diligence requirements of CS3D, with which companies will need to comply, and so preparations for CS3D can begin now.

It is clear that affected companies will need to fundamentally rethink their compliance programmes and reconsider the risks and implications raised by relationships with their business partners. Whilst life sciences companies have traditionally played a leading role in the compliance space, their traditional compliance programmes have typically been designed to identify, prevent, and address risks faced by the company, rather than adverse impacts caused by the company’s operations on internal and external stakeholders. This will need to change for companies that have operations in the EU.

The main action items required by the CS3D are:

  1. Scoping and assessing those areas of the business which risk having adverse human rights and environmental impacts, including adverse impacts by business partners.
  2. Developing and implementing measures to prevent or mitigate these adverse impacts.
  3. Assessing and monitoring the effectiveness of these due diligence policies regularly, at least every 12 months. For life sciences companies, this will mean adjusting the timing and scope of internal audits on high-risk business partners, such as distributors.
  4. Adopting adequate safeguards to avoid liability for adverse impacts caused by the company’s direct business partners, including adequate safeguards at the pre-engagement, engagement, and post-engagement phases of a business relationship. CS3D should be considered in the scope of corporate vetting and the monitoring of business relationships that have traditionally been less relevant for purposes of ABAC risk assessment, including upstream business relationships.
  5. Allowing employees and other potentially adversely affected persons — as well as trade unions and other workers’ representatives — to submit complaints concerning a company’s actual or potential human rights and environmental impacts.
  6. Adopting a climate transition plan which ensures that the company’s business model and strategy are compatible with the transition to a sustainable economy and with the Paris Agreement’s aim of limiting global warming to 1.5°

Initial CS3D assessments should focus on identifying obvious gaps and opportunities for alignment with the requirements of CS3D. It is also important to note that, whilst in most member states, CS3D will not be transposed into national law before 2026, its national requirements are likely to enter into force much earlier in those member states which already have sustainability laws that can de facto serve as transposition laws after minimum adjustment. This will be the case in France and Germany.

This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.