The European Federal Government Directive 2024/1,760, published on July 5 in the Official Journal of the European Federal Government (EU), establishes rules on the due diligence procedures  that companies must take to protect human rights and the environment. The rule will come into force on July 26.

Approved by the European Parliament in February and by the Council of the European Federal Government in April, the Corporate Sustainability Due Diligence Directive (known as CS3D) will apply to the Member States of the European Federal Government, which will have two years to adapt their respective national standards to the new rules.

The way the implementation should be made was not specified. It may be a law, regulation or other internal mechanism existing in the legal framework of each country.

As Member States have not yet implemented their regulations, it is not possible to accurately predict the provisions and obligations that will be established for companies based in the EU and for companies from other locations that maintain operations in the European community.

There is, however, consensus that the consequences for the economic system will be relevant. Companies that operate in Brazil may be affected, including those that do not operate in the international market.

Given this scenario, it is relevant to better understand the basic points of this directive and the impacts it brings.

What does the directive mean in practice?

For now, there is no change for companies from a legislative point of view. EU Member States have by July 26, 2026 to adopt and publish laws, regulations and administrative provisions necessary to comply with the directive. Only after the adoption of specific rules in each country companies will be subject to the new rules.

What are the main provisions of the directive?

The directive requires EU member states to implement rules related to procedures for due diligence on human rights and the environment. These due diligence procedures apply to companies that are based in the respective Member State or that operate in its territory.

In general, local laws will regulate human rights and sustainability compliance programs. These programs should embrace several initiatives, such as:

• risk assessment, elaboration and review of policies for the inclusion of due diligence on human rights and sustainability;
• identification and evaluation of adverse impacts;
• prevention of potential adverse effects;
• neutralize and minimize actual adverse effects;
• monitoring and evaluation;
• communication; and
• remediation mechanisms.

How and when will the new rules apply to companies?

The rules will be applied progressively, according to criteria related to the number of workers and net worldwide turnover. The direct impacts should initially reach the largest companies – those with more than 5 thousand employees and a net worldwide turnover of more than 1.5 billion euros – from 2027.

By 2029, organizations covered by the directive will reach:

• EU companies (on an individual or consolidated basis) with more than a thousand employees on average and a net worldwide turnover of more than €450 million; and
• non-EU companies (on an individual or consolidated basis), which generate a net turnover of more than €450 million within the EU.

What is the impact on the value chain?

The directive attracts the attention from the entire world, as it will apply to companies with comprehensive operations and revenues in the EU, but not necessarily based in European territory. The concept of the value chain part of the scope of the directive has an impact beyond the EU's borders.

The rule requires companies to adopt measures to prevent, detect, and repair the negative social impacts of their activities. This duty of diligence of companies extends to the activities of their suppliers and service providers.

As a result, a company based in Brazil may be affected, even if it only operates locally. If, for example, a company based here has a customer subject to the new European laws and regulations, that company will probably be monitored by that customer. This is due to the duty of diligence imposed on him by the new directive.

Under the new rule, companies operating in the EU will have to conduct due diligence involving suppliers and business partners upstream and downstream:

• upstream – business partners related to the production of goods or the provision of services by that company, including the design, extraction, sourcing, manufacture, transport, storage and supply of raw materials, products or parts of products and the development of the product or the service.
• downstream: business partners related to the distribution, transport and storage of a product.

What will be the sanctions?

According to the directive, Member States must to establish one or more independent supervisory authorities to supervise compliance with the norm. These authorities should have adequate power and resources to enforce the law. They will be able to ask for reports from companies and conduct investigations into violations. It will also be up to these agencies to impose penalties to be defined by local rules, respecting the limit of by 5% of the company's global gross revenue in the preceding year of the violation.

For the calculation of the penalty, the seriousness and duration of the violation, the investments made by the company, the company's contribution to remediate the effects, the financial benefits gained or losses avoided by the company, among other factors, will be evaluated.

What is the comprehensiveness of this changing for Brazil?

The heavy sanctions of the directive should lead European multinationals or those with a large presence in the European to be very demanding with their suppliers.

Multinationals operating in Brazil will need to adapt their compliance program to the Brazilian reality and merge it jointly with European laws and regulations, without compromising production efficiency.

Brazilian companies operating in the Europe are likely to be directly affected, and even those that do not operate in the region risks of losing business and customers if they do not have adequate controls in place to prevent, identify, and remedy violations of human rights and environment.

Suppliers without consolidated compliance practices tend to be passed over because they represent a relevant corporate risk. For companies with consolidated programs, the tendency is to have an advantage in the dispute for customers and markets and to earn comprehensive competitiveness.

Brazil is discussing its own rule on the subject in the National Congress. Bill 572/22, which creates the national framework on human rights and business and establishes guidelines for the promotion of public policies on the subject, has already been the subject of (necessary) discussion. The expectation is that this bill will be impacted by the new directive.