A Basic syllabus of corporate responsibility regulation – PART 2: Why should we care about corporate responsibility?

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Corporate responsibility is becoming increasingly more legal, and the role of corporate responsibility issues has moved from being a communication and marketing issue to being more and more at the centre of day-to-day business and strategy. For example, in a survey of large corporations commissioned by OP Financial Group (Finland’s largest financial services group) the results of which were published in 2024, over 80% of respondents, i.e. large corporations, felt pressure to tighten or reform their entire subcontracting chain requirements due to responsibility obligations. Furthermore, 56% of the respondents said that they have had to change subcontractors or suppliers due to responsibility obligations. This proportion has increased by well over 10% in a year.

Corporate responsibility and issues related to responsibility are also increasingly on the agenda of chief legal officers and other lawyers, such as attorneys, due to the increased litigation risk and various contractual assurances, among other things. The media is also following more closely the state of various regulatory projects, as we have seen with the CS3D.

As legislation evolves, the corporate responsibility and responsibility in general are no longer a matter of voluntarily obeyed soft law, but of genuinely binding regulation, although various soft law instruments, such as UN and OECD publications, act as a source of law for interpreting the content of corporate responsibility legislation. These earlier publications of UN and OECD have had a fairly strong influence inter alia on the background and contents of the binding legislation at the EU level.

In addition to the CS3D, the EU has, for example, introduced the CSRD, the Taxonomy Regulation, the Forced Labour Regulation, the Deforestation Regulation, the Conflict Minerals Regulation and the Greenwashing Directive, which regulates the use of various green claims in marketing. The amount of regulation is enormous and there are very few companies in the market that could completely ignore corporate responsibility legislation, let alone openly state that they are not affected by the legislation. Consumer awareness and interest in responsibility issues have also increased.

Another reason to be interested in corporate responsibility and responsibility in general is that it is economic. For example, with the introduction of the Taxonomy Regulation, the economic operation of companies is classified according to their environmental sustainability, so that the financial institution granting e.g. external financing can take that into account when making a financing decision. If corporate responsibility issues are not properly managed, external financing may be difficult or at least expensive to obtain.

Regulatory compliance will be supervised

The CS3D requires the nomination of an independent and autonomous national supervisory authority. In Finland, this will likely result in the creation of a completely new authority. The supervisory authority will supervise companies’ compliance with their obligations under the CS3D, which have been implemented at national level. To support its obligations, the supervisory authority must have access to information from companies and national supervisory authorities may also exchange information with each other.

To improve compliance, the CS3D provides for various sanctions, such as administrative fines imposed by the national supervisory authority, the exact amount of which will be known once the Directive has been implemented at national level. However, the Directive on Corporate Sustainability Due Diligence provides that the maximum sanction must not be less than 5% of the company’s worldwide net turnover, calculated based on the consolidated turnover at the level of the ultimate parent company. By comparison, the maximum sanction under the GDPR is 4% or €20 million (whichever is higher), so the sanction under the CS3D may be even higher. In addition to administrative fines, national supervisory authorities will be given the possibility to make a public statement if a company fails to comply with a decision imposing a financial consequence within the time limit set out in the decision. The public statement will mention the company responsible for the infringement and the nature of the infringement.

The original proposal for the CS3D also imposed a personal responsibility on the management of a company, but the adopted directive no longer includes this element. However, it should be noted that, for example, the amendments to the Accounting Act following the CSRD include an element of personal liability of the management of the company under the Finnish Companies Act. This sanction under the CSRD was originally intended to be criminal, but the requirements of precision and accuracy of legislation did not allow this. The personal responsibility of the management referred to herein relates to the fact that the sustainability report included in the annual report based on the CSRD must be signed by the members of the board and that, by signing it, the member of the board declares that the report has been prepared in accordance with the reporting standards referred to in Chapter 7 of the Accounting Act. The liability of the board member in relation to the annual report is in turn determined by the liability provisions of the Finnish Companies Act.

As noted in the first part of this blog post series, the due diligence in the CS3D requires that a company establishes a reporting channel for reporting and complaining about occurred or potential harmful effects. The whistleblower must be protected as set out in the Whistleblowing Directive. The CS3D also requires national legislation to ensure that a company can be held liable to a natural or legal person if the company has failed to comply with the due diligence obligation and the legally protected interest of a natural or legal person has been harmed. In addition, the harmed person may appoint a human rights or environmental organisation or a trade union to represent them. This possibility of authorisation is a compromise solution to the class action proposal, which was widely reported in spring 2024 and which also attracted opposition in Finland. It is therefore not possible to bring a class action directly under the directive, but the matter will be governed by national legislation. Currently there is no such possibility in Finland.

Compensation for damages is based on the principle of full compensation and the CS3D also requires sufficient statute of limitations for bringing an action for damages. The statute of limitations must be at least five years, unless national law provides for a longer period for civil liability. It is also essential to note that this liability for damages is without prejudice to the civil liability of a subsidiary or a direct or indirect business partner in the chain of activity of the company. It is also possible that operators may be jointly liable for damages.

 

Read the part 1: The content of the CS3D in brief

Read the part 3: Corporate responsibility legislation challenges traditional contracting models

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