The Association for Financial Markets in Europe (AFME) recently published a report addressing significant concerns surrounding the Corporate Sustainability Due Diligence Directive (CS3D).
The CS3D aims to serve as a framework for financial institutions, helping them to identify risks, engage with clients, and ensure diligence regarding human rights, environmental impacts, and sustainable practices. However, AFME identified several shortcomings in the CS3D that may hinder financial institutions from fulfilling the directive’s goals.
The report highlights six areas requiring compromise: value chain, risk-based due diligence, prevention and mitigation of adverse impacts, civil liability, climate change transition plans, and directors’ duties. The AFME suggests that the CS3D should revise its language to enhance clarity and transparency in these aspects. Specifically, in the context of combating climate change, AFME emphasizes the importance of alignment with existing CSRD, international, and EU initiatives.
A crucial recommendation from AFME is for the CS3D to implement a “proportionate, risk-based approach” when defining the “value chain” for financial institutions, noting that the current regulation underrepresents the extent of downstream value chains associated with financial organizations. Additionally, the report urges for a revision of due diligence policies to prioritize urgent threats and immediate impacts.
Oliver Moullin, Managing Director at AFME, commented on the ongoing negotiations, stating, “As discussions on the CS3D progress, it is vital to address the key challenges associated with the proposed value chain for financial institutions and how due diligence requirements can be practically applied to financial services. It is essential to ensure that the directive does not undermine the competitiveness of EU companies or the role of banks in financing the transition.”
Moullin further stressed the need for the directive to become an effective tool for financial institutions to conduct due diligence, identify material risks, engage with clients, and promote best practices throughout the investment value chain. He stated that achieving this requires a balanced, risk-based, and workable approach, alongside a clear and legally sound framework.