The CS3D is intended to act as a tool for financial institutions to identify risks, engage with clients, and provide a clear legal framework to ensure due diligence on human rights, environmental impacts, and sustainable initiatives.

The AFME outlined where the CS3D falls short of its objectives and could keep financial institutions from achieving the objective of the directive.

The paper addresses six areas where compromise must be reached: value chain, risk-based due diligence, preventing and mitigating adverse impacts, civil liability, combatting climate change transition plans, and directors’ duties. AFME’s paper advises the CS3D to adjust phrasing and clarify wording in these areas to make the directive more transparent and specific. In the paper’s article on combatting climate change, the AFME points out that the CS3D should be in line with CSRD, international, and EU initiatives.

Another key recommendation from the AFME is for the CS3D to adopt a “proportionate, risk-based approach” when defining “value chain” for financial institutions. The depth of downstream value chains held by financial organisations is downplayed in the regulation, the AFME posits. Similarly, the paper calls for due diligence policies to be revised to focus on urgent threats and immediate impacts.

Oliver Moullin, Managing Director at the AFME, stated: “As the negotiators continue discussions on the CS3D, we want to outline the key challenges that arise from the proposed scope of the value chain for financial institutions and the practical application of due diligence requirements to financial services. As the co-legislators seek an agreement, it is essential to ensure that the directive does not harm the competitiveness of EU companies or the role of banks in providing finance to support the transition.

“To ensure that the Directive can become an effective tool for financial institutions to carry out due diligence, identify material risks, engage with their clients, and promote best practices across the investment value chain, it is necessary to ensure that the proposal takes a proportionate, risk based and workable approach and that it provides a clear, practical and legally certain framework.”