?? EU's CS3D - nearing completion... ??

Earlier this year, in my previous article on CS3D – I noted that there had been some delays and bumps in the legislative road. This has continued throughout 2023 – with numerous political trilogues (a key part of the EU inter-institutional negotiations process). Since the beginning of discussions there has been a focus on the financial services industry specifically. There was an ongoing disagreement on whether to allow EU member states to decide whether to include the industry within the chain of activities definition and whether the sector should have its own specific focus within the Directive. Following the 5th trilogue meeting on 13 December, we now have a provisional agreement on CS3D. This article highlights some of the key points to note at this moment in time.

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??Scope of application

• Large companies (more than 500 employees and net worldwide turnover of €150 million)
• Altered threshold for "high-risk" sectors (more than 250 employees and 40 million turnover in the EU)
• Parent companies of groups with a turnover of more than 150 million
• Thresholds apply to non-EU companies if they generate this turnover in the EU (€300 million net turnover generated in the EU, 3 years from the entry into force of the directive).

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?? Application dates (phased implementation)

·?????? 2027: 1000+ employees

·?????? 2028: 500+ employees

·?????? 2029: 250+ employees in “high-risk” sectors.

?? Risk-based approach

• Firms must identify risks where they are most severe or most likely to occur based on risk factors
• Prioritize the order in which they mitigate these risks based on severity and likelihood
• Firms covered by the scope of CS3D do not have to check each other
• To avoid over burdening SMEs - when identifying risks beyond Tier 1, firms should contact the companies at risk directly
• An obligation to take measures only exists where a firm has caused the risk itself; everything beyond this is subject to a duty of care.

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???? Financial service industry

Although slightly confusing in the official press release - financial services will still need to comply with due diligence obligations for their upstream value chains (only duty for own operations, upstream risks & climate plans (Art15). Further technical drafting remains to be completed. Firms will have to establish CSRD-aligned transition plans, linked to remuneration. Review clause will come later on.

??Scope in value chain

Chain of activities (with inclusion of transportation, storage and disposal if these areas are taken over by another company, and exemption of the sale/use/distribution of products). Exception of dual use products and weapons (export control). The Council press release says downstream activities are partially in, such as distribution and recycling.

?Next steps

There appears to be a significant amount of technical work to be completed. This provisional agreement will need to be adopted by the European Parliament and member states.

The views reflected in this article are views of the author’s and do not necessarily reflect the views of the global EY organization or its member firms.