EU missed opportunity for ‘transformative change’ as financial firms excluded from CSDDD

Industry reacts to conclusion of political negotiations on the Corporate Sustainability Due Diligence Directive

Financial institutions have been granted a “free pass” to neglect human rights and environmental impact, said ShareAction after political negotiations on the Corporate Sustainability Due Diligence Directive (CSDDD) concluded on Wednesday (13 December) – with financial institutions exempt from some requirements.

After tough negotiations with divides over the inclusion of financial companies, the Council and the European Parliament announced they had reached a provisional deal on CSDDD, which aims to enhance the protection of the environment and human rights in the EU and globally.

The due diligence directive lays down rules on obligations for large companies regarding their “actual and potential adverse impacts on the environment and human rights for their business chain of activities”. This covers the upstream business partners of the company and partially the downstream activities, such as distribution or recycling. If they do not comply they can face a penalty of up to 5% of the company’s turnover.

Despite calls for the financial sector to be included in the scope of companies, financial institutions have been temporarily excluded with a review clause for possible future inclusion. This strikes a “discordant note”, said Isabella Ritter, EU policy officer at ShareAction, as they will only have to check human rights and environmental harms in their own operations.  

“EU negotiators have missed a resounding opportunity for more transformative change,” Ritter commented. “Despite strong support from financial sector representatives and civil society, EU policymakers, due to the council’s pressure, chose to exempt financial institutions from due diligence requirements when offering financial services to their clients. This grants financial institutions a free pass to neglect human rights and environmental harms.” 

Excluding financial companies represents a significant difference in treatment compared to non-financial companies and could lead to market fragmentation, said ShareAction in a separate statement.

Representatives from the Business & Human Rights Resource Centre were also disappointed with the exclusion. Executive director Phil Bloomer said it was an “historic moment” for human rights in business but expressed concern about the “serious omissions”.

“It is disappointing that fierce pressure from parts of the industry appears to have succeeded in eviscerating some key safeguards. One example would be the ‘temporary’ exclusion of financial activities from due diligence when investors and banks play such a central role in defining the behaviour of companies in human rights.”  

Johannes Blankenbach, senior EU/western Europe researcher & representative at Business & Human Rights Resource Centre added: “Apparent carve-outs of rights, value chain parts or activities covered are highly regrettable, will undermine impact and mean certain corporate abuses can continue unabated.”

However, the Global Reporting Initiative (GRI) felt it was the right decision to exclude financial institutions as this time: “This deal recognises the challenges for financial institutions of implementing ambitious regulations,” said Eelco van der Enden, CEO of GRI.

“Our hope is that, as we move forward, the review clause will offer an opportunity to include both upstream and downstream activities of financial institutions within the scope of the CSDDD.”

Transition plans

ShareAction did however welcome the mandatory adoption on transition plans for financial institutions and the focus on human rights.

“This is a definite high note, emphasising their key role in fighting climate change,” said Ritter.

“Article 15’s transition plan provisions, which require the setting of time-bound targets and their implementation, will establish a coherent framework, compelling financial actors to take their climate pledges more seriously. The plan’s implementation can be further incentivised through financial rewards for directors.”

The provisional agreement now needs to be validated by the European Parliament and EU member states in an upcoming plenary session and council votes expected in early 2024.

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Natalie Kenway

Natalie is editor in chief at MA Financial covering ESG Clarity, Portfolio Adviser and International Adviser. She was previously global head of ESG insight for ESG Clarity and has been an investment journalist...