CSDDD informal agreement: A mixed bag on financial sector requirements

Financial institutions will only be required to conduct due diligence on their own operations but will have to implement 'robust' transition plans.

The Corporate Sustainability Due Diligence Directive (CSDDD) has been informally agreed by EU co-legislators, with some activities of the financial sector to be covered. 

The directive will, among other things, impose mandatory human rights and environmental due diligence requirements.

Regarding the scope, CSDDD will apply to EU companies and parent companies that have more than 500 employees and a net worldwide turnover of more than €150 million.

The directive will also apply to companies with more than 250 employees and €40 million in turnover if at least €20 million of turnover was generated in a high-risk sector. It will also apply to non-EU companies and parent companies with equivalent turnover in the EU.

Throughout the legislative process the inclusion of the financial sector has proved a political sticking point.

Responsible Investor has extensively covered the opposing views of the European Parliament, which pushed for full inclusion, and the Council of the EU, whose position has been subject to intense infighting and lobbying by France. 

According to the informal agreement, which was still being negotiated into the early hours of this morning, financial institutions will only be required to conduct upstream due diligence regarding their own operations. 

However, the co-legislators agreed to revisit an expanded inclusion of the sector during the first review of the legislation. 

“Finance is in, but of course not in the way that we wanted in the Parliament,” the directive’s rapporteur, Lara Wolters, an MEP for the S&D Group, said at a press conference today. 

Spain’s state secretary Gonzalo García Andrés said the final outcome is a “very significant improvement with regard to the provisional outcome in Council”, in which member states would have been able to decide whether to include the financial sector. 

Mixed views

The agreement received a mixed response from industry bodies, investors and NGOs.

Eurosif welcomed the inclusion of financial institutions in due diligence requirements but expressed regrets that it was confined to the upstream value chain. “This de facto excludes services provided towards clients, meaning investments, loans and insurance activities towards. We hope this can remedied during the review foreseen in the text.”

Victoria Lidén, senior sustainability analyst at Storebrand Asset Management, said the manager had supported the full inclusion of the financial sector.

“Due diligence throughout the value chain, using a risk-based approach in line with international standards, enables us to manage risks and adverse impacts more efficiently in our portfolio,” she told RI. “We note that many investors, including ourselves, already today dedicate significant resources to due diligence processes in accordance with international standards.”

It is regrettable that the finance sector will be largely exempted for now, Lidén added. “Due diligence requirements should apply to all sectors, as investors can play a crucial role in influencing their investee companies.”

Isabella Ritter, EU policy officer at ShareAction, said: “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.”  

She continued: “The exclusion of due diligence rules for financial institutions on their clients’ activities, confining them solely to the review clause at a later stage, strikes a discordant note. The financial sector will only have to check whether there are human rights and environmental harms in their own operations.” 

But Victor Van Hoorn, managing director and head of Brussels office at ICI Global, said he was glad that EU policymakers had excluded investment activities from the CSDDD.

“This acknowledges that a more thoughtful approach to these is needed than the proposal that was on the table. It also recognises the diversity of financial institutions and activities, some of which are not based on contractual arrangements.”

Mandatory transition plans

Provisions around transition plans made it into the agreement, and these were broadly welcomed and seen as strong.

Corporates and financial institutions will have to set emissions reduction targets and implement plans to transition their business to align with the 1.5C temperature goal.

For organisations with more than 1,000 employees, management “will receive financial benefits for implementing the plan”. 

Speaking to RI, Richard Gardiner, head of EU policy at the World Benchmarking Alliance, said: “This law will override current voluntary net-zero pledges, which have largely failed, and fast track the sector to align with the Paris Agreement. After the debacle at COP28, this is good news in a bleak week. 

Ritter agreed. “The mandatory adoption of transition plans by financial institutions is a definite high note, emphasising their key role in fighting climate change,” she said.

“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.” 

Gardiner added that the directive “gives national supervisors real teeth”. They will be able to launch inspections and investigations and impose penalties on non-compliant companies, including “naming and shaming” and fines of up to 5 percent of their net worldwide turnover. 

“It’s hard to imagine that any compliance officers will not take this extremely serious and this threat should help drive a high level of compliance,” said Gardiner. 

The agreed draft law now needs to be formally approved by the legal affairs committee and the parliament as a whole, as well as by EU member states, before it can enter into force. 

“These crucial decisions are anticipated in the early months of 2024, ahead of the European elections. It is critical that EU lawmakers and EU member states do not bring down the EU’s first corporate accountability law in the final steps,” said Ritter.