EU Council set to push for finance exclusion from CSDDD

The headline of this article has been updated to reflect that it refers to the Council of the EU and not the European Council

EU member state representatives have endorsed the Spanish Presidency’s proposal to exclude the finance sector from the bloc’s Corporate Sustainability Due Diligence Directive (CSDDD), Responsible Investor understands.

RI reported last week that in a council working party meeting planned for the following day, the Spanish Presidency would propose an approach that would have a possible exclusion of the financial sector with a review clause for the extension to cover the sector at a later stage. 

The reason behind the move is that the council was split on the extent to which the financial sector should be included in the CSDDD, which will impose mandatory human rights and environmental due diligence requirements on corporates. France, in particular, has been lobbying for an exclusion with a review clause. 

However, there was no agreement last week. But RI understands that at a so-called “Coreper” meeting of member state representatives on Wednesday, the Presidency’s proposed mandate was endorsed.

The Presidency now has the political nod to draft its mandate in more detail ahead of the next trilogue meeting with the European Commission and European Parliament, which is planned for 22 November.

The endorsed proposal would see the financial sector be excluded from the scope of the directive and delay the extension to the sector to a later stage by adding a review clause, once a detailed impact assessment has been done. 

An observer closely following the negotiations told RI that member states – including the Netherlands, Denmark, Finland and Germany – voiced their opposition to this position.

The inclusion of finance has been a sticking point throughout the CSDDD legislative journey.

Originally, the council agreed last year that inclusion would be up to member states, while the the parliament voted for financial institutions – including asset managers – to be covered to a large extent by the directive. 

Investors and investor networks – such as Eurosif, PRI and IIGCC – have continuously advocated for it to cover the whole of the financial sector.  

And on Tuesday this week, Frank Elderson, European Central Bank board member and vice-chair of its supervisory board, called for finance to be included in the directive. 

“At the ECB, we consider that this can help to ensure that financial institutions – including banks – systematically integrate sustainability matters into their decision-making and risk management practices,” he said in a speech at The Decade of Sustainable Finance event in Brussels. 

“Not excluding the financial sector from the remit of the CSDDD can further help to create greater certainty around financial institutions’ obligations in this area and around climate- and environment-related litigation risks for the financial sector.”

Responding to the endorsement of member states of Presidency’s proposal, Isabella Ritter, EU policy officer at ShareAction, said: “How can we justify the exclusion of the financial sector, which holds nearly four times more financial assets in the EU than non-financial companies, from this law when other sectors are not? Such a discrepancy would create an evident double standard between financial and non-financial companies.” 

Echoing Ritter’s disappointment, Richard Gardiner, head of EU policy at the World Benchmarking Alliance, told RI: “While many EU member states will go to COP in a few week and wax lyrical about how we need to fund the transition to clean energy, this week they have clearly said that the financial sector should be under no obligation to either have any sort of Paris-aligned transition plan in place or consider the impacts of the financing activities on the climate.

These two positions are simply incompatible and risk undermining the legitimacy of the EU Green Deal.”

He added that the agreement does not have a broad majority among EU member states. “If there is to be a final deal, there will be a need to take the overall of majority of EU institutional views into account, and that means including at least banks and insurers in scope”.

On a more positive note, the Presidency’s proposal includes support for the parliament’s position on improved access to justice measures, more details to the content of transition plans and linking remuneration policies to transition plans. 

Observers told RI that some member states appeared to criticise the renumeration and access to justice measures, although the proposals on transition plans in general “seemed quite fine” for most member states.

Aleksandra Palinska, executive director of Eurosif, said the progress on the transition plans and climate targets was positive, given they are instrumental for accelerating the transition towards a sustainable economy. “However, it should be clear that the companies within the scope must not only set but also implement the transition plans, including climate targets.” 

Palinska also welcomed the understanding that the provision on a link between directors’ remuneration policy and transition plans has been retained. “Remuneration can be a powerful incentive.” 

“The devil is in the details though, so we are looking forward to seeing the agreed text. We are also very much looking forward to the trilogue negotiations,” she said. 

However, Ritter described the concessions as “peanuts” considering the massive impact of the financial sector on people and the planet.