EU member states are divided over whether or to what extent the financial sector should be covered by the EU’s Corporate Sustainability Due Diligence Directive (CSDDD), Responsible Investor understands.

The CSDDD, which will impose mandatory human rights and environmental due diligence requirements on corporates, has had a bumpy journey through the legislative process to the trilogue stage, which got underway in September.  

Since the first trilogue, which according to stakeholders focused mainly on the technical aspects of the due diligence process, the European Council of member states has had a series of working-party meetings.

RI understands that member states are not unified, and the original position agreed by the council late last year did not give its presidency a firm negotiating mandate for trilogue discussions.

The council is gearing up for another meeting next week, where it will aim to work out its position and negotiating mandate ahead for the next trilogue.

With the next trilogue expected around mid-November, RI spoke to observers close to the negotiations to get a sense of where discussions have got to and what needs to be hashed out next month when the council, European Commission and European Parliament come together.

The inclusion of finance

Among the topics discussed in the council meetings has been the controversial issue of the inclusion of finance, which the council and parliament have been split over. The former agreed last year that inclusion would be up to member states, while the latter voted for financial institutions – including asset managers – to be covered to a large extent by the directive.

However, RI understands that member states now believe an opt-in clause for the financial sector is not practical as it is unlikely any states would opt in, given the importance of the EU being a single market. 

Before the meeting, the Spanish presidency of the council put out a flash note, seen by RI, which described the positions of parliament and the council, and put forward a series of questions to work out what member states might find acceptable when it comes to the inclusion of finance.

Several stakeholders praised the Spanish presidency’s statement, adding that it appears to be trying to get the council closer to the position of the parliament.

RI understands that the most recent meeting this month was moved online and shortened at the last minute, contributing to failure to achieve a firm outcome on inclusion of the financial sector. However, the position of different member states seems to be becoming clearer. 

“Excluding asset managers completely distorts European markets and could create unfair competition for European company financing”

Richard Gardiner, World Benchmarking Alliance.

An observer closely following the negotiations told RI that, at one end of the spectrum, it appears France is against any kind of inclusion of finance. This position is backed by smaller member states such as Slovakia and Malta.

By contrast, the NetherlandsDenmark and Portugal are pushing for full inclusion of entire sector, including asset managers, the observer said. 

Between the two extremes are Italy and Germany, which want to focus on finance companies that have a “direct business relationship” with corporates – effectively banks and insurers. 

The latter approach appears to have majority support, according to Richard Gardiner, head of EU policy at the World Benchmarking Alliance.

Based on the views expressed by member states to date, there is clear support to begin with banks and insurers in scope, and then to cascade in asset managers,” he said. “But excluding asset managers completely distorts European markets and could create unfair competition for European company financing.”  

He also flagged that there is still a risk more member states could support the full exclusion of finance. “If the council land with finance not in at all, I don’t know where we can go from there in trilogue,” he added.

Investor support

Throughout the CSDDD’s journey, investors and investor networks – such as Eurosif, PRI and IIGCC – have continuously advocated for it to cover the whole of the financial sector. 

Anna Maria Fibla Møller, head of responsible investments at AP Pension, told RI that when it comes to investors, the due diligence requirements “must follow a risk-based approach and cover the full value chain”.

She added that they should also be tailored to investors’ size and asset classes, “taking into account varied amounts of leverage, different stewardship approaches and the need for divestment to be the last resort”.

enior policy analyst at PRI, also noted that while investor due diligence should be across the value chain, “investors need to be able to prioritise parts of the value chain for further assessment, following the risk-based approach as set out in the UNGPs and OECD guidelines”.

the directive should ensure investors conduct due diligence continuously. I think – and our signatories also have said – that in line with international standards this should be carried out pre-investment, at a regular times throughout the investment’s life, and if events make it necessary.”

Failure to consider the whole value chain and require continuous due diligence “could lead to serious sustainability risks going unidentified, given that the most severe risks and impacts are not necessarily in the first tier of a value chain”, Ransome said.

“It could also weaken investor leverage with companies – which we’ve heard as a concern from signatories.”

For IIGCC’s sustainable finance senior policy manager, Leo Donnachie, an article proposed by the European Parliament provides a good foundation for including investors in the scope of CSDDD. 

The article lays out “appropriate measures” for institutional investors and asset managers.

Specifically, the text says investors must do due diligence “to induce their investee companies to bring actual adverse impacts caused by them to an end”. Where relevant, investors would be required to engage with investee companies in order to minimise the extent of adverse impact or bring it to an end.

“The article recognises the nuances within the investor/investee relationship, the tools investors have at their disposal to carry out sustainability due diligence, and the constraints on these tools,” said Donnachie. 

Gardiner said the article needs further work, but that it lays out “the clear basis to develop a constructive and practical approach for how asset managers should be included in this directive”. 

Transition plans

Whether CSDDD should introduce a legal requirement to develop transition plans has also been on the agenda of council meetings.

“I would question what the point is of an obligation to set transition plans, including climate targets, without ensuring they are implemented”

Aleksandra Palinska, Eurosif

In its 2022 position, the council agreed this would only be required of large firms, and there was no implementation component. However, the parliament expanded the scope to all firms under the directive, included a implementation component, and linked the requirement to director remuneration for large companies.

RI understands the council position is unlikely to change, with only a couple of member states supporting the inclusion of a requirement on the implementation of transition plans. 

“Having a clear obligation for large companies to set and implement transition plans, including climate targets, is a cornerstone of the EU sustainable finance agenda and the most essential provision to ensure we have any chance of meeting EU net-zero targets,” said Aleksandra Palinska, executive director of Eurosif.

“I would question what the point is of an obligation to set transition plans, including climate targets, without ensuring they are implemented.” 

Palinska and other stakeholders said some corporates have raised concerns about legal liability and what happens if companies eventually do not meet their transition plan targets.

“As long as companies can demonstrate reasonable efforts made towards achieving the targets, there won’t be a problem,” she said. “The main objective of this provision is to ensure that all large companies set the transition plans and that these transition plans are reliable and are implemented, to prevent greenwashing.” 

There was also consensus among stakeholders contacted by RI that transition plan requirements under CSDDD should be coherent with and reference the disclosure provisions set out in CSRD, as per the parliament’s position.

Next steps 

The hope and expectation is that there will be political agreement on the directive by January. There is definitely a sense of urgency from stakeholders.

IIGCC’s Donnachie told RI: “We hope the November trilogue will lead to breakthroughs on some of the most contentious issues surrounding CSDDD, in particular whether to include financial services, and which companies will be in scope.

“These issues should be resolved before the end of 2023. If they stretch into 2024, they risk being delayed even further by the looming EU elections.”