The European Parliament has voted in favour of a proposed directive that will impose mandatory human rights and environmental due diligence requirements on companies, and has confirmed that financial institutions will be covered by the rules.
The Corporate Sustainability Due Diligence Directive (CSDDD) got the green light from members of the European Parliament on Thursday, with 366 for, 225 against and 38 abstentions.
The road to the directive clearing the parliamentary hurdle has been bumpy. MEPs were voting on a cross-party compromise reached in the parliament’s legal committee in April.
While this was seen as a key milestone, the conservative EPP group of MEPs were unhappy with parts of the agreement. EPP and other right-wing MEPs lodged a raft of last-minute amendments ahead of Thursday’s vote. All apart from one were rejected.
The next steps for the CSDDD will be trilogue discussions between the parliament, the European Council and the European Commission, which are expected to begin in the coming weeks.
A key point of contention throughout has been the degree to which financial institutions would be covered in the directive’s scope.
In December, the council said it had agreed that the inclusion of financial institutions would be up to member states. But Thursday’s vote saw the parliament agree with the April legal committee position that financial institutions, to a large extent, will be covered by the directive.
The legal text outlines “appropriate measures” for institutional investors and asset managers, adding that investors must do due diligence “to induce their investee companies to bring actual adverse impacts caused by them to an end”.
Where relevant, investors will be required to engage with investee companies in order to minimise the extent of adverse impact or bring it to an end, the text says.
Richard Gardiner, head of EU policy at the World Benchmarking Alliance, told Responsible Investor that the vote is another significant step in closing the corporate accountability gap.
“With this vote, EU policymakers are recognising that current voluntary codes of conduct are not producing the seismic shift we need to ensure sustainable corporate business practices,” he said.
“In particular, large investment funds can no longer hide behind their clients and must recognise their global impact. Momentum for hard law is growing and companies and finance alike must be ready for this regulatory shift.”
Amandine Van Den Berghe, a lawyer at ClientEarth, agreed. “As controllers of the purse strings, financial actors have huge influence over corporate behaviour,” she said. “It is not a bold move to require asset managers and financial institutions to conduct due diligence, it’s common sense.”
In a press briefing, Lara Wolters, the rapporteur on corporate sustainability, said the inclusion of financial institutions will likely remain a key battleground. “The council’s position has been not in line with parliament’s, to say the least.”
The directive also requires companies to implement a transition plan compatible with limiting global warming to 1.5C.
For large companies with more than 1,000 employees, meeting the plan’s targets could have an impact on directors’ variable remuneration. However, wider proposed rules on directors holding legal responsibility for implementing and overseeing the due diligence process of their companies did not make it through.
Isabella Ritter, EU policy officer at ShareAction, described this as “disappointing”. “Having directors’ oversight is an important part of responsible business conduct according to international guidelines, and enables companies to be more resilient and efficient,” she told RI.
Gardiner echoed this: “Change needs to come from the top down. Without the legal mandate, we will always be lacking real corporate leadership on sustainability.”
More broadly, Gardiner said Thursday’s vote will have wider implications when it comes to the EU’s other sustainability initiatives.
“This vote only reinforces the importance of good quality reporting under the upcoming European Sustainability Reporting Standards (ESRS),” he said. “When companies go to carry out their due diligence, they will need in depth and materially relevant data on their supply chain to this.
“In effect, both laws reinforce each other, and this vote pushes the focus to enhance the ambition of the ESRS.”