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December 14, 2023

Scoop – EU agrees on partial inclusion of financial sector in CSDDD

Flags flying outside European Commission hq
The decision on whether financial institutions should be covered by downstream due diligence requirements will be reviewed two years after the CSDDD comes into force (Photo: Dmitry_Rukhlenko/Envato)

Contrary to an EU official communication, certain activities of banks and other financial companies will be captured by new corporate sustainability rules

All financial institutions operating in the EU will have to comply with upstream supply chain obligations and draw up climate transition plans aligned with the Paris Agreement, after all-night negotiations between the European Commission, parliament and EU member states came to a provisional agreement on the Corporate Sustainability Due Diligence Directive, according to two sources involved in the negotiations.

Later this morning, Lara Walters, the Dutch MEP who helped negotiate the agreement, told journalists during a press conference that officials “resisted the push to completely exclude finance” from the directive. “Financial institutions will have to put in place climate plans like any other company and adjust their remuneration schemes accordingly,” she said.

In a statement, Walters said, nonetheless: “We [the Socialists group in the parliament] deplore that the financial sector — banks, insurers and asset managers — will not have the same obligations as other types of companies to address impacts.”

The decision will be reviewed two years after the CSDDD comes into force to decide whether financial institutions should be covered by downstream due diligence requirements, which could make them liable for clients’ activities, the sources told Sustainable Views.

The partial inclusion of the financial sector contradicts an official announcement stating it would be “temporarily excluded” from the directive.

In a LinkedIn post, Richard Gardiner, head of EU public policy at non-profit World Benchmarking Alliance, commented on the partial inclusion of financial companies. “There will be a review on defining how finance addresses its downstream risks BUT importantly they are NOT fully excluded,” he wrote.

Meanwhile, Article 15 of the directive says incentives in remuneration policies should be linked to a company’s sustainability performance, but this remains a voluntary requirement.

‘Hole punching’ by France and Germany

Non-profits that had campaigned hard for a strong directive were cautiously positive about the provisional deal.

“This deal marks a significant milestone as the largest of companies will finally have to clean up their act. But it did not get through unscathed with the regressive business lobby and a group of EU countries led by France and Germany punching holes in the law,” said Marc-Olivier Herman, economic justice policy lead at Oxfam EU.

France had been leading the opposition to the inclusion of the financial sector in the directive, according to experts close to the negotiations. Sustainable Views understands the Czech Republic supported Paris’ position during Wednesday night negotiations. Germany and Italy, meanwhile, supported by other EU countries had opposed stronger provisions on civil liability.

The deal excludes the possibility of civil liability for companies accused of failing to comply with the prevention and mitigation of climate impacts.

The European Coalition for Corporate Justice, a non-profit, said in a statement that the agreement on civil liability provision was a “promising although imperfect step forward.

Under the deal, courts will be able to require companies to disclose internal documents and plaintiffs will have the option of being legally represented by NGOs and trade unions in line with national laws. However, the minimum deadline to file claims under the CSDDD was set at five years. “The bare minimum to account for the complexities of litigating across various jurisdictions,” said the ECCJ.

“We commend the co-legislators for responding to the constructive voices from trade unions, civil society and businesses,” said Julia Otten, senior policy officer at law firm Frank Bold. “This agreement is a valuable outcome towards establishing an EU-wide framework for responsible business conduct.”

However, Frank Bold rued the decision to remove proposals by the European Commission on the duties of company directors to oversee due diligence and to take sustainability into account when acting in the interests of the company.

“We consider this deletion a short-sighted step that will deprive companies across the EU and their stakeholders of legal clarity and predictability regarding the role and responsibilities of governance bodies in fostering more sustainable business practice,” said the law firm in a statement.

The World Benchmarking Alliance’s Gardiner told Sustainable Views the agreement “gives national supervisors real teeth as companies will now have to fear fines of up to 5 per cent of global turnover if they fail companies. Its hard to imagine that any compliance officers will not take this extremely serious and this threat should help drive a high level of compliance”

“Regarding the financial sector, the significant upside of this agreement is that the financial sector will now be legally mandated to both adopt and implement a meaningful transition plan,” he added. “This law will override current voluntary net zero pledges, which have largely failed, and fast track the sector to align with the Paris Agreement.”

Negotiations had faced an uphill struggle following pushback from some financial institutions, as SV reported in November, while Frank Elderson, a member of the executive board and vice-chair of the supervisory board of the European Central Bank, said the CSDDD would help ensure the financial industry systematically integrates sustainability into decision-making and risk management.

The rules will apply — at the earliest starting in 2027 — to EU companies that have more than 500 employees and a net worldwide turnover of more than €150mn. They will also apply to companies with more than 250 employees and €40mn in turnover, if over 50 per cent of such turnover was generated in a high-risk sector, like textiles, agriculture or the extraction of minerals. Non-EU companies will also be subject to the directive if they exceed certain turnover thresholds in the single market.

Sustainable Views understands technical discussions will take place next week to agree the final deals of the deal, which will then need to be endorsed and formally adopted by the EU institutions.

Representatives of the French, Czech, German and Italian governments have been contacted for comment.

This article has been amended after publication to add details about the vote and comments from experts.

A service from the Financial Times