Last round for due diligence directive: Will finance sector appeals be heard?

Posted on 08 December 2023

Negotations on the EU Corporate Sustainability Due Diligence Directive (CSDDD) are going into the final round, with a deal potentially expected for next week.
What is happening?

On Wednesday, 13th December, the European Parliament, EU Member States and the Commission will hold what could be their last trilogue negotiation meeting on the Corporate Sustainability Due Diligence Directive (CSDDD). The meeting is critical to agreeing upon the most contentious parts of the upcoming law that could put an end to destructive corporate and financial practices that damage the environment and infringe upon human rights.

Why does this matter?

The Directive would require companies to identify, prevent, mitigate, and end environmental harms and human rights violations across their value chains. An ambitious Directive is essential to ensure companies effectively manage sustainability impacts and risks. 

However, the EU Member States, under pressure foremost from France, decided in November to exclude financial companies from the due diligence framework in their negotiation mandate. This would allow financial actors to neglect the sustainability harms they are reinforcing, causing them to also miss the associated financial risks. But the Council is heavily split, as many states, including the Netherlands, Denmark, Finland, Germany, Ireland and others, advocate for the financial sector to benefit from the due diligence rules.

The opposition is even more surprising, as a new, comprehensive list of almost 50 statements from 2022-2023 shows that the inclusion of financial institutions and activities in the CSDDD is unequivocally supported by hundreds of financial firms, hundreds of real economy companies, hundreds of civil society organisations, faith leaders and academics, and an umbrella trade union organisation representing over a million financial sector workers in Europe.[1]

Considering that financial firms hold close to 80% of the financial assets of the entire private sector in the EU, excluding the sector from the due diligence rules would make the Directive cover only a fraction of the financial flows.[2]

What will WWF be looking for?

Meaningful inclusion of financial institutions and activities in due diligence rules:
Financial institutions should be required to incorporate sustainability matters in their financial practices, including for lending, insuring and investing activities, in order to help them identify and address sustainability harms and spot the relevant financial risks. The law should enable a risk-based approach, allowing due diligence rules to be relevant for all financial players and activities. The financial sector must be fully included in the law to avoid market distortion and ensure all financial players are equally incentivised to address sustainability matters.

The requirement to adopt and implement transition plans with science-based targets:
There is no EU law obligating larger companies from all sectors to actually reduce emissions. CSDDD can make it mandatory for firms not just to adopt, but also implement climate transition plans, and thereby take concrete steps to reduce emissions and cope with the growing climate-related risks. All transition plans should, at a minimum, be based on science-based, absolute emission reduction targets in Scopes 1, 2 and 3. The achievement of these targets should be linked to directors’ variable remuneration. 

A broad definition of environmental harms to consider in due diligence:
To ensure that the Directive leads to the prevention and minimisation of environmental harms, it must define a wide list of harmful environmental impacts that companies must consider in due diligence, with conventions specifying the obligations where possible. The definition must include, among others, climate change and biodiversity loss. Limiting the environmental scope only to a narrow set of conventions would fail to reflect the environmental footprint of companies, create an unfair playing field as some sectors would be more affected than others, and lead to inconsistencies with other laws, such as the EU Taxonomy and Corporate Sustainability Reporting Directive, thereby increasing burden for companies.

Quotes

“Allowing financial institutions to ignore the harm they aggravate would send a disastrous signal that the EU sees financial actors can be competitive only if they remain free to violate human rights, fuel deforestation and pollute the oceans,” said Uku Lilleväli, Sustainable Finance Policy Officer at the WWF European Policy Office. “With many EU economic sectors already suffering from the failure to cope with the intensifying climate impacts, not including the financial sector due diligence in the law and ensuring responsible, risk-resilient financial practices would be a recipe for disaster. The overwhelming support from the industry itself to secure financial sector due diligence—substantially outnumbering the opposing voices—underscores the need and call for finance to be in the driver’s seat for change.”

“Overall, negotiators will decide how effective the law will be in combatting climate change and environmental degradation,” Uku Lilleväli added. “Unless companies will be required to actively lower emissions and tackle all the relevant environmental harms, the CSDDD will fail to meaningfully address the climate and environmental crises.” 

[1] Business and Human Rights Resource Centre (2023). Statements show widespread support for inclusion of financial activities in the Corporate Sustainability Due Diligence Directive.

[2] Eurostat (2023). Financial corporations - statistics on financial assets and liabilitiesEurostat (2023). Non-financial corporations - statistics on financial assets and liabilities.
The inclusion of financial institutions and activities in the CSDDD is unequivocally supported by hundreds of financial firms
© Shutterstock / Chepko Danil Vitalevich / WWF