The Corporate Sustainability Due Diligence Directive (CSDDD) and why it matters: FFI Explainer

Mandatory Human Rights and Environmental Due Diligence legislation in the EU: Time to treat banks and investors like any other company

What are we talking about?

In February 2022 the European Commission launched a long-awaited proposal on corporate sustainability due diligence (CSDDD). The aim of this Directive is to foster sustainable and responsible corporate behavior and to anchor human rights and environmental considerations in companies’ operations and corporate governance. The new rules should ensure that businesses address adverse impacts of their actions, such as human rights violations and environmental damage, in their value chains inside and outside Europe.

The Corporate Sustainability Due Diligence Directive can provide the financial sector with a clear legal framework to address these issues and pave the way for a more robust and resilient economy.

Why is this important for the financial sector?

Financial institutions have an enormous impact on people and the planet. Investment decisions funnel trillions of euros towards companies operating in global value chains - impacting industry developments for decades to come. Although the financial sector is starting to acknowledge that ESG-risks and especially climate-related risks are material and need to be considered in investment decisions, the vast majority of financial actors still turn a blind eye to human right violations committed by their corporate clients and investee companies, relying instead, on voluntary initiatives that have insufficient impact.

FFI’s recent research on the 2022 Qatar World Cup showed that almost half (47%) of the financing to construction and hospitality companies in Qatar - two sectors with documented high risks of human rights violations – is provided by European banks, pension funds and insurance companies using the savings and premiums of European citizens. None of the financial institutions that were approached as part of the research were able to share evidence that they use their influence to enable access to remedy for victims of harm in Qatar as part of their engagement with the selected companies.

What is the current state of play?

Following the launch of the proposal by the European Commission, the European Council adopted a general position on the proposal in December 2022. Over the course of the last months, the European Parliament has debated on the proposal extensively in different Parliamentary Committees. A final plenary vote on their position is scheduled for 1 June 2023. After these positions are taken, the EU institutions will enter into negotiations to come up with a final legislative text.

Although the ambitions formulated in this proposal are high, there are multiple pitfalls in the current positions by the EU institutions – specifically related to the role and responsibility of the financial sector - which could negatively impact the effectiveness of the legislation. For example, the European Council's decision to allow member states to individually decide whether to include financial services in the scope of the legislation increases legal uncertainty and creates a heavier administrative burden for cross-border financing and business throughout the European Union. This renders it very unlikely that member states would choose to include financial services at national level.

The European Commission and the European Council also propose to exempt asset managers and investors and limit mandatory due diligence obligations to financial services only, giving a free pass to investments and financial products. Furthermore, the activities of the trading partners of companies benefiting from the financial service are excluded, exempting banks from their due diligence obligations regarding the activities of subcontractors of the companies they finance.

Finally financial actors are expected to carry out due diligence measures only at the point when their services are provided and are not obliged to ensure that human rights and environmental protection are respected after services have been provided, although human rights violations and environmental damage also occur after a loan or investment.

What is needed to ensure efficient and effective legislation?

Financial institutions, just like any other business regardless of their sector, operational context, ownership, and structure need to set up processes to identify and assess human rights and environmental risks, take appropriate action to prevent or mitigate adverse impacts, track the effectiveness of those actions, and regularly report.

Due diligence requirements for financial institutions in the Directive should therefore include their full business portfolio and be a continuous process. Furthermore, the definition of ‘value chain’ needs to be clarified with regards to the financial sector; it should include the full range of capital market activities, including secondary market transactions, since financial institutions also exercise leverage through the offering of those services.

It is now up to the European Parliament to adopt a position that better reflects the above-mentioned issues and adopt the proposal by the JURI-committee on the financial sector, which was also agreed upon in the Economic and Monetary Committee (ECON) and was drafted after careful consideration by the European political parties.

What can you do to support?

In order to have a law that is going to work for people and planet, it is important that your voice is heard and that the European Parliament adopts a stronger position. In order to do so, you can:

• Call on your MEPs to vote for an ambitious CSDDD proposal which includes the financial sector;
• Ask your bank to speak out in in favour of the CSDDD proposal which includes the financial sector;
• Join the Justice is Everybody’s Business campaign and support their actions.