EU’s corporate due diligence rule hits political roadblock

February 19, 2024|Written by

A vote on the EU’s corporate sustainability due diligence directive (CSDDD) continues to be postponed over criticism that it would be too burdensome, leaving questions about next steps and whether financial institutions will be included.

The CSDDD will require companies to assess the potential and actual impact of scope 1, 2, and 3 emissions and will hold businesses accountable for human rights or environmental breaches.

The provisional deal agreed on in December watered down requirements for the financial sector and was due for a vote by EU ambassadors, but was removed off the agenda twice as it was not expected to reach a majority.

Both Germany and Italy said they would abstain from a vote, while other EU countries have also voiced concerns about the rule, leading to concerns that the vote would have fallen short of the 15 countries, representing at least 65% of the EU population, required to pass.

The delay on the vote was a “brick wall” for lawmakers who expected the ruling to pass, said Silke Goldberg, a partner at Herbert Smith Freehills law firm.

“At face value it seems that there are concerted efforts to prevent the new directive from seeing the light of day, but it is not that simple. There are a number of countries with their own plans in place, indicating that we should be in no doubt; environmental and human rights due diligence is – and will remain – a legislative priority,” she said.

Questions around inclusion of financial sector

One of the controversial points in the CSDDD was the inclusion of financial institutions. While financial firms are included in the current scope of the law, they are only responsible for their own operation and upstream business partners. Banks’ investment and lending activities are currently excluded from CSDDD obligations, as an agreement was made to agree on the issue at a later date.

However, some advocates are worried that the upcoming EU elections could mean the inclusion of bank’s downstream activities, which make up the bulk of emissions, won’t be included at all. The EU has already agreed to delay elements of its corporate sustainability reporting directive, which could impact thousands of US firms when it comes into force.

“The upcoming EU elections are expected to give the conservatives a stronger influence in the European parliament, and nothing guarantees that we will indeed have a proposal that includes the financial institutions that is actually voted [on],” said Olivier Guérin, EU advocacy officer at climate group Reclaim Finance.

Advocates had pushed for financial institutions’ downstream activities to be included in the legislation from the start. Holding banks to the same upstream standards as other companies is “hollow” as it only covers things like the “production of leaflets, banking cards, and recyclable coffee cups,” said Guérin.

“We need a specific inclusion of financial services, not the same obligations,” he said.

Vincent Vandeloise, senior research and advocacy officer at Finance Watch, said while financial institutions are limited on what they can do “to guarantee an effective transition, financial institutions have substantial power to accelerate the transition”.

“[The] CSDDD will need to be completed with additional provisions on the expected content of transition plans,” he said.

As it stands now, in a best-case scenario, financial firms investing and lending activities wouldn’t be included until at least around 2029 or 2030.

“These are five years during which financial institutions will be able to continue their activities, literally business as usual, and financing climate chaos,” said Guérin.

This page was last updated February 19, 2024

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