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25 Apr 2023

Finance Watch

Limited inclusion of financial services for corporate sustainability

On 25 April 2023, the European Parliament’s Committee on Legal Affairs (JURI) approved its position on the corporate sustainability due diligence directive (CSDDD) to push companies to integrate environmental and social issues in their business model, operations and value chain.  Finance Watch is concerned by the reluctance from legislators to set more ambitious due diligence rules for the financial sector to contribute to the climate transition and protect human rights, beyond transparency requirements.

The CSDDD is built on two key elements. Firstly, it introduces a requirement to create transition plans for companies to align their business model and strategy with the limiting of global warming to 1.5 °C in line with the Paris Agreement. Secondly, it requires companies in scope to conduct due diligence on their entire value chain to identify, prioritise and prevent potential or actual adverse impacts on human rights and environmental matters, as well as to monitor and remediate them. However, the compromise text voted on today has a very narrow definition of value chain for financial services, which could exempt financial undertakings from carrying due diligence for most of their asset management activities and exclude client’s contractors from their review.

Finance Watch, the pan-European NGO advocating to make finance serve society, welcomes that the JURI committee agreed to include financial undertakings in scope to adopt transition plans. This resolves the legal uncertainty as to whether Corporate Sustainability Reporting Directive (CSRD) reporting rules create the obligation to have such plans. Nevertheless, more ambition and clarity on the due diligence aspects are still needed. The current definition of value chain for financial services only covers “the activities of clients directly receiving financial services” and leaves room for interpretation. Today, it could entail that financial services would not have a direct role to play in the due diligence on clients’ contractors and the investment activities, including for non-EU investee companies. Yet Finance Watch welcomes the inclusion of measures for institutional investors and asset managers to induce their investee companies to bring actual adverse impacts to an end.