Press Release: Leading EU Sustainable Finance Think Tank slams Council for jeopardizing EU Supply Chain Directive
November 16, 2023
Council proposal to risk the exclusion of financial institutions from the EU Corporate Sustainability Due Diligence Directive (CSDDD) could trigger an avalanche smothering EU ambition to prevent environmental destruction and human rights violations in EU supply chains before Christmas, says leading EU Sustainable Finance Think Tank Climate & Company.
Brussels, 16/11/2023: In the run-up to reaching an agreement before Christmas, the negotiations on the CSDDD, the often-called “EU supply chain law”, reached a turning point. Ahead of the next political Trilogue negotiations on 22 November, yesterday, EU ambassadors gave in to a proposal by the Spanish Presidency to exclude the financial sector from due diligence obligations under the CSDDD, with an eye on potentially including it at a later stage. The French government has been pushing hard in the Council to exclude the financial sector. Allegedly in an attempt to gain the graces of European financial titans in the race for becoming the EU’s next big finance hub after London. “The Council is playing a dangerous political game by holding back on such climate and biodiversity critical inclusions. This is no time for political expediency.” says Ingmar Juergens, CEO of Climate & Company.
The CSDDD is the one incentive for financial institutions to stop financing harmful activities hidden in their clients’ and investees’ value chains. This is where up to 80% of natural capital destruction and the majority of human rights violations take place. And it is the one opportunity to reduce the administrative burden for non-financial companies. This is because the CSDDD would create a harmonized set of due diligence requirements by their banks and investors across the EU. Removing even categories of financial institutions from the scope of the CSDDD – let alone the whole financial sector – risks derailing this opportunity. In addition, it could undermine the level of environmental and social ambition and the EU’s duty to create a level-playing field. A few Member States, such as Germany, have been pushing to exclude asset managers and institutional investors in particular from the scope of the CSDDD.
Climate & Company CEO Ingmar Juergens stated: “The CSDDD is the last opportunity to introduce concrete incentives for the financial sector to take charge of human rights violations and the destruction of our planet – and hence, the future of our children. EU capitals should not sabotage what has been a formidable effort by the EU Commission and the Parliament to acknowledge and tackle the tremendous footprint of the EU economy hidden in its supply chains.”
“Asset managers and investors play a crucial role in the transition to sustainable supply chains. Their exclusion would undermine their role in the green transformation and in the shift of private capital towards sustainable business. The Council must do what we know will not only benefit humankind but even shore up profits for the finance industry. Everyone comes out better-off!” added Juergens.
Why the exclusion of financial institutions would be a missed opportunity:
Climate & Company’s analysis shows that if the financing of environmental destruction hidden in the value chain is not addressed via the CSDDD, it won’t be addressed anywhere else. The CSDDD is the unique opportunity to stop the financing of the destruction of our natural capital, such as unique tropical forests, essential drink water resources or the 8.7 million species that are estimated to exist on earth, out of which the majority has not even been identified yet.
The key points from our concise 5-pager briefing:
- Value chain due diligence can be a real challenge for the financial sector, and the feasibility of this procedure is of utmost importance. However, once the CSDDD is implemented via the real economy, financial Institutions will be able to build on the due diligence information made available by non-financial corporates. Instead of excluding the financial sector from the CSDDD, the EU Council should propose to include all financial institutions now. A practical solution would then be to postpone the Directive’s entry into force until more data is made available by real economy companies through their own CSDDD requirements. This climate and biodiversity solution is ‘risk free’ and would make the CSDDD more manageable for all financial institutions, including asset managers and investors. To increase the feasibility of the CSDDD, it will be also key to differentiate between obligations for financial institutions that have contractual relationships with the clients, i.e. banks and insurers, versus those that do not, i.e. institutional investors and asset managers. The European Parliament’s proposal (Art. 8a) is a good first step to recognise the different tools, and constraints, that investors and asset managers have at their disposal.
- The current EU regulatory framework (Corporate Sustainability Reporting Directive (CSRD), the European Sustainability Reporting Standards (ESRS), the Sustainable Finance Disclosure Regulation (SFDR)) only requires financial institutions to be transparent about their own and their clients’/investees’ impact and their due diligence processes, whatever they might be. Not more and not less.
- Voluntary measures have not been enough to effectively prevent impacts such as deforestation worldwide. This is why it is vital that the Council pushes to include all financial institutions within the CSDDD. Otherwise, there will simply be no coherent set of incentives for them to end harmful sustainability impacts throughout their value chains.
- Financial institutions and their investees/clients cannot face 27 different due diligence requirements. Excluding them from the CSDDD would lead to divergent obligations in each Member State, in fact increasing the administrative burden on them. Unless engagement is harmonised, it will also be a nightmare for investee companies facing a wide range of diverse uncoordinated procedures by their investors and banks across the EU. They need clarity and consistency which the CSDDD would provide and not a bureaucratic spaghetti currently proposed by different member states.
State of Play of the EU-Negotiations:
On Friday 10 November, The Spanish Council Presidency proposed to initially exclude financial institutions from the EU Corporate Sustainability Due Diligence Directive (CSDDD). Instead, they suggested the inclusion of a review clause to potentially add financial institutions to the scope at a later stage, subject to an impact assessment. This does not guarantee their future inclusion. This position was adopted yesterday in a meeting of EU ambassadors. The exclusion was the result of heavy battles: France strongly lobbied towards the exclusion of the whole financial sector while Member States like Germany, Ireland, Luxembourg and Italy have pushed for the exclusion of institutional investors and asset managers. Denmark, Portugal and the Netherlands, as well as a few investors from these countries, have been among those supporting the inclusion of all financial institutions in the file. Both the European Parliament report as well as the original European Commission proposal opt to include financial institutions in the CSDDD to different extents.
The next developments on the matter are expected when the EU institutions meet for their political Trilogue on 22 November, with a final decision expected before the end of the year.