A harmonised EU due diligence framework for the financial sector in the CSDDD: why and how?

This concise 5-pager briefing is based on our longer analysis on why mandatory sustainability due diligence for financial institutions is key to reach the goals of the EU Green Deal.

Our key points:

• Financial institutions (FIs) are a partner in enabling the majority of corporate and household investments. Through their investment strategies and their engagement with clients and investee companies, they can have a say in how green or sustainable these investments need to be.
• FIs also face increasing risks from financing clients or investing in assets with impacts on the environment and exposure to environmental risks, such as financing actors along deforestation linked supply chains. These risks can add up to systemic risks at market level, thus representing stability risks for Member States’ and the EU’s economy.
• So, whether the focus is on achieving positive impacts or managing financial risks, FIs will need to go beyond their established due diligence patterns to include sustainability objectives.
• Yet, no harmonised sustainability due diligence framework for financial instituions across all EU Member States is available to support FIs in this endeavour.
• The Corporate Sustainability Due Diligence Directive (CSDDD) has the potential to fill this gap. However, its inclusion of FIs in the current drafts is not sufficient to address the bulk of environmental impact.

We share five recommendations to adjust the CSDDD to include sustainability due diligence for financial instituions during the negotiations. This will make it more effective:

• Include all financial institutions in the scope of mandatory sustainability due diligence provisions in the CSDDD, and avoid distortion of competition and additional burden through divergent national legislation.
• Include FIs’ entire value chain beyond direct clients/investees in the scope, to address the vast majority of environmental and social impact (such as deforestation) hidden upstream in their clients’ and investees’ value chain.
• Require regular identification of impacts, as supply chains and environmental conditions change over time.
• Require divestment or disengagement as back-up strategies, if actions are not taken by investees and clients.
• Provide specific guidelines for the financial sector to recognize the specific structures and procedures of different types of FIs, clarify expectations and provide the necessary guidance.