Sustainability due diligence and reporting obligations for financial institutions in EU policies

To date, the financial sector plays a significant role in funding investments that contribute to deforestation. Therefore, financial institutions have a crucial role to play in curbing deforestation and associated land-use change, which are key drivers of climate change and biodiversity loss.

With this brief, our team at Climate & Company, together with our partners at Germanwatch, aims to provide for a clear understanding of the obligations to expect for financial institutions under each of the relevant recent EU regulatory measures related to sustainability disclosure and due diligence.

The case of deforestation

This is done by illustrating the respective obligations and by drawing on the case of deforestation-related risks and impacts. This brief also aims to discuss the consequences that the inclusion or exclusion of financial institutions in each regulatory measure could bring about.

The four main takeaways of our brief include:

1. While deforestation as a (potential) adverse impact is in principle covered by some of the regulatory measures addressed here, none of the EU regulatory measures includes thorough sustainability due diligence requirements for financial institutions, particularly regarding deforestation.

   The Regulation on Deforestation-free Products and Corporate Sustainability Due Diligence Directive (CSDDD) could be suitable instruments to prescribe such requirements but do not comprehensively do so in the current legislative proposals.

2. Ambitious mandatory disclosure on sustainability risks and impacts would greatly facilitate the exercise of due diligence.

   Particularly for financial institutions, the implementation of the CSDDD as well as the proposed Regulation on Deforestation-free Products (if includes financial institution in a future version) would be significantly facilitated by solid and mandatory value chain disclosure requirements.

3. For the mandatory disclosure of companies’ sustainability risks and impacts to be useful to financial institutions, the specific requirements of the EU disclosure regulatory measures will need to enter into force as soon as possible (and realistically feasible).

4. Guidance from the Commission would help financial institutions to comply with their disclosure and sustainability due diligence requirements.