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The inclusion of financial institutions in mandatory sustainability due diligence

May 22, 2023

This policy brief sheds light on why mandatory sustainability due diligence for financial institutions is key to reach the goals of the EU Green Deal, while providing a clear and useful framework for financial institutions themselves.

We identified a concise set of arguments for introducing mandatory sustainability due diligence in the financial sector:

  1. Voluntary commitments have not been enough.
  2. Financial institutions need a level-playing field.
  3. Policy coherence is key for an effective and efficient framework.

This policy brief also provides concrete options for improving the CSDDD, ahead of the Trilogue negotiations. These touch upon:

  • The definition of the value chain of financial institutions;
  • The limitation to pre-contractual identification of actual and potential adverse impacts ;
  • The obligation to terminate “business relationships”;
  • The specific measures to be taken by institutional investors and asset managers.

Based on this policy brief, on LinkedIn we have shared two shortcomings in the European Parliaments adopted report on the Corporate Sustainability Due Diligence Directive (CSDDD).

The CSDDD requires companies and financial institutions to ensure that they comply with environmental standards and human rights throughout their value chains. As it stands, financial institutions would not have to address the bulk of environmental impacts (e.g. biodiversity loss from deforestation) for many sectors. This is mainly due to two provisions:

  1. For financial institutions, the value chain in scope remains limited to the activities of the direct clients or investee companies receiving the financial service. It does not include the related value chain and thus the impact happening further up in the value chain (upstream), in producer countries.  
  2. This also excludes SMEs from the due diligence procedure of financial institutions. SMEs make up a majority of high-risk sectors, such as construction or agriculture. Their potentially harmful activities with massive impact on biodiversity loss would thus not be addressed. SMEs would also highly benefit from guidance and support from banks, in a harmonised way, which the CSDDD could help provide. 

Find more about this project and the sustainable finance instruments that can help achieving deforestation-free supply chains here.