In February 2021, the European Commission unveiled its plan to hold European companies and financial institutions accountable for their adverse impacts on the climate, human rights and biodiversity. The aim of this “Corporate Sustainability Due Diligence Directive” (CSDDD) was to ensure that economic and financial institutions assess the risks their activities have and take actions to prevent or, if not possible, mitigate them. The text is to be debated on June 1st in a plenary session of the European Parliament. While the most recent version of the text has been improved compared to the European Commission and the EU Council’s versions, it lacks some key elements to hold financial institutions accountable. The definition of the value chain should notably be expanded, and the content of mandatory transition plans further detailed.
The European legislative process takes time. More than a year after the European Commission presented the Corporate Sustainability Due Diligence Directive (CSDDD), the text will finally be put to a vote during the May 31st European Parliament’s Plenary. This vote is the outcome of months of discussion by various parliamentary committees which have attracted significant financial industry lobbying (1).
Ensuring the accountability of financial institutions and services
The definition of “value chain” is a crucial element of the CSDDD as due diligence obligations must be carried out on companies’ “value chains”. Depending on this definition, some firms could be included or excluded from the due diligence obligation. Since the European Commission’s first proposal in early 2021, hundreds of NGOs (2) including Reclaim Finance have been fighting against a watered-down definition that would exclude financial services from the scope of due diligence. Interestingly some financial lobby groups, including the UN Principles for Responsible Investment (PRI) and the Institutional Investor Group on Climate Change (IIGCC), also supported the inclusion of the financial sector (3)(4)
However, due to an offensive led by France, the general agreement adopted last December in the EU Council allowed EU Member States to choose between partially including or fully excluding financial institutions. Following this logic, a bank could, for example, finance fossil fuel extractions without being held accountable under the due diligence framework for the greenhouse gas (GHG) emissions of the project it invested in or its local environmental impact.
The European Parliament clearly identified the dangers of a proposal that would simply exempt financial players from any responsibility when it comes to the consequences of their financial decisions. The current proposal that arose from the discussions and vote in the JURI Committee includes most financial institutions. Unfortunately, it also limits the scope of their due diligence to the clients they provide “direct” support to. Concretely, a bank would only have to conduct due diligence on the subsidiary of a company it provides financial services to if it explicitly benefits to this subsidiary.
The definition of the value chain should cover all upstream and downstream activities (i.e. before the manufacturing of the product, such as the financial services to help the extraction of raw materials, and after the manufacturing, such as the distribution of the final product). Being a major player in the value chain of a company, financial institutions should carry out full due diligence on all their operations (5). This entails including clients’ subsidiaries and parent companies as long as there is a strong financial and/or governance connection between them.
Robust climate transition plans for all
Another key element of the Corporate Sustainability Due Diligence Directive is enshrined in Article 15, which imposes an obligation on companies to adopt a climate transition plan in their strategy. Article 15 applies to all companies in the scope of CSDDD, including financial institutions. The Committee on Legal Affairs followed in the footsteps of other committees, most notably the Environmental Committee, to greatly enhance this article. The current version of the article features a mention of the Corporate Sustainability Reporting Directive (CSRD) and some detail on what a transition plan must contain (including scope 1, 2 and 3 emission targets).
Nonetheless, the new version of the article could still be improved to ensure the quality of the transition plans. The current text uses wording such as “where relevant” and “where appropriate”, which provides a get-out clause. Furthermore, the notion of “science-based targets” has been replaced by the simple word “targets”, reducing the potential quality of the targets set. Finally, more specific criteria should be added, notably building on the recommendations of the UN High Level Expert Group (HLEG), including on fossil fuel development.
The European Parliament’s position on CSDDD, which may slightly change during the June 1st Plenary, is definitely a step up compared to the positions of the European Commission and the Council of the EU. But more improvements are needed to ensure that companies – and especially the financial sector – take responsibility for their actions. During the Parliamentary debates and the following trilogues, Reclaim Finance notably calls for the review of the definition of Value Chain to cover all financial institutions and services and for the continued improvement of article 15 to further the adoption of robust transition plans.
