This Wednesday, April 24th, after more than two years of negotiations, the European Parliament has put the final touches on the Corporate Sustainability Due Diligence Directive (CSDDD). The adoption of this text is a victory for the climate, the environment, biodiversity and human rights. However, the very conservative positions of certain parties in the negotiations have considerably reduced the scope of the text for the financial sector. The exclusion of financial services from the scope of due diligence and the uncertainties about the robustness of mandatory climate transition plans call for additional measures to avoid impunity for banks, investors and insurers.
It is a done deal! Large corporations (1) will nowforward have to ensure that their operations do not have disproportionate impacts on climate, the environment, biodiversity, and human rights throughout their entire supply chain (2). If this were the case, companies would be required to remedy the damages and could face criminal prosecution. Despite some weaknesses, the Due Diligence Directive is a significant step against the impunity of European multinational corporations or those operating in the European market. However, the assessment is less positive when focusing specifically on its impact on the financial sector.
The major failure: The Exclusion of Financial Services
The greatest disappointment of this text concerns the inclusion of the financial sector. Two political visions clashed during the examination of this text. The European Parliament positioned itself in favor of including financial services in the due diligence Directive. This would have covered, for example, loans granted to projects that are harmful to the climate, the environment, biodiversity or human rights. On the other hand, the Council of the EU, led by France, strongly opposed their inclusion in the directive, echoing the arguments put forward by the sector, most notably by the French Banking Federation.
The rhetoric used by France and some financial actors is particularly misleading. According to them, the due diligence duty must include the financial sector, “as it will apply to other sectors” (3). This wording actually means the exclusion of financial services – responsible for the vast majority of the impact of banks, investors and insurers on the environment and human rights – from the scope of the directive. Indeed, the directive targets the business activities of companies, which includes the extraction of raw materials, production, transportation, storage, and then the sale of products. In reality, a financial actor does not produce anything directly, its non-financial activities are almost non-existent.
As the position of the Council of the EU prevailed, financial actors will only have to ensure due diligence on their non-financial activities. This includes, for example, ensuring that advertising brochures are printed on paper from sustainable forests and that the plastic of bank cards can be recycled. However, there is nothing on financial support, such as investments in fossil fuels. This is a huge missed opportunity to regulate financial services.
A Bittersweet Victory: Mandatory Climate Transition Plans
One of the major advances for the climate is the obligation for companies to adopt and implement a transition plan. The companies covered by the Directive will have to ensure that their activities and strategies are compatible with the European climate objectives. While the Corporate Sustainability Reporting Directive (CSRD) left companies free to adopt a plan (4), the CSDDD goes further by requiring them to do so and by asking them to provide elements demonstrating that sufficient resources are devoted to its implementation.
These plans concern large companies, but also financial actors. The latter will have to study the compatibility of their financial services with the imperative of reducing global warming and adopt greenhouse gas emission reduction targets for them (scope 3). Given the available scientific evidence, such an obligation should notably result in the adoption of sectoral policies that cut support for fossil fuel expansion (5).
Note, however, that any company that publishes a CSRD transition plan would be presumed to meet the CSDDD adoption obligation. This CSRD baseline is not perfect, however, as the broad indicators and criteria required in the CSRD can lead to highly variable quality of transition plans (6). Indeed, the CSRD is a transparency-focused regulation and is therefore only minimally prescriptive in what it requires of companies and the quality of the plans. It will then be up to the European authorities to specify their expectations on the content of the plans and to the supervisors to verify their quality and ensure their follow-up. In this respect, the transposition into national law will be an important step, as it will be necessary to provide the designated competent authority with the means to fulfill this mission.
While the adoption of the CSDDD is good news for the environment and human rights, the exclusion of financial services is inconsistent with the philosophy of this text and reduces its potential effectiveness. This exclusion leaves financial actors free to continue their most harmful practices, including the massive financing of fossil fuels and the most polluting activities. While these services are included in the scope of the obligation to adopt a transition plan, this obligation remains too imprecise and not sufficiently binding to ensure the necessary change in practices. For the European authorities, a double task therefore remains: 1) Set precise requirements regarding the transition plans of companies and financial actors and their supervision; 2) Prepare the future inclusion of financial services within the scope of the due diligence duty (7).
