Council to discuss inclusion of finance under EU due diligence rules

EU countries are set to start discussions on the inclusion of the financial sector under the scope of the proposed EU corporate accountability directive, in an effort to find a negotiating mandate and strike a deal with the European Parliament.

The inclusion of finance is one of the most contentious points in the ongoing negotiations of the corporate sustainability due diligence directive (CSDDD), first proposed by the European Commission in February 2022 to ensure large companies are held accountable for human rights and environmental violations throughout their value chain.

While the European Parliament voted in favour of mandatory due diligence rules for financial institutions, including asset managers and institutional investors, member states initially opted for a carve-out of the sector in their general approach reached last December.

The inclusion of finance was opposed in particular by France, which pushed to give EU countries the choice to include or exclude finance when transposing the directive into national law.

But given the different positions on the issue, the Spanish EU Council Presidency is seeking a compromise. According to an internal document seen by Euractiv, the presidency is putting a range of options on the table to be discussed by the countries’ law enforcement attachés on Monday and Tuesday (16-17 October).

Options on the table

In particular, the Spanish presidency is testing the waters regarding the possibility of erasing the carve-out agreed in the common position. According to the document, this approach could not only represent a red line for the Parliament but could also compromise the level of harmonisation of the law across the Union.

When it comes to the banking and assurance sectors, the presidency is proposing “a proportional, yet reasonable, obligation for financial undertakings to avoid any potential or actual impact.”

The document recognises the existence of an indirect link between financial services, such as loans and credits, and the adverse impacts created by the beneficiary companies. Still, it excludes the possibility for banks to “supervise the whole value chain of their clients.”

While it is unclear what the obligation would entail, the document also suggests that financial companies should avoid relationships with companies already sanctioned under the directive.

When it comes to institutional investors and asset managers, the document states that these only have limited leverage on clients compared to banks, denying any link between investors and the activities of the investee company.

At the same time, the presidency maintains the need to apply the directive to the sector and proposes to add an article on engagement policies or strengthen the engagement policy requirements in the 2007 directive on the exercise of certain rights of shareholders, which is, however, limited to listed companies.

All eyes on member states

Depending on the position of member states on the options presented by the presidency, discussions on whether to include them and how will continue in the coming weeks, with the next negotiation round with the European Parliament expected to take place in November.

It is not yet clear whether France and other countries will continue to oppose the inclusion of the financial sector under mandatory due diligence in line with the general approach. 

Moreover, it is unsure whether member states will support the application of due diligence requirements for finance to the downstream part of the value chain, which represents the segment with the highest possible impact on human rights and the environment for the sector.

While some business associations remain opposed to the inclusion of finance or downstream activities, both civil society organisations and MEPs continue to urge the Council to include the sector under the directive.

Déjà vu: Financial sector and corporate sustainability due diligence, in or out?

The EU should include financial markets in the scope of its Corporate Sustainability Due Diligence Directive (CSDDD) to help reorientate capital markets towards more sustainable investments while making European financial markets more consistent and reliable, argues Richard Gardiner.

“To exclude the financial sector altogether would be totally against the idea of sustainable finance,” EU lawmaker Heidi Hautala (Greens), shadow-rapporteur on the file, said at the end of September.

“I hope that a smart compromise can be found,” she added.

[Edited by János Allenbach-Ammann/Zoran Radosavljevic]

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