How can we justify requiring companies to consider and mitigate sustainability-related risks and harms, but allow financial institutions to neglect them entirely? The question now lies in the hands of the EU negotiators, Isabella Ritter and Uku Lilleväli write.
ADVERTISEMENTAt the heart of the European Union, a major fight is unfolding now over the future of corporate accountability and sustainability practices.
The Corporate Sustainability Due Diligence Directive, or CSDDD, is more than just a mouthful of an acronym; it represents a pivotal moment in shaping how companies navigate their environmental and human rights responsibilities.
As the negotiations between the European Parliament, member states and the European Commission are nearing a final deal next week, the financial sector's inclusion in the CSDDD remains a highly contentious point.
As negotiations unfold, the EU possesses a pivotal opportunity to establish a framework that prevents and mitigates corporate-caused environmental and social harm.
The success of the CSDDD hinges on aligning financial flows with this noble goal, and the upcoming trilogue will test the EU's commitment to sustainability.
France's stand and the trilogue dance
The recent decision by EU ambassadors, under pressure from France and its financial sector, to entirely exclude financial companies from the due diligence framework is a severe step going fully into reverse.
The battleground over the inclusion of the finance sector in the CSDDD reflects a stark divide within the Council of the EU.
Contrary to the opposition led by France, many governments advocate for more comprehensive coverage of the financial sector.
The Netherlands, Finland, and Denmark, for instance, argue that including the entire finance sector is crucial for ensuring a level playing field and preventing competitive disadvantages.
Several others like Germany have asked to include at least banks and insurers in the directive’s scope.
The diverging views beg the question if the Council’s decision is a true compromise or a mere insistence of France, which seems to be driven less by a genuine commitment to responsible business practices and more by short-term sectoral interests.
In fact, the largest French bank BNP Paribas is currently risking legal action for allegedly breaching the French equivalent of the CSDDD.
The irony is stark, as President Emmanuel Macron just held a speech at COP28 in Dubai, calling for channelling private financial flows towards more sustainable objectives and the transformation of the current financial system.
Unprecedented support from the industry
The Council’s decision not only ignores but goes against the calls from a big part of the industry itself to play its part in protecting human rights and the environment.
Over the last year, hundreds of financial institutions and industry representatives, as well as umbrella organisations such as the Dutch Federation of Pension Funds, the Association of Insurers, and Banking Association, the Danish pension funds, UN PRI and Eurosif, have repeatedly stressed the need to include the financial sector in the directive.
These demands emphasise that sustainability considerations are essential for informed, responsible financial practices.
Neglecting or inadequately managing climate and other risks is no longer compatible with sound risk management, as rightfully noted by Frank Elderson, Vice Chair of the European Central Bank's supervisors board.
The arguments against the inclusion of the financial sector lack substance. No, other EU laws do not include adequate due diligence rules, and the proposals on the table allow for a risk-based approach that can be tailored to different financial firms and activities.
ADVERTISEMENTFurther, claims that due diligence is reasonable only for certain financial activities do not withstand scrutiny.
If exempted partially or fully, the CSDDD risks distorting markets and allowing financial actors to ignore the sustainability implications of their assets, thereby leading them to miss relevant financial risks.
Such a carve-out would not only hinder responsible investment practices but also create a skewed playing field between financial and real economy players.
Time for the EU to live up to its leading role
The financial sector's influence on environmental and human rights issues is undeniable.
And the numbers also tell a clear story: the sheer scale of financial assets in the EU owned by financial undertakings, nearly four times that of non-financial companies, underlines the urgency of including the financial sector in the CSDDD to avoid a damaging double standard.
ADVERTISEMENTWithout due diligence rules for financiers, financial institutions will continue to be allowed to ignore the social and environmental harm they fuel.
An alarming instance of such negligence is exemplified by the recently uncovered backing of European banks for toxic mining operations in Colombia and Peru.
But not only environmental harm — European banks and investors have also been tied and provided funding to companies involved in war crimes in South Sudan.
Banks in particular keep fuelling the climate crisis, by pumping $669 billion (€620bn) in fossil fuel financing in 2022 while lacking transparency when setting their green finance targets.
The list of evidence showcasing financiers enabling harmful activities across the globe is extensive and self-evident.
ADVERTISEMENTSo, how can we justify requiring companies to consider and mitigate sustainability-related risks and harms, but allow financial institutions to neglect them entirely? The question has now become political and lies in the hands of the EU negotiators.
Will the EU live up to its self-nominated leading role in sustainable finance? Or will it, once again, give the financial industry preferential treatment by casting a blind eye?
The EU must lead the way, setting a precedent for global corporate responsibility, as the world watches and the future of our planet hangs in the balance.
Isabella Ritter serves as EU Policy Officer at ShareAction's Brussels office, and Uku Lilleväli works as Sustainable Finance Policy Officer at the WWF European Policy Office.
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