The exclusion of the financial sector from the EU CSDDD reveals a lack of commitment to ESG
Johannes Jäger
Nov 12, 2024
#EU / Western Europe
#Sustainability standards
#Corporate responsibility and lead firms
The EU CSDDD and the financial sector
The EU CSDDD is undoubtedly an important leap forward in terms of ESG (Jäger et al. 2023). Despite the fact that it had been watered down considerably due to intensive lobbying activities it is still a remarkable step in bringing human rights to the agenda of international supply chains. The final version of the directive provides important entry points for progressive developments. International civil society cooperation is expected to be crucial in increasing the effectiveness of the regulation, but it still remains to be seen how precisely it will contribute effectively (FICSC-EUCSDDD, 2024). The EU CSDDD will require large European companies and large companies that export to the EU to comply with the regulation. However, compared to the initial proposal the current version of the CSDDD is weak in terms of content and scope. In the final implementation phase from 2029 onwards only companies with more than 1000 employees or a net turnover of more than 450 million Euros will be subject to the regulation (Aboushady et al., 2024). The regulation will require companies to conduct due diligence related to basic human rights, but environmental issues have been largely ignored and count only inasmuch environmental damage affects human rights. Contrary to the proposal by the European Parliament, significant elements of the financial sector have also been explicitly excluded from the EU CSDDD. Downstream activities, i.e. core business activities such as providing loans, etc. are not regulated under the directive. This means that large banks or other financial institutions will not have to conduct due diligence for these activities. However, anti-money loundering and avoiding the financing of terrorism legislation are already a central element ofbank’s every day due diligence practice. Hence, in principle, while such legislation works, exempting the financial sector from the EU CSDDD allows the sector to ignore human rights abuses in activities or investments that are financed. Only upstream activities, e.g. purchasing equipment, fall under the regulation and furthermore climate plans will have to be delivered by large financial institutions (Savourey/Litwin, 2024).
Why the financial sector has been largely left out
Why including finance in the EU CSDDD is the necessary next
As the European Commission has concluded, voluntary measures do not suffice. Binding rules are required to force companies to behave in accordance with achieving ESG goals. This is the reason why the EU CSDDD has been implemented. Continuing to largely exempt the financial sector from these rules - they apply to all other industries - sends the wrong signals. It undermines not just the credibility of the financial sector to take ESG seriously but also the EU’s reputation as a global leader in terms of human rights. Hence, including finance, further developing the EU CSDDD and the EU contributing to binding international social and environmental standards are important steps towards effectively contributing to ESG.
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