The European Parliament has provisionally voted to include the financial sector in ambitious new rules on how the private sector must ensure sustainability in its supply chains.

The Parliament’s committee on legal affairs, known as JURI, today voted on a raft of amendments to the EU’s proposed Corporate Sustainability Due Diligence Directive (CSDDD). The Directive is a major set of requirements forcing companies to conduct due diligence on, and take responsibility for, human rights abuses and environmental harm throughout their supply chains.

One of the battlegrounds as the Directive goes through negotiations is whether the financial sector will be covered by the rules. The original legislative proposal from the European Commission included a broad and relatively vague reference to the financial sector, which both Council and Parliament wanted made clearer.

In a bid to offer more clarify, the Council exempted almost all financial institutions, saying the CSDDD should focus on companies in the real economy. But the Parliament has gone in the other direction in its clarification.

“At the very top level, what’s been approved today is that banks, insurers and asset managers are all in scope,” said Richard Gardiner, head of EU public policy for non-profit the World Benchmarking Alliance. “That means they’ll have to conduct environmental and human rights due diligence on at least the first tier of the companies they interact with.”

For banks and insurers, that interaction is based on the agreement of a client relationship with the company, when they provide them with cover or loans, for example. But asset managers don’t have such agreements with portfolio companies, so JURI voted through a specific proposal which would lay out how asset managers should engage with, and perform due diligence on, investee firms.

The Parliament makes the distinction between entities that are linked to environmental harm and human rights abuses, and those that actually cause or contribute to those abuses.

“Companies in the financial sector are presumed under the current text as being linked to investee companies that are causing and contributing to adverse impact, but they aren’t directly causing or contributing themselves,” explained Maria Elena Sandalli, who leads on EU sustainable finance for consultancy firm Hanbury Strategy.

“So if focuses on their ability to demonstrate that they’ve exerted leverage on those companies to make sure that adverse impacts are brought to an end. It does not hold them liable for the impacts,” she said.

The CSDDD will not introduce any new reporting requirements as all the disclosures should be done through the EU’s Corporate Sustainability Reporting Directive.

“Today’s vote is a massive deal, because most of the financial sector has been pushing against this and saying it’s unworkable,” said Gardiner. “But so far Parliament has refused to budge, except to allow this more tailored approach.” 

Today’s vote was at committee level, meaning it was cast only by the group steering the proposals. It is seen as a strong indicator of the European Parliament’s broader position, but that will officially be decided in a vote at plenary – currently scheduled for 1 June. Once the whole of Parliament has agreed its official position, it will enter negotiations with the Commission and the Council.

Although the Council has removed most of the finance industry from the scope of the CSDDD, it wants EU Member States to be able to choose whether they apply the rules to the sector when they transpose the Directive into national law.

“It’s going to be a challenge for the Parliament and Council to find a compromise on these proposals, because their positions are so opposed when it comes to the way the Directive should treat asset managers and fund providers,” said Sandalli.

A final legislative text is expected later this year, or by Spring 2024 at the latest.

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