The European Parliament and the European Council are working toward an agreement that would subject financial businesses to the same environmental, social, and governance (ESG) requirements as companies in other sectors, as reported by Bloomberg on January 29. According to a joint document seen by Bloomberg, lawmakers and member states “emphasize that financial undertakings — as companies in other economic sectors — should contribute to protecting human rights and the environment, which are core values of the union.” The wording in the document implies a potential change to the provisional deal reached between the European Council and Parliament last December, which temporarily excluded the finance sector from the scope of the Corporate Sustainability Due Diligence Directive (CSDDD).

The CSDDD, considered the EU’s most stringent ESG rule, imposes obligations on large companies concerning environmental and human rights violations in their value chains, holding them accountable for the acts of their clients and vendors. The finance sector was temporarily exempted from this due diligence law out of concerns about keeping European financial businesses competitive and reducing regulatory burdens. However, the recent joint document stated that the current wording of CSDDD lacks specific requirements for addressing the prevalent human rights and environmental violations that occur in the downstream part of financial activities. Therefore, the document calls for “appropriate sustainability due diligence requirements” for regulated financial undertakings regarding the activities of their clients, investees, and business partners. The move may expose financial firms to increased ESG pressure, now viewed as the top litigation risk for corporates.

Sources:

https://www.bloomberg.com/news/articles/2024-01-29/banks-set-to-lose-temporary-reprieve-from-eu-s-toughest-esg-rule?srnd=green

https://www.consilium.europa.eu/en/press/press-releases/2023/12/14/corporate-sustainability-due-diligence-council-and-parliament-strike-deal-to-protect-environment-and-human-rights/

https://www.sustainableviews.com/why-the-eu-csddd-must-consider-harmonised-rules-for-finance/#:~:text=complex%20sustainability%20regulations.-,The%20partial%20exclusion%20of%20the%20financial%20sector%20from%20the%20CSDDD,shielded%20from%20added%20regulatory%20burden.