Financial sector included in EU Due Diligence Law

In a remarkable move, the European Parliament has decided to extend the scope of its proposed Corporate Sustainability Due Diligence Directive (CSDDD) to include financial institutions. Previously, these key players were not part of the planned rules. The change reflects a broader recognition of financial institutions’ critical role in safeguarding human rights and promoting environmental sustainability.

The decision marks a significant milestone in the evolution of the EU’s approach towards corporate responsibility. It underscores the need for every stakeholder, regardless of their role or sector, to be accountable for their contribution towards building a more sustainable and equitable world.

Controversy surrounding the liability of financial companies

Despite the commendable inclusion of financial institutions in the CSDDD, there is a strong contention surrounding the degree of their responsibility for harmful practices by their clients. The proposed rules indicate that financial companies will not be considered as causing harm directly, nor will they be held liable for the negative impacts resulting from their client’s actions. This essentially implies that a financial institution maintaining a relationship with a client causing environmental damage or infringing upon human rights will not bear any legal repercussions.

This ‘light touch due diligence’, as charity ShareAction labels it, starkly contrasts with international standards that typically call for stricter accountability.

Reaction from advocacy groups

ShareAction has expressed a mixed reaction to the directive. While they criticised the perceived leniency towards financial institutions, they were enthusiastic about other aspects of the proposed law. Specifically, they praised measures that enhanced directors’ duties, established transition plans, and brought changes to executives’ remuneration. These elements were seen as significant wins in the ongoing struggle for more responsible corporate governance.

Anti-Slavery International, another prominent advocacy group, voiced concerns despite recognising positive elements in the proposed law. They highlighted that the current proposal has several loopholes that could potentially limit the law’s impact on improving the lives of workers and communities around the globe. To address these issues, Anti-Slavery International has shared its own set of recommendations on its website.

The role of stewardship and engagement

As we navigate this complex issue, it’s crucial to emphasise the role of stewardship and engagement with investee companies. These strategies can serve as powerful tools to urge companies to mitigate their adverse impacts on society and the environment. Rather than merely punishing financial institutions for their client’s actions, the emphasis should be on proactive engagement. By forging a dialogue with companies, we can work towards minimising harmful practices and promoting sustainability.

The decision to include financial institutions in the CSDDD marks a significant step forward. However, it’s not without controversy. The relaxed accountability towards these powerful entities raises questions about the potential dilution of the law’s impact. However, their inclusion in any form might be a necessary first step towards broader corporate accountability.

In these times of rapid change, ongoing scrutiny of these developments is crucial. We must continue to push for progress and accountability, with a particular emphasis on proactive stewardship and engagement. After all, the goal is not just to hold corporations accountable but also to usher in a new era of corporate responsibility that prioritises the well-being of people and the planet.